Edelweiss Financial Services, has entered into an agreement with Caisse de dépôt et placement du Québec’s (CDPQ), one of North America’s largest institutional investor. As per the agreement, CDPQ will invest around Rs 1,800 crore in ECL Finance, the credit business vertical of the diversified Edelweiss group.
This is the second partnership between Edelweiss and CDPQ after 2016 when CDPQ picked up 20 percent stake in Edelweiss’s asset reconstruction company.
Contours of the deal
Non-banking finance company ECL Finance manages the group’s lending activities across wholesale and retail segments. The deal excludes the distressed credit and wealth management related credit books like loan against securities (ESOP funding and margin financing).
The said transaction involves the asset/loan book of around Rs 30,000 crore as at end December. Wholesale lending constitutes almost 56 percent of this Rs 30,000 crore loan book and comprises mainly of real estate loans, a segment vulnerable to cyclical downturns.
The amount will be invested by CDPQ in three tranches through convertible debentures to be compulsorily converted into equity. The first investment of $150 million would be immediately available on receiving the regulatory approvals. The remaining $100 million will be invested in two equal tranches at the end of the first and second years from the initial investment.
The deal will strengthen the lender’s balance sheet
The equity infusion will improve the capital adequacy and leveraging capability of ECL Finance. It will enable the lender to boost its retail lending business as well as take advantage of any market consolidation opportunities.
We are particularly enthused by the fact that the lending business is drawing interest from global investors despite the business being adversely impacted by liquidity concerns currently.
And boost investor confidence
ECL became a wholly-owned subsidiary of Edelweiss group in September 2017 after the latter bought out the 7.8 percent stake held by GIC, Singapore.
As per the management, CDPQ will end up owning between 13- 18 percent equity in ECL Finance on full conversion and depending on the conversion price. In effect, the deal values ECL Finance anywhere between Rs 10,000 – 14,000 crore.
Edelweiss’ current market capitalisation is around Rs 15,300 crore. The stock has corrected more than 40 percent from its 52-week high since September 2018 when a liquidity crisis engulfed the NBFC sector. If the deal value with CDPQ is anything to go by, the upside to the stock can be meaningful.
Simply put, the current market cap of the stock ascribes a very low value to the other businesses of Edelweiss if we go by the higher end of the estimated deal value for ECL Finance. This means investors are getting other non-lending businesses of the group almost free.
Edelweiss group, that commenced operations as a capital market player, has incubated several business segments like distressed assets, insurance, and wealth and asset management in addition to credit business (wholesale and retail lending) over the past few years. The group has emerged as India’s third-largest wealth manager after Kotak Mahindra Bank and IIFL wealth.
Edelweiss has fast evolved into a ‘bank-like’ structure with the lending business is facing sectoral headwinds such as high interest rates, reduced liquidity and vulnerable asset quality. However, there are multiple growth levers for the stock in the long term. The current deal will only strengthen investors’ confidence and prompt them to keep the stock on their radar.