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Edelweiss Capitaliazling the Rising Markets

May 25, 2010

Edelweiss’ 4Q10 profits were better than estimates on higher investment banking fees and a sharp expansion in the wholesale financed asset book. For the full year (FY10), profits were however 18% below our estimates. Overall, the excess balance sheet and systemic liquidity remained a drag on returns (lower working capital and arbitrage yields).

EDEL’s institutional broking client market share (retail acquisition still not consolidated) appears to have stabilized at current levels (1.7% share) with yields stable at about 5.5bps. Decline in treasury volumes, however, led to a 17% qoq decline in overall daily turnover for 4Q. Management indicated approvals for the Anagram purchase (can add 50% to client market share) are likely soon and should be consolidated 1QFY11 onwards

EDEL’s loan book expanded again sharply in 4Q10 (over 80% qoq rise) – currently focused mainly on promoter financing and margin funding. Management has indicated entry into retail asset financing – viz, SME and mortgages, however these are likely to be medium term initiatives as it will require a separate distribution build-out and risk appraisal/management systems.

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