“We expect to have about Rs 500-600 crore of excess capital available that we can invest for future growth to acquire companies. Our board decided that we need to be very focussed and reallocate capital in a very smart way,” says Rashesh Shah, Chairman, Edelweiss Group.
Edelweiss Group is going to exit insurance broking business. US insurance broking firm Arthur J Gallagher & Co is likely to acquire JV partner Edelweiss Financial Services‘ 70% stake in Edelweiss Insurance Brokers at a valuation of $100 million (around Rs 750 crore). Insurance is a great place to be right now and you are exiting and divesting the stake here. What is the strategy?
Edelweiss is a diversified group with almost 10 different businesses and this insurance broking business is very similar to investment banking and very similar to broking business. It was earlier part of the wealth management business which we have spun off and we are getting it listed as a standalone business. Here we had a partnership with Gallagher. They were keen to keep it as a standalone and increasingly this is becoming a global business. They wanted to increase their stake and we got a good price. So, we are reallocating capital.
I must remind you we have two other insurance businesses. We have a life insurance business and a general insurance business where collectively we have invested more than Rs 2,500 crore up till now and we continue to invest in that. We are reallocating capital from insurance broking which was a small, very high quality, very niche business. Since it was part of wealth management after we spun off wealth management, this became a standalone business and so our board decided that if there was a good partner and the business future is very bright, we can re-plough this capital into other growth areas.
After this sale, we still have eight businesses; we have a housing finance business, NBFC, asset management, mutual fund, ARC, life insurance, general insurance and wealth management. All are very good businesses. Our customer assets had grown by 35% in the last one year. We have restructured and from one company with many divisions, we have now become many standalone separate companies and each one has a very bright future and can take off on its own.
You have also done a transaction in the wealth business a couple of months back. PAG, one of the most reputed companies, has come in. How much capital have you raised together and how would you be utilising that?
The total capital we have raised in these two transactions will be close to Rs 2,500 crore. About half of that — Rs 1,400 crore — goes into repaying debt. We had some holding company level debt and which we have now decided to reduce. So about Rs 1,400 crore goes into reducing debt and the balance goes as investments in our asset management business. We have an alternative business and a mutual fund business, the collective assets are now close to Rs 85,000 crore. As they are growing fast, we need to make some very tactical investments in that. We are making small investments in our NBFC and housing finance business and the retail part of the credit business which are growing very well plus, our insurance business.
Even after this, we expect to have about Rs 500-600 crore of excess capital available that we can invest for future growth to acquire companies. Our board decided that we need to be very focussed and reallocate capital in a very smart way.
Did you say acquire companies? Which direction would you take?
There are a couple of areas where we are seeing a lot of opportunities to make very smart tactical acquisitions; one is in the fintech space. We think the entire credit space is getting disrupted in a very fast way given the NBFC crisis, credit issues in SME and housing finance. There are some good analytics firms. There are some good firms which underwrite risk management on retail credit portfolios. That is a good place for some tactical investments. One can spend Rs 100-200 crore to buy some smart capability.
We want to grow the retail credit business which is SME and home loans as well as our asset management business. We also want to grow the insurance businesses. Even in general insurance, we are seeing some very good tactical opportunities coming up. It is a very fintech driven business. One of the biggest things would be to buy stakes which either gives us distribution or stakes which gives us technological capabilities.
Edelweiss wants to focus on getting distribution. We can get that by buying a small stake in a small finance bank and that will allow distribution of insurance and asset management products by the small finance bank. We also want to invest in technology. As we have become more retail in the last two years, our retail customers have gone from half a million to 2.5 million. Now we are adding between 1.2 and 1.5 million retail customers every year. So distribution and technology are very important for us.
Have you identified any of those banks where you may be keen to pick up small stakes or some of the credit organisations or SME related fintech kind of companies?
There is no development to announce anything. We are evaluating and the year FY22 is a very important year because we have restructured our businesses and simplified our organisation structure. We have capitalised all our businesses adequately. All businesses have enough capital for growth plus we have some excess capital at the holding company level. We will make sure there is enough capital. Now we have to think about growth. The last two years have been about managing liquidity, simplifying the structure and strong balance sheet.
Let us come back to value unlocking. There would soon be another listed company from your house. How far is Edelweiss Wealth from being a listed company and how is business growing over there?
Edelweiss Wealth had a very good year last year. Retail broking and individual investors coming back to the market has been a big thing as interest rates have come down and investors are looking for advice on how to get some extra yield and how to manage risk very well, given all the disruption in the mutual fund industry.
Our customer assets in Edel Wealth Management last year grew by 25%. The business made a profit of approximately Rs 240 crore last year. With a PAG deal, Rs 400 crore of fresh capital has been infused in the business and we we are going through a demerger process because that will allow us to give Edelweiss shareholders direct equity in the wealth management business and we think that demerger process is about 12 to 18 months away depending on NCLT process.
We should have Edelweiss Wealth Management listed. The business is growing well. It is very well capitalised. By the end of this year, it should have an equity base of close to Rs 1,800 crore plus. Having that level of equity base and growth, it seems to be in a very good place and listing will be good for that business.
You have seen cycles from the market point of view, from credit point of view and economy as a whole as well. What stage of the market cycle are we looking at? In terms of rebound, are we euphoric or are we fairly priced?
It is always a challenge to make any predictions on the market. Market even after 30 years keeps us surprised, especially in the short term. In the short term, anything can happen, some global announcement by US Fed, some Indian government announcement, some accident happening anywhere in the world could derail the market. In the short run, it is very hard to say where the market is headed.
On a long term basis, India has seen degrowth in corporate profit for the last eight years from 2013 till 2021. The long term trend has turned around and I think corporate profit will be on an uptick for the next four-five years at least. So on a five-year basis, one feels very optimistic about corporate profit growth.
