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Edelweiss Capital (EDEL.BO)
Industry Headwinds to Continue
Cutting Target Price to Rs25, maintain Sell on industry headwinds — We
reduce our target price to Rs25 on the back of lower earnings (down 46-48%
over FY12-13E on lower than expected brokerage industry volumes and
commissions without any change in overall costs) and a lower fair-value multiple
(11x 1yr Fwd PE, from 15x earlier), reflecting a meaningful reduction in
profitability. While valuations are low, we believe near term recovery prospects
remain weak and will continue to weigh on the stock.
Challenges continue across segments — Edelweiss continues to face strong
business headwinds across its various segments. Broking continues to face
challenges on a) Market fragmentation (increasing competition); b) Lower
commission yields (changing product mix); and c) Muted outlook on financial
product distribution (regulatory changes). Investment banking activity has slowed
and while its lending piece is faring better, it is still a relatively smaller part of the
overall platform/revenue stream.
Quant View: Contrarian — As per our quantitative methodology, Edelweiss
Capital currently lies in the Contrarian quadrant of our Value-Momentum map
with relatively weak momentum but strong value scores.
Edelweiss currently lies in the Contrarian quadrant of our Value-Momentum map
with relatively weak momentum but strong value scores. It has been a resident
there since the past 6 months. Compared to its peers in the Insurance & Other
Financials sector, Edelweiss fares better on the valuation metric but worse on the
momentum metric. Similarly, compared to its peers in its home market of India,
Edelweiss fares better on the valuation metric but worse on the momentum metric.
From a macro perspective, Edelweiss has a high beta to the region so is likely to
rise (or fall) faster than the region. It is also likely to benefit from falling EM yields,
and a weaker US Dollar.
Edelweiss Capital
Company description
Edelweiss, founded in 1995, started as a niche investment bank that focused on
private-equity syndications. It was co-founded by Rashesh Shah and Venkat
Ramaswamy. Edelweiss has over the years built a diversified product offering in the
institutional segment through broking and investment-banking services, backed by a
strong treasury and arbitrage trading portfolio. Edelweiss also offers financing
against assets and shares, asset and wealth management, and insurance broking.
It operates its various businesses directly and through various subsidiaries, which
are consolidated under the parent.
Investment strategy
We rate Edelweiss Sell/Medium Risk (3M). Edelweiss is among the largest
institutional brokerages in India and has retained its market positioning with a strong
management team. However, the Indian brokerage industry continues to face
challenges on a) Market fragmentation (increasing competition); b) Lower
commission yields (changing product mix); and c) Muted outlook on financial
product distribution (regulatory changes). Moreover, Edelweiss has a relatively
smaller retail franchise, which we believe is a longer term structural growth segment
in India; and can impact Edelweiss’ competitive positioning. Edelweiss’ arbitrage
trading business has also continued to attract lower turnover and profitability which
is expected to remain a drag on overall profitability. Moreover, we expect cost
pressures to increase going forward, leading to possible declines in profit margins.
Valuation
Our target price of Rs25 is based on a price to earnings approach. We value
brokerages/related businesses at a discount to broader market earnings multiples in
the current environment given structural challenges in a cyclical business. In the
current market environment, we use 11x 1yr Fwd PE (Sep'12) to value Edelweiss’
overall business (in line with our multiples for other players in the sector). Our target
multiple is at a 20-30% discount to the broader Sensex multiple, valuing Edelweiss
at Rs25 per share.
Risks
We rate Edelweiss Medium Risk, in line with our quantitative risk-rating system,
which tracks 260-day historical share-price volatility. This is because Edelweiss’
revenues continue to be closely linked to capital market growth and volatility. Upside
risks to our target price include: a) higher-than-expected growth in brokerage
volumes; b) better-than-expected returns on the treasury portfolio; and c) higherthan-
anticipated upsides on the asset financing and retail brokerage platform.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Edelweiss Capital (EDEL.BO)
Industry Headwinds to Continue
Cutting Target Price to Rs25, maintain Sell on industry headwinds — We
reduce our target price to Rs25 on the back of lower earnings (down 46-48%
over FY12-13E on lower than expected brokerage industry volumes and
commissions without any change in overall costs) and a lower fair-value multiple
(11x 1yr Fwd PE, from 15x earlier), reflecting a meaningful reduction in
profitability. While valuations are low, we believe near term recovery prospects
remain weak and will continue to weigh on the stock.
Challenges continue across segments — Edelweiss continues to face strong
business headwinds across its various segments. Broking continues to face
challenges on a) Market fragmentation (increasing competition); b) Lower
commission yields (changing product mix); and c) Muted outlook on financial
product distribution (regulatory changes). Investment banking activity has slowed
and while its lending piece is faring better, it is still a relatively smaller part of the
overall platform/revenue stream.
Quant View: Contrarian — As per our quantitative methodology, Edelweiss
Capital currently lies in the Contrarian quadrant of our Value-Momentum map
with relatively weak momentum but strong value scores.
Edelweiss currently lies in the Contrarian quadrant of our Value-Momentum map
with relatively weak momentum but strong value scores. It has been a resident
there since the past 6 months. Compared to its peers in the Insurance & Other
Financials sector, Edelweiss fares better on the valuation metric but worse on the
momentum metric. Similarly, compared to its peers in its home market of India,
Edelweiss fares better on the valuation metric but worse on the momentum metric.
From a macro perspective, Edelweiss has a high beta to the region so is likely to
rise (or fall) faster than the region. It is also likely to benefit from falling EM yields,
and a weaker US Dollar.
Edelweiss Capital
Company description
Edelweiss, founded in 1995, started as a niche investment bank that focused on
private-equity syndications. It was co-founded by Rashesh Shah and Venkat
Ramaswamy. Edelweiss has over the years built a diversified product offering in the
institutional segment through broking and investment-banking services, backed by a
strong treasury and arbitrage trading portfolio. Edelweiss also offers financing
against assets and shares, asset and wealth management, and insurance broking.
It operates its various businesses directly and through various subsidiaries, which
are consolidated under the parent.
Investment strategy
We rate Edelweiss Sell/Medium Risk (3M). Edelweiss is among the largest
institutional brokerages in India and has retained its market positioning with a strong
management team. However, the Indian brokerage industry continues to face
challenges on a) Market fragmentation (increasing competition); b) Lower
commission yields (changing product mix); and c) Muted outlook on financial
product distribution (regulatory changes). Moreover, Edelweiss has a relatively
smaller retail franchise, which we believe is a longer term structural growth segment
in India; and can impact Edelweiss’ competitive positioning. Edelweiss’ arbitrage
trading business has also continued to attract lower turnover and profitability which
is expected to remain a drag on overall profitability. Moreover, we expect cost
pressures to increase going forward, leading to possible declines in profit margins.
Valuation
Our target price of Rs25 is based on a price to earnings approach. We value
brokerages/related businesses at a discount to broader market earnings multiples in
the current environment given structural challenges in a cyclical business. In the
current market environment, we use 11x 1yr Fwd PE (Sep'12) to value Edelweiss’
overall business (in line with our multiples for other players in the sector). Our target
multiple is at a 20-30% discount to the broader Sensex multiple, valuing Edelweiss
at Rs25 per share.
Risks
We rate Edelweiss Medium Risk, in line with our quantitative risk-rating system,
which tracks 260-day historical share-price volatility. This is because Edelweiss’
revenues continue to be closely linked to capital market growth and volatility. Upside
risks to our target price include: a) higher-than-expected growth in brokerage
volumes; b) better-than-expected returns on the treasury portfolio; and c) higherthan-
anticipated upsides on the asset financing and retail brokerage platform.
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