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Edelweiss Financial Services Ltd.
BUY
-1 of 30- Monday 6th February, 2017
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
ST
OC
K P
OIN
TE
R
Target Price ₹ 217 CMP ₹ 124 FY19E P/Adj. BV 1.8X
Index Details Edelweiss Financial Services Ltd (EFSL) is on the cusp of accelerated
growth given the growth opportunities presented by:
Under penetration of credit in India
Exponential growth of the wealth management industry
Unique opportunity presented by the Asset Reconstruction space
Emergence of Insurance as a high growth sector
Changing investment habits of Indian investor, which is expected
to spearhead the growth of the asset management industry
Buoyant capital markets which are expected to fuel the growth of
the broking segment
We believe that EFSL has a robust business model in place to cater to all
the above opportunities and partake in the India growth story while
keeping risk under control.
Overall we expect consolidated revenue to grow at CAGR of 23.6% over
the period FY16-19 to Rs.9,933 crore. Consolidated PAT to grow at
CAGR of 35.6% over FY16-19 to Rs.1,032 crore. RoA to expand by 68bps
to 1.9% by FY19. RoE to broaden by 581bps to 17.1% by FY19.
We are optimistic about the prospective fortunes of EFSL given that:
Credit book is set to grow at a CAGR of 21.3% to Rs.35,748 crore by FY19. Over the same period asset quality (which is already superior than that of its peers and private banks) is expected to remain stable.
We expect the wealth management AUM to grow at a CAGR of 30.8% over FY16-19 to Rs.77,600 crore driven by:
o Strong branding of its franchise ‘Edelweiss’ o Aggressive spend towards building the franchise
Sensex 28,241
Nifty 8,741
Industry NBFC
Scrip Details
Mkt Cap (₹cr) 10,263
BVPS (₹) 45.1
O/s Shares (Cr) 83.1
Av Vol (Cr) 1.4
52 Week H/L 44/123
Div Yield (%) 1.2
FVPS (₹) 1
Shareholding Pattern
Shareholders %
Promoters 36.9
Public 63.1
Total 100.0
EFSL vs. Sensex
0
20
40
60
80
100
120
140
0
5000
10000
15000
20000
25000
30000
35000
01-Jan-14 01-Jan-15 01-Jan-16 01-Jan-17
SENSEX EFSL
Rs.Rs.
Key Financials (₹ in Cr)
Y/E Mar Net
Interest Income
Non Interest Income
PAT EPS Adj. BV RoE (%) RoA (%) P/E(x) P/Adj. BV(x)
2016 1197.9 2351.2 414.5 5.0 45.1 11.3 1.2 24.8 2.7
2017E 1497.0 3445.9 578.3 7.0 49.7 13.6 1.4 17.7 2.5
2018E 1830.0 4191.8 756.7 9.1 58.3 15.1 1.6 13.6 2.1
2019E 2231.2 4973.5 1032.2 12.5 69.9 17.1 1.9 9.9 1.8
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o Favorable capital markets
o Hallmark equity research
The business which till date was in the investment phase is
expected to start contributing to the profitability.
Acquisition of JP Morgan schemes and Ambit alpha funds schemes
to augment AUMs of the Asset Management business. Buoyed by
the changing investment habits of Indian investors the AUM is
expected to grow at a CAGR of 91.3% to Rs.35,000 crore by FY19.
CDPQ’s investment in its ARC business is expected to bolster
fortunes of this segment. We expect ARC AUM to grow at a CAGR
of 26.3% over the period FY16-19 to Rs. 54,552 crore.
Favorable sentiments for the capital markets are expected to lead
to a surge in revenues of this segment at CAGR of 12.9% to Rs.753
crores by FY19.
Although the Insurance business is not expected to break even
until FY21, we expect premiums to grow at a CAGR of 52.0% to
Rs.1,054 crore by FY19.
We initiate coverage on EFSL as a Buy with a SOTP based price objective
of Rs.217 representing a potential upside of ~75.0 % over a period of 21
months. At CMP of Rs.124, the stock is trading at 2.5X FY17 P/Adj. BV.
SOTP valuation of EFSL
Business Segment Valuation basis Multiple Business valueHolding company
discount
Value after holding
company discount
Value per
share
(Rs. In Cr) (Rs. In Cr) (Rs.)
Credit P/Adj book value 2.7 X 10528 13% 9160 110
Wealth management % of AUM 5% 3880 10% 3492 42
ARC % of AUM 5% 2728 10% 2455 30
AMC % of AUM 5% 1750 10% 1575 19
Broking PE 13 X 451 10% 406 5
Insurance Networth 1.2 X 543 10% 488 6
BMU & Others Book value 1.0 X 470 10% 423 5
Enterprise Value 20350 17999 217
Source: Ventura Research
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Company background
Edelweiss Financial Services Ltd (EFSL) is one of India's leading diversified financial
services company providing a broad range of financial products and services to a
substantial and diversified client base that includes corporations, institutions and
individuals. EFSL's products and services span multiple asset classes and consumer
segments across domestic and global geographies. Its businesses are broadly classified
as shown under
EFSL’s Business Verticals
Source: EFSL ,Ventura Research
Edelweiss
Credit
Wholesale
AUM - Rs. 13306
Retail
AUM - Rs.8043
Wealth Management
AUM - Rs.44200
Asset Management
AUM - Rs. 6900
Broking & Allied
Revenue - Rs.524 Cr
Asset Reconstruction
AUM - Rs.31100
Insurance
Premium - Rs.145Cr
As on Q2FY17 except capital markets which is as on FY16 and Insurance as on H1FY17
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Lower credit penetration presents a huge opportunity
Credit penetration in India is extremely low as compared to other economies. On
similar benchmarks, the Non Bank Finance Companies (NBFCs) penetration in India
is even lower.
While it is commonly expected that credit will grow rapidly as economic growth
gathers pace, it is safe to assume that non bank finance will grow even faster. This is
borne out by the growth rates seen over the past several years.
Why NBFC growth will accelerate?
NBFC sector growth should accelerate in the medium term in India on the back of:
Indian economy has a huge latent credit demand fuelled by a massive self-
employed and MSME business
Public sector banks are under severe stress due to mounting bad debts
Unique nature of credit demand such as inadequate income proof makes it
difficult for traditional bank lending
Digital trends in consumer and MSME segments offer new disruptive
opportunities for innovation and partnerships
Deepening of wholesale debt markets to provide easier access to funds for
NBFCs
Demonetization and Digitalization will result in loss of market share for the
various practices of unorganized money lenders as borrowers move away
towards organized lenders viz., Banks and NBFCs.
Credit penetration in India Vs Other economies NBFC size substantially lower than Other economies
447
374
244
165149
127 12797
0
50
100
150
200
250
300
350
400
450
500
UK Japan US China Germany Thailand Malaysia India
Total credit as % of GDP
264
130
74
33 29 27 2613
0
50
100
150
200
250
300
UK US Japan China Germany Thailand Malaysia India
NBFC credit as % of GDP
Source: Global Shadow Banking Monitoring Report 2015, Ventura Research
Source: Global Shadow Banking Monitoring Report 2015, Ventura Research
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Superior profitability and better asset quality
Asset quality of NBFCs next only to that of private banks but far better than
other scheduled and PSU banks
NBFCs share growing marginally in overall credit
21.3% 20.9% 20.3%
48.2% 48.2% 47.2%
4.5% 4.6% 4.6%
18.0% 18.4% 19.6%
5.7% 5.5% 5.8%
0%
20%
40%
60%
80%
100%
120%
FY13 FY14 FY15
SBI & Associates Nationalized Banks Foreign Banks
Regional Rural Banks Private Banks NBFC
Source: Basic Statistical Returns of Scheduled Commercial Banks in India , ASSOCHAM PWC Report on NBFC, Ventura Research
Higher operating ratios for NBFC
0.4%
4.8%
2.2%
10.6%
1.2%
11.3%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
RoA RoE
Scheduled commercial banks NBFCs Edelweiss
Source: Financial Stability Report 2016,Ventura Research
As on FY16
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Key investment highlights:
The business of EFSL can be broadly divided into Credit, Non Credit and Insurance
Credit Business: Assets set to double over the next four years
A structured and methodical approach has aided in the brisk growth of its credit
portfolio:
From the onset of its foray into the credit business EFSL has adopted a very conservative
and methodological approach in lending:-
They have avoided lending to risk prone sectors (viz. Power, Infra and Auto
loans)
They have emphasized on diversification to curtail risk and have operated like a
typical bank despite being in a non banking framework.
After identifying 55 credit opportunities within the lending space they have
strategically chosen verticals which have high growth
Once a potential high growth credit opportunity is identified they assign its
responsibility to a carefully chosen business head who has experience,
knowledge and the ability to handle the business
All aspects of the business segment are subject to intense scrutiny to understand
feasibility, operational issues and all risks involved
GNPA NNPA
3.8%4.5%
5.2%
9.6%
3.0%
4.0%4.4%
7.6%
1.8%
1.7%
2.0%2.7%
1.5%1.8%
3.3%
4.5%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
FY13 FY14 FY15 FY16
NBFC Pvt banks All Sch banks PSUBanks
2.0%
2.7%
3.2%
6.1%
1.7%
2.3%2.5%
4.6%
0.7%
0.8%1.0%
1.3%
0.7%1.0%
1.5%
2.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
FY13 FY14 FY15 FY16
NBFC Pvt banks All Sch banks Psu Banks
Source: Financial Stability Report 2016, Ventura Research
Source: Financial Stability Report 2016 ,Ventura Research
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Once all the nitty-gritty elements has been sorted out and operational risks
addressed, a full fledged roll out is undertaken.
Loan book to grow at a brisk rate with increased focus on retail lending
Over the period FY12-16, the loan book has grown at a CAGR of 43.0% to Rs. 20,014
crore, driven by wholesale lending. Wholesale lending comprises of structured
collateralized credit to corporates and real estate finance while retail lending includes
housing finance, LAP, SME, Agri finance and Rural finance. During the period FY14-16,
NII has grown from Rs.520 crores to Rs.1,192 crores while asset quality has been
commendably maintained at less than 1.5% despite a challenging period.
Currently EFSL’s lending book is skewed towards wholesale lending which contributes
70% while retail lending contributes the remaining 30%. However going forth, we expect
that increased thrust on the retail segments will lead to a more balanced spread between
the two segments. Overall we expect the loan book to grow at a CAGR of 22.7% from
FY16-19 to Rs.35,748 crores with the thrust being on growing the retail book.
Advances book by verticals
Products FY14 FY15 FY16 FY17E FY18E FY19E% of total book
as on FY16
% of total book
as on FY193 Year CAGR
Wholesale book 5815 12954 13993 14249 16506 18939 70% 53% 11%
Structured collaterized book 6014 6750 8100 9558 11087 34% 31% 18%
Distress Asset Book 1226 1896
Wholesale mortgage 5714 5347 6149 6948 7852 27% 22% 14%
Retail book 2089 2105 6021 10213 13293 16809 30% 47% 41%
Retail mortgage 752 2641 3169 3740 4301 13% 12% 18%
Agri & Rural financing 301 590 944 1369 1848 3% 5% 46%
Loan against shares 451 1940 3500 4025 4629 10% 13% 34%
SME & others 601 850 2600 4160 6032 4% 17% 92%
Total Credit book 7904 15059 20014 24462 29800 35748
Earlier a associate, now a subsidiary. So loan book converted into caoital
Source: EFSL ,Ventura Research
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Wholesale lending: Backbone of historical growth
As a strategy, EFSL gives loans to corporates with high collateral (~2.5 times) or on the
basis of a strict check on the credit worthiness of the counter party. Collateral may be in
liquid or illiquid form. Its sub-divisions include:
o Structured collateralized credit to corporates
o Wholesale mortgage which caters to real estate developers
o Distress asset book which is now converted into capital of EFSL, as its ARC arm
has become a subsidiary.
Wholesale book share to dwindle to 53%
FY16
Wholesale Retail
Source: EFSL, Ventura Research
on the back of faster growth of retail book
FY19
Wholesale Retail
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Overall we expect the wholesale book to grow at a CAGR of 10.6% over FY16-19 to
Rs.18,939 crore.
Retail lending: A future thrust area
EFSL’s retail lending includes housing finance, LAP, SME, Agri finance and Rural
finance. Overall we expect the retail book to grow at a CAGR of 40.8% to Rs.16,809
crore over the period FY16-19.
Wholesale book
0
5000
10000
15000
20000
FY15 FY16 FY17E FY18E FY19E
Structured Collateralized Assets Distressed Assets Credit
Wholsesale Mortgage
Rs in Cr
Source: EFSL, Ventura Research
Degrowth, as ARC business is converted into subsidiary
Retail book to grow at blistering pace
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
FY15 FY16 FY17E FY18E FY19E
Retail Mortgage Agri & Rural Financing Loan against Shares SME & Others
Rs in Cr
Source: EFSL ,Ventura Research
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EFSL’s retail mortgage book is expected to grow at a CAGR of 17.6% over FY16-19 to
Rs.4,301 crores. The company has rightly chosen to foray into and expand its housing
finance business considering under penetration of the mortgage market, the gap between
demand and supply and improved affordability as a result of tax incentives.
Agri and Rural finance to grow at a CAGR of 46.3% over FY16-19 to Rs.1,848 crores.
EFSL’s Agri financing also involves providing loans to farmers against which the farmers
keep their stock as collateral in EFSL’s warehouses. For this EFSL earns warehousing
charges in addition to financial income. Today, EFSL is the second largest warehousing
company (315 warehouses) with a capacity of 13.2M tones. It is planning to grow its
warehouses to 500–600 by FY19.
SME finance is expected to grow at CAGR of 92.2% over FY16-19 to Rs.6,032 crores.
With the growing contribution of the SME segment to the economy, the government has
taken a good number of initiatives to encourage the growth of this sector. Considering
this opportunity EFSL has forayed to expand its SME book.
NII to increase steadily with marginal increase in NIMs
Over the period FY14-16, the NII has grown at a scorching pace of 51.4% CAGR to
Rs.1192 crore. Going ahead we expect the NII to increase to Rs.2,270 crore by FY19 (3
Year CAGR of 23.9%). Driven by a surge in retail lending overall yields are expected to
fall by 80bps to 15.4% by FY19. However NIMs are expected to improve marginally by
10bps to 6.9% given the improved cost of funds.
NII NIMs
520
804
1192
1518
1858
2270
0
500
1000
1500
2000
2500
2014 2015 2016 2017E 2018E 2019E
Rs. in Cr
6.7% 6.7% 6.8% 6.8% 6.8% 6.9%
10.1%10.9% 10.7% 10.5% 10.4% 10.3%
15.1%15.8% 16.2%
15.6% 15.5% 15.4%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
2014 2015 2016 2017E 2018E 2019E
NIM Cost of funds Yields
Source: EFSL, Ventura Research
Source: EFSL, Ventura Research
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Cost to Income to witness continuing improvement:
Over the years, the C/I have declined from 48% in FY14 to 44% in FY16. As the benefits
of size accrue we expect the C/I to fall further to 41% by FY19. However the pace of
decline would be significantly lower as the retail book rollout consumes more cost than
wholesale lending.
Asset quality to remain stable:
EFSL has been a step ahead of its peers in managing its asset quality. We have factored
in a deterioration of 30bps/15bps in GNPA/NNPA to 1.7% / 0.7% by FY19.
Cost to Income to decline with increase in credit book
48%
46%
44%
43%
42%
41%
36%
38%
40%
42%
44%
46%
48%
50%
2014 2015 2016 2017E 2018E 2019E
Source: EFSL, Ventura Research
GNPL NNPL
0.90%
1.30%
1.40%
1.50%
1.60%
1.70%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
1.80%
2014 2015 2016 2017E 2018E 2019E
0.20%
0.40%
0.50%
0.55%
0.60%
0.70%
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
2014 2015 2016 2017E 2018E 2019E
Source: EFSL, Ventura Research
Source: EFSL, Ventura Research
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EFSL has a better asset quality than its peers High capital adequacy ensures room for ample growth:
As on FY16, the CAR of EFSL stood at 16.7%. While the CAR is sufficient to cater to its
future growth, we expect EFSL to raise capital in FY18.
High Capital Adequacy to drive future growth
15.312.9 12.3 11.6
10.5
4
3.83.6
3.43.2
0
5
10
15
20
25
FY15 FY16 FY17E FY18E FY19E
Tier I Tier II
In %
Source: EFSL, Ventura Research
GNPL NNPL
1.4% 1.4%
2.7%
7.4%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Edelweiss IIFL L&T Finance holding
Magma Fincorp
0.5% 0.5%
1.7%
5.7%
0%
1%
2%
3%
4%
5%
6%
Edelweiss IIFL L&T Finance holding
Magma Fincorp
Source: EFSL, Ventura Research
Source: EFSL, Ventura Research
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Non - Credit Business
Wealth Management: The next growth driver
AUM to grow at a scorching pace
After Kotak and IIFL, EFSL is the 3rd largest wealth management company in India in
terms of AUM size. EFSL has witnessed its wealth management business growing at a
scorching pace of 82% CAGR in its Asset under Advice (AUA) over the period FY14-16.
Presently, EFSL is serving 300 Ultra High-Net worth individuals and more than 1,100 high
net worth families. We expect AUA to grow at a CAGR of 38.0% over the period FY16-19
to Rs.77,600 crore driven by:
Strong branding of its franchise ‘Edelweiss’
Aggressive spend towards building the franchise
Favorable capital markets
Hallmark equity research
Credit business at a glance
Particulars FY16 FY17E FY18E FY19E
Interest Income 2894 3475 4194 5038
(-) Interest expended 1701 1957 2336 2768
Net Interest Income 1192 1518 1858 2270
Growth (%) 27.3% 22.4% 22.2%
Operating cost 562 674 809 960
Operating Income 630 844 1049 1310
(+) Other Income 40 49 60 71
Total income 671 893 1108 1381
Provision 160 216 250 288
Profit before tax 511 678 858 1094
Tax 174 230 292 372
Profit After Tax 337 447 566 722
Growth (%) 32.7% 26.6% 27.5%
(Rs in crore)
Source: Ventura Research
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Building a platform for future growth:
The profitability of the wealth management business has yet to start unraveling as the management is burning cash in order to build a franchise of respectable size. This is in keeping with its aspirations of fast closing the gap with its peers. Currently, the cost to income ratio stands at ~98% as EFSL has invested heavily in technology and manpower. However we believe that the company is at an inflection point and profitability should ensure, given the expected aggressive expansion of its AUM to Rs.77,600 crore over FY19 and optimum utilization of its human resources. Over the period FY16-19 we expect the cost to income to improve by ~3300bps to ~65% - 70% by FY19 from the current level of ~98%.
Investment in technological up-gradation to continue
EFSL has also recently signed an agreement for technology business transformation for its two key businesses –Wealth Management and Insurance, where it will undertake about 15 projects across these businesses and spend close to Rs.100 to 175 crore over the next 5-years.
Wealth Management AUM
8900
17750
29500
49500
62000
77600
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
2014 2015 2016 2017E 2018E 2019E
In Rs. Cr
Source: EFSL, Ventura Research
Outcome of wealth management business
Particulars FY16 FY17E FY18E FY19E
Commission & fee 201 336 474 593
Growth 67% 41% 25%
Operating Expense 197 295 355 386
Growth 50% 20% 9%
Operating profit 4 40 118 208
Growth 903% 194% 75%
(Rs in crore)
Source: Ventura Research
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Asset Reconstruction (ARC): How the ARC business works?
Asset reconstruction companies (ARCs) are formed as a response to a systemic crisis to
protect commercial banks by creating one ‘bad bank’ that takes over the stressed loans of
the entire system. It is a market-driven model that allows banks to take their own decisions
to sell bad loans to ARCs, based on bilateral negotiations and/or auctions.
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The market for stressed assets is not adequately developed in India and ARCs are facing
capital constraints.
ARC: A business with latent benefits:
The main objective of EFSL in acquiring any book is to turnaround the company for
unlocking maximum value. On an average it takes around 5-7 years to get money back to
the ARC Company. EFSL ARC which got its license in the year of 2009 is relatively a
Funding for ARC business to improve
2427
3128 30
3430 31 32 34
43
69
0
10
20
30
40
50
60
70
80
FY10 FY11 FY12 FY13 FY14 FY15
Owned funds total assets
In Rs. Billion
Source: Financial Stability Report 2015, Ventura Research
Indian ARC market to mature further
90110
70100
500 500
20 305
30
200 210
0
100
200
300
400
500
600
FY10 FY11 FY12 FY13 FY14 FY15
Book value of asset acquired Acquisition cost
In Rs. Billion
Source: Financial Stability Report 2015, Ventura Research
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new business with an AUM of Rs.9,200 crores in FY14 which has rapidly grown to
Rs.31,100 crores as on H1FY17. As these funds (Capital + bonus) start returning, the
ARC business will make a serious contribution to EFLS’s profitability. Any bonus accruals
will be a windfall over and above the invested capital.
EFSL’s ARC AUM has increased at a CAGR of 71.6% over the period FY14-16 to
Rs.27,100 crore. This is expected to grow at CAGR of 26.3% by FY19 to Rs.54,522 crore
on the back of:
NPA problem plaguing the banking sector As NPAs in the banking system have soared to ~6.3 lakh crore, we see a huge
opportunity for ARC companies. However the banking companies are still not interested
in offering their NPAs to ARC companies as they are expecting higher valuations for their
accounts. However, as the NPA woes persist, we expect more banks to unload their
stressed assets on to ARCs. Recently there is an encouraging trend of high value
accounts being turned over to ARC companies.
Reworking of business enhances confidence in business model EFSL has a robust team of specialists, acknowledged for their experience in
debt/business restructuring as well as strong executional capabilities. The Team chooses
case-specific appropriate resolution strategies to unlock maximum value from financially
stressed or distressed companies for the benefit of all stake holders. The primary focus of
ARC has been on the revival and turnaround of potentially viable industrial enterprises
and towards this end, EFSL draws synergistic support from the EFSL Group to extend
additional need based funding, if any required.
ARC AUM
9200
20000
27100
35772
44715
54552
0
10000
20000
30000
40000
50000
60000
2014 2015 2016 2017E 2018E 2019E
In Rs. Cr
Source: EFSL, Ventura Research
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Fund investment of Rs.5,000 crore provides for the next leg of growth CDPQ has targeted investment of Rs.5,000 crore over four year in the ARC business.
Through this investment CDPQ will also be acquiring a 20% equity stake in Edelweiss
Asset Reconstruction Company (EARC). Investment will be in the form of equity as well
as debt. The same is the single largest investment by an institutional investor in this
sector. The partnership aims to channel between Rs. 12,000-14,000 crore (including
CDPQ’s Rs. 5,000 crore and investments from the EFSL Group and other international
institutional investors) into private debt and restructuring of stressed assets in the
country.
Contribution from the ARC is expected to grow at a CAGR of 43% to Rs.245 crores from
the current Rs.83 crore.
Asset Management: Industry in a sweet spot
Assets managed by the Indian mutual fund industry have grown from Rs. 5.87 lakh crore
in FY12 to Rs.12.32 lakh crore in FY16 representing a growth of CAGR 28% in assets
over FY12-16.
Contribution from ARC business
Particulars FY16 FY17E FY18E FY19E
(Rs in crore)
Commission & Fee 389 534 684 844
Growth 38% 28% 23%
Other Income 48 65 81 97
Total Income 437 599 765 941
Operating Expense 354 467 582 696
Operating profit 83 132 184 245
Growth 59% 39% 33%
Source: Ventura Research
- 19 of 30- Monday 6th February, 2017
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EFSL’s mutual fund business is set to benefit with the growing brand value of EFSL. Its
AUM from asset management has grown at a CAGR of 19.9% to Rs.5,000 crore over
FY14-16. However post the acquisition of a few schemes from its peers we expect the
AUM to grow at CAGR of 91.3% to Rs.35,000 crore over the period FY16-19.
AMC AUM
2900 3000
5000
20000
28000
35000
0
5000
10000
15000
20000
25000
30000
35000
40000
FY14 FY15 FY16 2017E 2018E 2019E
In Rs. Cr
Source: EFSL , Ventura Research
Mainly due to acquisition of JP Morgan and Ambit alpha schemes
Indian Mutual Fund Industry AUM
5.9
7.0
8.3
10.8
12.3
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
FY12 FY13 FY14 FY15 FY16
Mutual Fund AUM
In Rs. lakh crore
Source: EFSL, Ventura Research
- 20 of 30- Monday 6th February, 2017
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Growth through acquisition
EFSL is expanding its asset management business through acquisition of schemes.
Recently it has acquired 2 schemes of JP Morgan and Ambit Alpha Fund, whose formal
closure is expected by end of FY17. As per the deal between EFSL and JP Morgan,
EFSL would acquire all onshore fund schemes managed by JP Morgan Asset
Management in India including its country-based onshore mutual fund business and the
international fund of funds. EFSL is also acquiring Ambit Alpha Fund with an AUM of over
Rs.1,100 crore. The transaction is subject to due diligence and requisite regulatory
approvals. Acquisition of both these schemes will take the overall AUM to ~Rs.15,000
crores.
Profitability to come in with increase in AUM
Currently EFSL AMCs business contribution is quite low; however post the acquisition of
JP Morgan and Ambit schemes and increased efforts to grow the AMCs AUM should lead
to higher contribution. We expect EFSL AMC’s AUM to increase at a CAGR of 91.3%
over FY16-19 to Rs.35,000 crore (including acquisition of above mentioned schemes).
The contribution from the AMC business is expected to grow at CAGR of 153% to Rs.83
crore over the period FY16-19 from current level of Rs.5 crores.
Capital Markets: India’s ‘Star’ market status augurs well for future growth
Brokerage business to grow along with capital markets
EFSL has a good mix of retail and institutional clients in its daily trading volumes.
However we expect a marginal increase in profit from this business considering the
increased participation from institutional clients. Apart from broking, EFSL also provides
various need based capital market services to its clients.
AMC Outcome
Particulars FY16 FY17E FY18E FY19E
Commission & Fee 14.2 68.8 156.0 236.3
Growth 385% 127% 51%
Other Income 6 7 7 8
Total Income 20 75 163 244
Operating Expense 15 53 111 161
Operating profit 5 23 52 83
Growth 343% 131% 59%
(Rs in crore)
Source: Ventura Research
- 21 of 30- Monday 6th February, 2017
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Brokerage Average Daily Volumes
3100
50005200
6700
0
1000
2000
3000
4000
5000
6000
7000
8000
FY14 FY15 FY16 H1FY17
Nos. in '000 Cr
Source: EFSL , Ventura Research
Outcome of Capital Market business
Particulars FY16 FY17E FY18E FY19E
Brokerage income 232 242 254 270
Fee Income 292 356 420 483
Total Income 524 598 675 753
14% 13% 12%
Operating expense 394 439 479 507
Operating profit 129 159 195 246
Growth 23% 23% 26%
(Rs in crore)
Source: Ventura Research
- 22 of 30- Monday 6th February, 2017
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Industry trends for the Indian Capital Markets Life Insurance: Under penetration implies huge opportunity
In 2016, the size of the Indian life insurance sector (excluding Sahara Life Insurance
Company Limited) was Rs. 3.7 lakh crore on a total premium basis, making it the tenth
largest life insurance market in the world and the fifth largest in Asia [According to Swiss
Re, sigma No 3/2016].
Market Capitalization NSE (In Rs’000 Crore) Number of shares listed on NSE
67
03
60
97
62
39
72
78
99
30
93
10
35
95
42
73
49
28
51
29
57
39
59
65
0
2000
4000
6000
8000
10000
12000
FY11 FY12 FY13 FY14 FY15 FY16
Capital Market Wholesale Debt Market
In Rs. '000 Cr
1646
1666
1688
1733
1808
1550
1600
1650
1700
1750
1800
1850
FY12 FY13 FY14 FY15 FY16
Number of shares listed
In Nos.
Source: NSE Fact Book 2016, Ventura Research
Source: NSE Fact Book 2016,Ventura Research
Trading value of different market segments (INR Cr)
0
10000000
20000000
30000000
40000000
50000000
60000000
70000000
80000000
FY12 FY13 FY14 FY15 FY16
Capital Markets Equity F&O Currency F&O
In Rs. Cr
Source: NSE Fact Book 2016 , Ventura Research
- 23 of 30- Monday 6th February, 2017
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The total premium in the Indian life insurance sector grew at a CAGR of ~ 17% between
fiscal 2001 and fiscal 2016. Despite this, India continues to remain an underpenetrated
insurance market with a life insurance penetration of 2.7% in fiscal 2015, as compared to
3.7% in Thailand, 7.3% in South Korea and a global average of 3.5% in 2015. This under
penetration offers a significant opportunity and augurs well for the future grows of EFSL’s
insurance business.
Partnership with Tokio Life Insurance
EFSL expanded its addressable retail market by launching EFSL Tokio life insurance
company (ETLIC) in 2011 in partnership with Tokio Marine of Japan. EFSL Tokio was
launched with the highest startup capital for an Indian Life Insurer with Rs.550 crore.
Tokio Marine infused fresh capital of Rs.530 crore taking its share to 49% with EFSL
holding the remaining 51%. Its net worth at the end of FY16 was Rs.939 crore.
Fastest growing insurance company
Over the period FY14-16 ETLIC has emerged as the fastest growing life insurance
company in India with gross premium growing at 68.1% CAGR to Rs.300 crore. ETLIC is
continuously expanding its footprints across agency and partnership with direct channels.
The JV has also scaled up its personal financial advisors. We expect gross insurance to
grow at a CAGR of 52.0% to Rs.1,054 crore by FY19.
Premium as % of GDP as of fiscal 2015 Insurance Density (Prem. Per Capita (US$)) as of fiscal 2015
12.0%
8.3%
7.3%
3.7%3.1%
2.7%2.0%
1.3%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
S. Africa Japan S. Korea Thailand US India China Indonesia
2717
19401719
688
215 178 15343 43 17 15
0
500
1000
1500
2000
2500
3000
Source: Swiss Re, sigma No 3/2016, Ventura Research
Source: Swiss Re, sigma No 3/2016,Ventura Research
- 24 of 30- Monday 6th February, 2017
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The JV is expected to continue to be in investment phase and breakeven is
expected only by FY2021 onwards.
Insurance premium
106
187
300
495
753
1054
0
200
400
600
800
1000
1200
FY14 FY15 FY16 FY17E FY18E FY19E
In Rs. Cr
Source: EFSL, Ventura Research
Insurance business outcome
Particulars FY16 FY17E FY18E FY19E
(Rs in crore)
Premium 300 495 753 1054
Growth 65% 52% 40%
Other Income 87 95 102 112
Total Income 387 590 855 1166
Cahnge in liability 255 354 487 641
Other Expense 287 413 538 664
Total Expense 542 767 1026 1305
PAT -155 -177 -171 -140
Source: Ventura Research
- 25 of 30- Monday 6th February, 2017
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Financial Performance:
Credit business
The overall credit book of EFSL grew by 29.6% YoY to Rs.21,349 crore (Excluding
Distress Asset Credit) in Q2FY17. Robust increase in the wholesale segment contributed
to NIM expansion by 20 bps. Overall yield also increased by 10bps to 16.2%. Asset
quality slightly declined as GNPA and NNPA increased by 10 bps each.
Financial performance
Particulars Q2FY17 Q2FY16 FY16 FY15
Income from operation
Fee & Commission 240.5 148.0 696.6 572.7
Fund based activities 1227.7 1017.8 4170.4 3082.0
Premium from life insurance 84.6 57.5 300.2 186.6
Other operating income 39.3 16.4 86.8 38.5
Total income from operation 1592.1 1239.7 5253.9 3879.8
Expenses
Employee benefit expenses 276.5 213.4 882.1 708.6
Depreciation & ammortization
expense 22.8 20.7 90.2 71.6
Change in life insurance policy
liability 86.8 49.6 255.5 139.5
Other expense 268.9 188.1 849.0 632.6
Total expense 655.0 471.8 2076.8 1552.4
Profit / (Loss) from operation
befor other income 937.1 767.9 3177.1 2327.4
Other Income 4.4 0.6 14.2 14.0
Profit / (Loss) from ordinary
activities before finance cost 941.5 768.5 3191.3 2341.4
Finacne cost 708.9 637.7 2620.1 1831.5
Profit / (Loss) before tax 232.6 130.8 571.2 509.9
Tax expense 96.8 48.2 235.4 201.7
Net profit /(Loss) after atx 135.8 82.6 335.8 308.2
Share of profit/ (Loss) of
associates 4.9 8.2 47.7 18.1
Minority interest -3.7 -4.9 -30.9 -2.4
Consolidated profit / (Loss) 144.4 95.7 414.4 328.7
Source: EFSL , Ventura Research
- 26 of 30- Monday 6th February, 2017
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Non Credit business
Wealth Management AUM grew by 126% YoY to Rs.44,200 crore for Q2FY17.
Asset management AUM has grown to Rs.6,900 crore for Q2FY17 excluding
acquisition of JP schemes.
ARC AUM has grown to Rs.31,100 crore.
Gross premium income from life insurance also grew 49% YoY to Rs.85 crore.
Financial Outlook:
Consolidated earnings are expected to grow at a CAGR of 35.6% to Rs.1032 crores
by FY19 driven by:
Credit book set to double in next four years while NII to grow strongly at a CAGR
of 23.9% over FY16-19 to Rs.2,270 crore.
Rapid growth in the wealth management AUM should lead to higher traction in
earning from wealth management.
Capital infusion from CDPQ should cater to planned growth of the ARC business
with RBI getting aggressive on cleaning up NPAs of banking companies. We
expect opportunity to ARC companies to grow over the next couple of years.
Broking business to grow along with growth in capital markets
AMC to grow with acquisition of JP Morgan and Ambit schemes.
Rapid expansion of insurance business.
.
PAT Bifurcation
170 230337
447566
722
101
152
182
241
311
396
-51 -53 -104 -110 -121 -86
-200
0
200
400
600
800
1000
1200
FY14 FY15 FY16 FY17E FY18E FY19E
Credit Non Credit Insurance
220
329
414
578
757
1032
Source: Ventura Research
- 27 of 30- Monday 6th February, 2017
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Valuation
As EFSL is a well diversified NBFC, we have adopted the SOTP method to value the
company. We initiate coverage on Edelweiss Financial Services Ltd with a BUY with a
price objective of Rs.217 representing a potential upside of 75.0% over the next 21
months.
P/BV
Source: Ventura Research
0
20
40
60
80
100
120
140
CMP 0.3X 0.8X 1.3X 1.8X 2.3X
SOTP valuation of EFSL
Business Segment Valuation basis Multiple Business valueHolding company
discount
Value after holding
company discount
Value per
share
(Rs. In Cr) (Rs. In Cr) (Rs.)
Credit P/Adj book value 2.7 X 10528 13% 9160 110
Wealth management % of AUM 5% 3880 10% 3492 42
ARC % of AUM 5% 2728 10% 2455 30
AMC % of AUM 5% 1750 10% 1575 19
Broking PE 13 X 451 10% 406 5
Insurance Networth 1.2 X 543 10% 488 6
BMU & Others Book value 1.0 X 470 10% 423 5
Enterprise Value 20350 17999 217
Source: Ventura Research
- 28 of 30- Monday 6th February, 2017
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P/E
0
20
40
60
80
100
120
140
Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16
CMP 8X 12X 16X 20X 24X
Source: Ventura Research
- 29 of 30- Monday 6th February, 2017
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Financials and Projection
Y/E March (` crore) FY16 FY17E FY18E FY19E Y/E March (` crore) FY16 FY17E FY18E FY19E
Income Statement Ratio Analysis
Interest Income 2,898.9 3,453.7 4,166.3 4,999.3 Efficiency Ratio (%)
Interest Expense 1,701.0 1,956.7 2,336.3 2,768.1 Int Expended / Int Earned 58.7 56.7 56.1 55.4
Net Interest Income 1,197.9 1,497.0 1,830.0 2,231.2 Int Income / Total Funds 78.9 81.2 83.2 82.8
YoY change (%) 25% 22% 22% NII / Total Income 33.8 30.3 30.4 31.0
Non Interest Income 2,351.2 3,445.9 4,191.8 4,973.5 Other Inc. / Total Income 66.2 69.7 69.6 69.0
Total Net Income 3,549.1 4,942.9 6,021.8 7,204.7 Ope. Exp. / Total Income 78.8 78.5 76.0 72.0
Total Operating Expenses 2,795.1 3,878.9 4,579.4 5,186.8 Net Profit / Total Funds 11.3 13.6 15.1 17.1
Pre Provision profit 754.0 1,064.0 1,442.4 2,017.9 Credit / Deposit
YoY change (%) 41% 36% 40% Investment / Deposit
Provisions for expenses 182.6 215.5 250.0 287.5 NIM 6.8 6.8 6.8 6.9
Profit Before Tax 571.3 848.4 1,192.4 1,730.4
YoY change (%) 49% 41% 45% Solvency
Taxes 235.4 339.4 482.9 709.5 Gross NPA (Rs. Cr) 280.2 366.9 476.8 607.7
Reported PAT 336.0 509.1 709.5 1,020.9 Net NPA (Rs. Cr) 100.1 134.5 178.8 250.2
YoY change (%) 52% 39% 44% Gross NPA (%) 1.4 1.5 1.6 1.7
Minority Interest 30.9 39.3 22.3 -8.7 Net NPA (%) 0.5 0.6 0.6 0.7
Share of Associate 47.7 30.0 25.0 20.0
PAT 414.6 578.3 756.7 1032.2 Capital Adequacy Ratio (%) 17.5 16.1 14.9 13.2
YoY change (%) 40% 31% 36% Tier I Capital (%) 13.7 12.5 11.5 10.0
Tier II Capital (%) 3.8 3.6 3.4 3.2
Balance Sheet
Cash & Balances with RBI 1,934.0 1,672.0 1,602.0 1,550.0 Per Share Data (`)
Inter bank borrrowing EPS 5.0 7.0 9.1 12.4
Investments 2,628.0 2,966.1 3,203.4 3,395.6 Dividend Per Share 1.3 1.3 1.3 1.3
Loan and Advances 20,014.0 24,462.3 29,799.9 35,748.2 Book Value 45.1 51.2 60.3 72.7
Other Assets 12,229.0 14,604.7 15,833.4 16,972.4 Adjusted Book Value of Share 45.1 49.5 58.1 69.7
Total Assets 36,805.0 43,705.0 50,438.6 57,666.2
Deposits Valuation Ratio
Demand Price/Earnings (x) 24.8 17.7 13.6 9.9
Savings Price/Book Value (x) 2.7 2.4 2.0 1.7
Term Price/Adj.Book Value (x) 2.7 2.5 2.1 1.8
Borrowings 27,773.0 33,090.0 36,700.0 41,500.0
Other Liability 5,357.1 6,363.9 8,730.7 10,126.2 Return Ratio
Equity 81.4 81.4 81.4 81.4 RoAA (%) 1.2 1.4 1.6 1.9
Reserves 3,593.5 4,169.7 4,926.4 5,958.6 RoAE (%) 11.3 13.6 15.1 17.1
Total Liabilities 36,805.0 43,705.0 50,438.6 57,666.2
Growth Ratio (%)
Dupont Analysis Interest Income 22.9 22.8 19.0
% of Average Assets Interest Expenses 17.32 20.82 17.77
Net Interest Income 3.6 3.7 3.9 4.1 Other Income 37.03 21.87 18.54
Non Interest Income 7.0 8.6 8.9 9.2 Total Income 34.9 23.0 19.2
Net Income 1.2 1.4 1.6 1.9 Net profit 25.6 35.9 44.7
Operating Expenses 8.3 9.6 9.7 9.6 Deposits
Operating Profit 2.2 2.6 3.1 3.7 Advances 22.2 21.8 20.0
Provisions & Contingencies 0.5 0.5 0.5 0.5
Taxes 0.0 0.0 0.0 0.0
Avg.Assets / Avg.Equity (x) 9.8 10.2 10.2 9.8
- 30 of 30- Monday 6th February, 2017
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Disclosures and Disclaimer Ventura Securities Limited (VSL) is a SEBI registered intermediary offering broking, depository and portfolio management services to clients. VSL is member of BSE, NSE and MCX-SX. VSL is a depository participant of NSDL. VSL states that no disciplinary action whatsoever has been taken by SEBI against it in last five years except administrative warning issued in connection with technical and venial lapses observed while inspection of books of accounts and records. Ventura Commodities Limited, Ventura Guaranty Limited, Ventura Insurance Brokers Limited and Ventura Allied Services Private Limited are associates of VSL. Research Analyst (RA) involved in the preparation of this research report and VSL disclose that neither RA nor VSL nor its associates (i) have any financial interest in the company which is the subject matter of this research report (ii) holds ownership of one percent or more in the securities of subject company (iii) have any material conflict of interest at the time of publication of this research report (iv) have received any compensation from the subject company in the past twelve months (v) have managed or co-managed public offering of securities for the subject company in past twelve months (vi) have received any compensation for investment banking merchant banking or brokerage services from the subject company in the past twelve months (vii) have received any compensation for product or services from the subject company in the past twelve months (viii) have received any compensation or other benefits from the subject company or third party in connection with the research report. RA involved in the preparation of this research report discloses that he / she has not served as an officer, director or employee of the subject company. RA involved in the preparation of this research report and VSL discloses that they have not been engaged in the market making activity for the subject company. Our sales people, dealers, traders and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein. We may have earlier issued or may issue in future reports on the companies covered herein with recommendations/ information inconsistent or different those made in this report. In reviewing this document, you should be aware that any or all of the foregoing, among other things, may give rise to or potential conflicts of interest. We may rely on information barriers, such as "Chinese Walls" to control the flow of information contained in one or more areas within us, or other areas, units, groups or affiliates of VSL. This report is for information purposes only and this document/material should not be construed as an offer to sell or the solicitation of an offer to buy, purchase or subscribe to any securities, and neither this document nor anything contained herein shall form the basis of or be relied upon in connection with any contract or commitment whatsoever. This document does not solicit any action based on the material contained herein. It is for the general information of the clients / prospective clients of VSL. VSL will not treat recipients as clients by virtue of their receiving this report. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of clients / prospective clients. Similarly, this document does not have regard to the specific investment objectives, financial situation/circumstances and the particular needs of any specific person who may receive this document. The securities discussed in this report may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Persons who may receive this document should consider and independently evaluate whether it is suitable for his/ her/their particular circumstances and, if necessary, seek professional/financial advice. And such person shall be responsible for conducting his/her/their own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this document. The projections and forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections and forecasts were based will not materialize or will vary significantly from actual results, and such variances will likely increase over time. All projections and forecasts described in this report have been prepared solely by the authors of this report independently of the Company. These projections and forecasts were not prepared with a view toward compliance with published guidelines or generally accepted accounting principles. No independent accountants have expressed an opinion or any other form of assurance on these projections or forecasts. You should not regard the inclusion of the projections and forecasts described herein as a representation or warranty by VSL, its associates, the authors of this report or any other person that these projections or forecasts or their underlying assumptions will be achieved. For these reasons, you should only consider the projections and forecasts described in this report after carefully evaluating all of the information in this report, including the assumptions underlying such projections and forecasts. The price and value of the investments referred to in this document/material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance. Future returns are not guaranteed and a loss of original capital may occur. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. We do not provide tax advice to our clients, and all investors are strongly advised to consult regarding any potential investment. VSL, the RA involved in the preparation of this research report and its associates accept no liabilities for any loss or damage of any kind arising out of the use of this report. This report/document has been prepared by VSL, based upon information available to the public and sources, believed to be reliable. No representation or warranty, express or implied is made that it is accurate or complete. VSL has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. The opinions expressed in this document/material are subject to change without notice and have no obligation to tell you when opinions or information in this report change. This report or recommendations or information contained herein do/does not constitute or purport to constitute investment advice in publicly accessible media and should not be reproduced, transmitted or published by the recipient. The report is for the use and consumption of the recipient only. This publication may not be distributed to the public used by the public media without the express written consent of VSL. This report or any portion hereof may not be printed, sold or distributed without the written consent of VSL. This document does not constitute an offer or invitation to subscribe for or purchase or deal in any securities and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. This document is strictly confidential and is being furnished to you solely for your information, may not be distributed to the press or other media and may not be reproduced or redistributed to any other person. The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of VSL and are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this report and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection. This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or any of its directors or any other person. Information in this document must not be relied upon as having been authorized or approved by the company or its directors or any other person. Any opinions and projections contained herein are entirely those of the authors. None of the company or its directors or any other person accepts any liability whatsoever for any loss arising from any use of this document or its contents or otherwise arising in connection therewith. The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read “Risk Disclosure Document for Capital Market and Derivatives Segments” as prescribed by Securities and Exchange Board of India before investing in Securities Market. Ventura Securities Limited
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