Stock Review: Edelweiss Capital

Foray into Diversified Businesses Will Make Current Valuations Reasonable

 

EDELWEISS Capital has spilt its stock in the ratio of 1:5 and issued bonus shares in the ratio 1:1. Hence, on August 10, 2010, the record date for these actions, its share price was adjusted to one-tenth of its previous price. While a share split does not change the capital structure, one bonus equity share for every share held will double its existing equity capital to Rs 75 crore.

   Moreover, a lower price band will enhance investor participation — attracting those investors who would not have participated earlier due to a higher price band. This could lead to higher volumes of trading in the stock.

   In the June 2010 quarter, the company's consolidated revenue grew 26% year-on-year but net profit grew by just 5%. The slower profit growth was mainly due to higher employee costs. Moreover, the company recognised the entire interest costs on the real estate property it recently purchased in the current quarter rather than capitalising it.

   The loan book grew 39% to Rs 2,500 crore in the June 2010 quarter from the year-ago level. This was driven mainly by an increased demand for funds and loan against shares segments. Edelweiss Capital is also planning to enter the housing finance market. A diversified set of business will help the company to grow its loan book at a healthy rate going forward, according to the management.

   While the move into the housing finance space is expected to improve the credit growth, it might have a negative impact on the net interest margin (NIM). NIM is a measure of the spread between the yield on loans and the cost of borrowing. This is because the yields on advances in the housing finance market are typically low. NIMs stood around 5% at the end of June 2010 quarter.

   The company's stock is currently trading at a price-to-earnings (P/E) multiple of 19.7. This is much higher than its peers Motilal Oswal Financial Services and India Infoline, which trade at an average P/E of around 13.6. This shows that the stock is overvalued compared with its peers. With the company trying to make significant inroads into life insurance and housing finance businesses, it may outgrow its peers making the current valuations reasonable.