Edelweiss Financial Services Ltd

NSE:EDELWEISS

Earnings Call Transcript

[Operator]

Ladies and gentlemen, good day, and welcome to Second Quarter FY '24 Earnings Conference Call of Edelweiss Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Ms. Priyadeep Chopra, President, Edelweiss Financial Services Limited. Thank you, and over to you, ma'am.

[Priyadeep Chopra, executive]

Thank you, Heera, and a very good afternoon, everyone, and wish everyone on the call a very happy dhanteras. A very warm welcome to our results call today. We have on the call with us Mr. Rashesh Shah, Chairman and MD of Edelweiss; Mr. Ananya Suneja, Chief Financial Officer, Edelweiss Services Limited; and Mr. Radhika Gupta, MD and CEO of Edelweiss Asset Management Limited.

We hope you've all had a chance to review the investor presentation as well as the business update on the mutual fund business that we filed earlier with the exchanges today. During our discussion today, we will be making references to these.

Please do take a moment and review the safe harbor statements in our presentations. We will be making some statements today that may be forward-looking in nature and, hence, may involve certain risks and uncertainties.

With that, I hand over the call to Mr. Rashesh Shah to begin the proceedings for the call. Thank you all, and over to you, Rashesh.

[Rashesh Shah, executive]

Hello. Thank you, Priya, and good afternoon to all of you, and a warm welcome to our earnings call for the quarter ended September 2023. First of all, I wish all of you a very happy and prosperous Diwali. Hope that you and your families have a very prosperous coming year also. I think as we look forward, it's going to be an exciting one year from this Diwali to the next Diwali because the global environment is very uncertain. It's dominated by news of war and recession.

However, India also has some events, especially the main elections coming up next year. But on the economic front, as all of you know, I think all of us read the papers, India is doing pretty well. I mean relatively and absolutely, we are in a good place. I think a GDP growth of about close to 6.5% is what is expected with the inclusion of the government bonds into the JPMorgan index. There'll be more inflows coming into India.

So overall, I think things are seem to be going pretty well for India. I mean being in the business for some years, there are always some pockets of worry. But on the whole, this is as good and benign and economic environment that we have. In this, for our reporting to you about our quarter, the quarter ended September '23, we had a consolidated PAT of INR 76 crores. But if you remove insurance because we are still making a loss, which is in the investment phase in insurance. Our ex-insurance PAT after minority interest is INR 153 crores. This is a PAT number we look at very closely, the ex-insurance PAT, which is up about 15% on a Y-o-Y basis.

But what has happened in the last one year in the various businesses have been very exciting. Our alternative asset management, we are one of the leaders in alternative asset management business. That AUM has grown by 25%. We have now reached INR 50,000 crores. So alternative's AUM of INR 50,000 crores is very, very encouraging. In this INR 50,000, as you know, friends, that fee-paying AUM is only the amount that we deploy. So the fee-paying AUM is about INR 27,000 crores. So we have another INR 23,000 crores which is not fee-paying AUM, which also as and when we deploy the money, the AUM meter will start earning money on that.

Our mutual fund also has shown more than 25% growth Y-o-Y, and our AUM is now INR 114,000 crores in the mutual fund, out of which more encouraging has been equity area. As you know, we have BHARAT Bond, which is about half of the mutual fund AUM. But out of the other half, which is close to about INR 55,000 crores, almost INR 34,000 crores is equity AUM which has grown 30% Y-o-Y. And in both in these businesses, now we have hit that inflection point of a healthy growth in profitability and mutual fund also has shown good growth and profitability.

We also have Radhika on the call today. She'll be happy to take questions on mutual fund business or perspective. We have, every quarter, added one business update for our investors, for the analysts. So in this quarter, we have added the mutual fund business. And Radhika is also there, she will be very happy to give you more color on that business and how we are taking it forward.

Our ARC business acquired debt of INR 1,300 crores. It also had good recoveries in this quarter. The general insurance business grew by 18%, and the gross written premium for the quarter is INR 191 crores. Even the life insurance business had a good quarter, 18% Y-o-Y growth. So overall, I think our businesses have done well.

Credit businesses are now seeing a fairly major uptick on housing finance, so an uptick in disbursement which is INR 300 crore disbursed for the quarter, which is a fairly healthy growth over the same quarter last year. MSME book also has seen good growth in this quarter in disbursement. So both MSME and housing which we are doing under the co-lending formula with our partner banks has also seen good uptake. And lastly, the wholesale book reduction is on track. We are on track as per the 50% reduction, and we are now at INR 4350 crores. And we expect to continue to reduce the wholesale book, but the trend will continue in.

All of you would have seen the trend we have had in the last 2 years on the wholesale book reduction. After the businesses, on the balance sheet side, continues to be very strong capitalized. We have both capital than required in most of the business, as you would have seen from the capital adequacy and other details we have given we have more than 36% capital adequacy across all our credit entities. So capitalization is good. Liquidity has improved. We have INR 3,300 crores of liquidity on the hand and our borrowing is coming down. So on the whole, I think, the liquidity as a percent in the borrowing is also very healthy.

We have also continue to reduce our debt. Currently, the net debt is about INR 15,220 crores. It's come down by almost INR 2,700 crores in the last 1 year. And as you may remember, maybe some of you, our peak debt was around INR 40,000 crores, which has now come down to INR 15,000 crores. So we have repaid almost INR 25,000 crores of debt over the last 5 years.

Lastly, an update on our price. It is 18 months ago, we had put down some priorities in our investor presentation. One was to complete the unlocking value of Nuvama. We're very happy to see the adapt process of demerger and the subsequent listing has gone to be smoothly. The listing was done on September 26. The stock has got fairly well listed.

They have the quarter 2 results also coming now, which are also very encouraging. And as you know, about 30% of the equity of the company was distributed to Edelweiss shareholders. Edelweiss continues to own around 15% balance of the equity in hand. So overall, we still have economic interest with our shareholders and us in the businesses. But on the whole, I think spinning off that business, getting it listed has been a very, very gratifying outcome that we have seen.

The second objective was about scaling up our asset management business. As you have seen, we've made good progress on that on both alternative asset management and on the AMC side. Third objective was -- third priority was to reduce our wholesale book, which also we continue to do as we go along. As we have got some of these priorities underway, going forward, in this investor presentation, you would have seen, we have set out new priorities for the next 18 months.

And just to enumerate them, we now want to scale up the profitability in the alternative mutual fund business. I think we both have got critical mass. Now we are at a stage where we can start scaling our profitability, get economies of scale in that business. The second priority is to grow the retail book through the co-lending model. We have set a target of AUM growth of 20% minimum for the next 2 to 3 years. And again, we can grow faster. But as we have learned in credit business, it is actually better to grow in a calibrated in a very stable manner, which we think a 20% growth is good for that.

Our third is to build profitability in the insurance business to reach breakeven by 2027. Both our life and general insurance business between '26 and '27 will reach breakeven. Hopefully, earlier with the new IFRS guidelines coming because IFRS guidelines are more friendly to insurance business profitability than the current guidelines. But under current guidelines, we expect to be profitable by '26 '27 in both the insurance business.

And fourth, we continue to focus on reduction of debt. We want to reduce our debt by 20-odd percent every year in the next 2 years and continue on that. And that will bring our debt down to a very, very, very easy level. It's already come down at a very comfortable level, but we wanted to become even more robust our balance sheet.

So the sum up, our work on balance sheet is largely complete. We still have some way to go, but we'll continue to tug away that. The key task now is to work on profitability, especially in asset management business that the insurance business is to break even and increase our co-lending disbursements in credit, in MSME and housing.

And again, overall, we are very happy with how the businesses have grown. All the businesses have strong management teams. Our unbending focus on making each business stand-alone, independent with their own governance, with their own capital base, with their own operating responsibility has worked well. We continue to do that.

This has made our structure very simple, and it has been easier to monitor the businesses, but at the same time, this unbundling has created a phenomenal amount of ownership and the leadership unbundling that will happen has been even more gratified. So we'll continue to work on this path. We have done unlocking of the Nuvama. Over the next few years, we would want to create value and unlock value in all our other businesses.

So I think with that, we will now open up to questions because I'm sure a lot of you have questions, feedback, color on what we are doing, and we'll be happy to hear that. As I always say, this interaction we have with all of you is something we find very useful, we find very gratifying. So once again, thank you all of you for being part of this and being here with us. Over to you.

[Operator]

[Operator Instructions] The first question is from the line of Siddharth Purohit from YES Securities.

[Siddharth Rajpurohit, analyst]

So I have broadly 3 questions. First one is on the alternative business. So we see that there has been new funds in the [indiscernible]. So does the economics of these new categories was similar to the private debt in terms of the fee earnings and ease? This is first.

Second is, did we see any possible diversification in terms of the product offerings with private equity as well? And the third question is currently approximately 50% of your AUM is deployed. So going ahead, will we see increased deployments? Does the management have any specific time line to deploy the dry powder in hand. These are the 3 questions.

[Rashesh Shah, executive]

Yes. Thank you. I think these are good questions. We are launching new funds, but almost all the funds -- actually all the funds, not almost all the funds, all the funds are fee, which is between 1% to 2%, and they have a carry. The carry changes some of our onshore funds, some of our offshore funds, some are with a hurdle rate. But usually, there is -- on an average, there is a hurdle rate of about 8% and then a full catch-up carry on an average. But as I said, these changes from fund to fund.

Our internal expectation is to make about 2% to 3% as annual fees, fees plus carry on the fund strategies we have. Carry comes obviously very back-ended while the fees come as we deploy the money. So on an average, all our funds will have some carry if we hit that threshold level. We are deploying new strategies in. Our current focus areas are private credit and real assets. So we have launched a commercial real asset fund, commercial lending fund on the real estate side. We have a stressed asset special situations fund, structured credit fund. So we are doing quite a few of new strategies.

Overall, I think we have about 7 or 8 funds already in the current whatever AUM you are seeing. And our current focus is on private credit and real assets. We are not looking at private equity as of now not because this is not a good asset class, I think it's a great asset class. But there are already quite a few players out there. And we also want to stick to our focus.

We've been one of the early players in private credit and real assets in India, and we now have a 12- to 13-year track record in that. We want to continue to build on that. We think this is a large enough opportunity, but we continue to evaluate adjustment strategies. And our long-term objective of the alternative asset management business is to be a multi-strategy fund house. So we will be a multi-strat fund house.

And on deployment, you are right. We have deployed about half the money. Other half is dry powder because a couple of funds were raised. Usually, it takes about 3 years to fully deploy a fund after we raise it. So when we raise, let us say, INR 8,000 crores, INR 9,000 crores AUM, it will get deployed over 3 years, and the fee will come as we deploy. We are currently targeting deployment of about INR 10,000 crores to INR 12,000 crores every year. So across all our strategies, we intend to deploy INR 10,000 crores to INR 12,000 crores.

So whatever is the undeployed funds in the AUM, we hope to complete this deployment in the next 2 years. But also remember, in the next 2 years, we'll raise new funds also. So there will always be an AUM to deploy gap that will always continue with us because we would have raised for first to raise the money then we deploy it. But I think assuming a 50% to 60% on that is good enough, but the current INR 22,000 crore, which is undeployed, as we deploy it, will start earning a fee for us.

[Operator]

Next question is from the line of Lalit Deo from Equirus Securities.

[Lalit Deo, analyst]

So I have 2 questions. So firstly, on the AMC business, the mutual fund business, so we are looking to build on a retail third-party distribution franchise. So could you give us more color like how are we looking to grow this business on the distribution front? Which are the partners -- which are the channels where we are specifically focusing in this year?

[Rashesh Shah, executive]

Yes. Fortunately, we have -- we also have Radhika on this call. So maybe Radhika, do you want to give more color on this?

[Radhika Gupta, executive]

Yes. Hi, and good afternoon to everyone, and wish all of you a very, very happy Diwali. So over the last 5 years, I think we've looked out to build out an independent distribution franchise. And if you look at distribution mix of AMC today, it is -- and I'm talking about the retail distribution, largely the equity distribution, it is about 75% through distribution, of which MFDs and platforms are a very significant percent. Banks are actually a small percent. So predominantly somewhere about 90% of that number is through MFDs and large platforms like NJ and Prudent .

I think what we have realized over the last 5 years is because of a combination of 3 things, one is consistent product innovation; second is really consistency in many of our funds, not swing in Q1, Q4 performance, but long-term consistency of track record; and thirdly, deep ground outreach, our market share and penetration in individual distribution Pan India is only growing. We are also seeing that with partners like NJ and Prudent Services we have onboarded 4, 5 years ago, our market shares are becoming increasingly more meaningful, and we expect that trend to continue.

So I always believe that distribution is a journey -- retail distribution is a journey that takes time. And we have made serious investments, and now you're seeing the dividends. In fact, if you look at our most recent NFO, which was the multi-cap NFO, we raised about sum of INR 1,000 crores in that NFO and largely retail distribution partners like NJ and Prudent plus more than INR 500 crores from NFBs. So it's a process we've invested in, and we are beginning to see the dividends now, and I think it will only get better.

[Lalit Deo, analyst]

And sir, second question is that so like we have been focusing on the debt and action part. Now we have done recently good job over there. But in terms of the net debt profile, if we see, then the debt -- net debt -- the gross debt is increasing in the corporate side. So this is that margin, I think. So like how should we look that segment, sir?

[Rashesh Shah, executive]

So on the corporate side has the increasing debt, actually, this quarter is a misnomer because we're also holding liquidity. You would have seen from last quarter to this quarter, our liquidity has also gone up. So we're holding a little bit of liquidity because of some repayment in the next couple of quarters. So that is -- we don't focus so much on gross debt only. We look at the net debt because on a quarter-to-quarter basis, it will change.

And so on that side, the corporate is not changed a lot, but the corporate also owns 14% of Nuvama which we can liquidate over the next couple of years. And the corporate has also has got a lot of assets like the office building and other stuff into which it has invested. So we have a plan to manage the corporate debt, but part of the corporate debt increase is because of liquidity that we are holding on hand.

So the net debt may not show as much change. But INR 200 cores, INR 300 crores here and there, it will keep on changing. But on a 3-year basis, we plan to bring it down. As I said, we have 14%, 15% of the Nuvama stock, which is valued at INR 1,300 crores, INR 1,400 crores, which over 2, 3 years, plus we have a lot of other assets.

We have investment in our funds, which will also come back to us over the next 2, 3 years, which is another couple of thousand crores. So I think it's fairly well matched with assets which will come down. And the other debt are the business debt between ARC, housing and NBFC, which has also been managed with their own individual cash flows. We have been holding a lot of liquidity at the corporate.

We continue to do that given the uncertain times and all, we always debate whether we should hold more or less liquidity, but I think we are comfortable with the current equity. But our idea would be that the corporate debt, as we have earlier said, with may be some stake sale, equity stake sale plus the assets, which is liquidated should get close to maybe INR 1,000 crores or so in the next 3 to 4 years. And that's the guidance we have given for investors and bankers.

[Operator]

Next question is from the line of Sanjay Pandit from 1729 Capital.

[Sanjay Pandit, analyst]

Congratulations on a good set of results. We are very big fans of the intrinsic value approach to capital allocation you outlined in the AGM presentation and suspect that given your discount to NAV, at some point, buying back stock would present a great use of capital. Edelweiss has built terrific businesses in wealth and alternative assets and AMC. Wealth IPO-ed very successfully, and we imagine that AMC and alternatives can follow suit before too long. We're also very pleased with the pace of the wholesale book wind down.

My question relates to the sort of businesses that aren't yet at scale or profitable. Number one, can the newer core lending businesses be expected to reach a certain ROE threshold in the next 3 years or so, say, 15% ROE, is that realistic? And the second question is, might it make sense to get outside strategic or financial investors in the insurance businesses sort of to arrive at sort of a market-driven NAV? This could also help to capital allocation going forward.

[Rashesh Shah, executive]

Yes. Thank you, Sanjay. I think these are also good questions. So I think that you said we're also strong believers of intrinsic value, but we know that intrinsic value is also -- it is based on our assessment and all that. To answer your question, first, on the co-lending side, we do believe that eventually, if you look at our housing finance, they have about INR 800-odd crores of equity with some retail earnings over 3 years, we expect.

We don't expect to put in more equity in that we won't require. We expect the equity will reach maybe about INR 1,000 crores, INR 1,100 crores over the next couple of years. And we do expect that under co-lending, all the modeling we have done that if we can get to a disbursement of about INR 5,000 crores to INR 6,000 crores a year, we can get to about INR 150 crores, INR 200 crores PAT. So 15% to 20% PAT is what we would target, which we would get with a INR 6,000 crore disbursement.

Currently, we are clipping along at about INR 1,500 crores disbursement in that business. But we were half of that a year ago and half of that a year ago. And the same thing is true with MSME. Currently, we have about INR 500 crore equity allocation to that. But as the wholesale book is getting wound down, we'll put another INR 500 crore equity allocation to that. So both the co-lending businesses, the housing business and the MSME credit business in, let us say, '26 or so I would expect that they would have about INR 1,000-odd crores of equity and should make INR 150 crores to INR 200 crores of PAT each, and that is our internal target.

INR 15 crores to INR 20 crores -- 15% to 20% ROE is possible. And in both of them, we are currently at about -- in SME, we are at about INR 1,100 crores, INR 1,200 crores annual disbursements. And in housing, they are about INR 1,500 crores, INR 1,600 crores annual disbursements. We are clipping along well. So if you see the growth rate, I think we should get to INR 5,000 crores to INR 6,000 crores annual disbursements in -- by 2026. And at that time, we should be able to make this level of profitability.

Your other question on insurance. We are always open to strategic partners. We do get over-choice and all. And we do think India is getting to be a very interesting market for a lot of strategics, and even PE investors are getting interested in the insurance business. So we will be open to having some conversations. We'll look at it over the next 2, 3 years. But as you can understand, we are fairly close to profitability. And the couple of catalysts we were waiting for one is in the life insurer business, we have now hit EV breakeven.

So that was a good very good milestone to achieve getting to EV breakeven. I think we'll get to accounting breakeven as per target. And if they're really closer to that, I think it's becoming an interesting business for the PE investors as well as the strategic investors. And the same thing is true with general insurance industry. Both of them, we are not over capitalizing it. We are not putting a lot more capital out there.

But if you get a good partner with who, as you said, can endorse the value of the business as well as help us grow the business even further little more capital, we'll be open to that. We are not currently deviating from our path to breakeven in all those businesses. We are very committed to quick the breakeven plan we have for those businesses, and we are confident with partner, without partners, we will get there.

[Operator]

Next question is from the line of Praveen Agarwal, Individual Investor.

[Unknown Attendee]

I have 2 questions, actually. So the first question is regarding the insurance business. Just on the lines that you were just explaining about really breakeven. Can you give us a little more color on...

[Operator]

But your audio is not coming clear. Can you please speak through the handset?

[Unknown Attendee]

Hello. Am I audible?

[Rashesh Shah, executive]

Yes, I can hear you. I can hear you, Praveen.

[Unknown Attendee]

Great. So the question is regarding the insurance business that you just mentioned regarding the breakeven coming in insurance. Could you please throw some light? Are we on track for the -- as per the guidance given regarding breakeven in '26 '27? And will the revised AUM recognitions have any impact on that in any way?

[Rashesh Shah, executive]

I think we are on target on both the general insurance business and the life insurance business. In '26, '27, we will hit accounting breakeven under the current accounting guidelines. There is some talk about adaptive IFRS and others. If that happens, it could happen faster also. So I think the 2 important things to watch out in the insurance business reported numbers, one will be IFRS, which will be positive. We are hopeful that IFRS will get introduced earlier.

And the second is the risk-based solvency. RBI's guideline, which is the risk-based capital RBC guideline, which will also be positive for people like us. It will release some capital, and it will improve the solvency of the business. So these 2 are important regulatory development, which can only impact if the business is positive. Outside of that, we are currently assuming as is where is business status quo we will hit breakeven in '26, '27. We are committed to that, and we have a very clear retention plan on that. New EoM guidelines are actually it will not affect us much. It does require some tinkering around in product mix, some tinkering in the strategy and the channel mix you have.

But overall, we do -- we are confident we meet the EoM guidelines which are there. We also hope that this EoM regulations will lead to more sanity and more clarity and more transparency and how the insurance commissions are paid. Overall, I'm personally pretty positive, which for IID has done. These new EoM guidelines are pretty good. It will reduce the complexity, and it has put a cap on how much you can pay, which is a good thing because all of us will have to be efficient and manage that channel mix accordingly. But we have -- we have a clear road map and strategy on capitalizing.

[Unknown Attendee]

Right. Sir, the second question is regarding on the listing of Nuvama. So firstly, many congratulations on the listing of Nuvama Wealth Management. The unlock has executed fairly well and as per the committed timelines. Going ahead, is the management thinking of any more transaction in the business?

[Rashesh Shah, executive]

I must say we have to first create value. Then we have to talk about unlocking value. I think we are creating value. I think the roadmap for creating value is now asset management and mutual fund alternative because they are, as I said, we are very, very focused on getting economies of scale and improving profitability [indiscernible] as we increase our fee-paying AUM and deploy capital and all.

After that, I think we'll come to credit. The retail credit businesses, both of them co-lending strategy that we followed on MSME and housing. And after that, will be insurance, as I say, '26. So over the next 3, 4 years, I would say, asset management, then credit and then insurance in terms of value creation.

And as and when we think a business has reached the value creation point at which we can either spin off or IPO or demerge that, we will be very happy to do that. We are working on the plan. I think over the next 3 or 4 quarters, we should be able to come back to shareholders and inform them on what are the next value unlocking plans. But I think the next one here, as we have set out the new priorities, we are very, very focused on now creating value, scaling of value that is already there in the asset management businesses.

[Unknown Attendee]

Right. That's an interesting pipeline.

[Operator]

Next question is from the line of [ Siddharth Shah ], Individual Investor.

[Unknown Attendee]

I have 2 on the alternatives and one on the NBFC. Some of the alternatives, if you look at the AUM versus fee-paying AUM, it seems rural assets has really done the heavy-lifting in terms of deployment. So is anything holding back the last year or a few quarters? And two, in the presentation, it seems that our deployments are lower than our realizations for the last 2 quarters, at least. And if that is the case, how do we see kind of the SP AUM scaling up in the alternatives business.

[Rashesh Shah, executive]

Yes. Good point, Siddharth. I think one is the real assets. We have not -- we had closed the new fund and all. So there -- so there the deployment of the old fund is almost over and completed. So we don't have a lot of dry powder in the real assets. On the credit strategies, we just raised a couple of fund. If you know we raised ISAF fund a couple of years ago. So that still has another one year to go for deployment. So there is some dry powder on that. We raised our ISAF III fund in this year only in the last year. So that has still got a lot of dry powder.

So when you look at this, usually, it is also about the vintage of the fund. When a fund is raised in the first year, you have only AUM but more deployed. In the second year, about 1/3 is deployed. Third year, another 1/3 is deployed, then the 100% is deployed. So this varies from vintage of the fund to vintage of the fund. And hence, I think rather than look at only 1 quarter or 1 half, you should look at the -- and try for the average.

A lot of our credit funds we've been getting back a lot of the old deployment because there is actually a good secondary market also now developing on some of the assets we had acquired, some of the loans we have acquired because a lot of those companies are doing this. So there are large hedge funds and others who have come in the market. So we have been opportunistic in that, and we have exited wherever we could exit even though there was a little bit of time left because we do believe that exits are as important.

But overall, as I said, we will deploy about INR 10,000 crores to INR 12,000 crores a year on an average. Now what happens is very often, we have IC-approved pipeline, investment committee approved pipeline between what we are deploying because in that in document stage and all. And at any point, we have about INR 5,000 to INR 6,000 crores of investment proposals, which are approved and which are in the documents certain stage with various clients across all our funds, not only in one fund, but last couple of years, we have always seen that average about INR 5,000 cores to INR 6,000 crores always in one in the pipeline.

So I think on that basis, on a quarter-to-quarter basis, it can vary by INR 1,000 crores, here and there INR 1,000 crores, INR 2,000 crores. But on an average, I think we are on track. We will always have more AUM than fee-paying AUM because we rank the fund and then deploy it. I mean, credit and real asset, the normal that you get fees only on deployed capital unlike the private equity where sometimes you get it on committed capital.

We also have a couple of funds where we also have charged committed capital, but largely, our funds are where we get deployed capital. So that is why the fee-paying AUM is an important number. But the good news on that is there is a INR 23,000 crore undeployed amount on the AUM, which without any additional cost as and when we deploy, it starts earning a fee for us.

[Unknown Attendee]

Understood. And just one clarification on the NBFC. I think we've wound it down to about INR 4,300 crores of wholesale assets. And I just wanted to clarify because it seems the mix of those wholesale assets between loans and SRs has skewed towards the security receipts. If so, will that pose any kind of liquidity risk or challenge to the business going forward?

[Rashesh Shah, executive]

No. I think, as you know, we have quite a bit of equity also in that. So whatever SRs we are holding, they have equity also. Plus SRs also are getting resolved. I mean we can always held them down to other funds because a lot of these are restructured loans now. And as I said, we have taken whatever impairment we have to take. So we currently don't see any further impairments on the wholesale book, which includes SRs as well as the loans.

And we do an ALM backing on that. And wherever we think we have -- we need liquidity, we can always sell the SR. There is a good secondary market. In the last 4 years, we have done asset sale deal also, which includes SRs also to people like Oaktree, to people like BlackRock to funds like merits. So in the past, we have done that also and that option is always available. So we do have ALM planning on a 1-year forward basis. So at any point of time, under very conservative estimates, we make sure we have enough liquidity for the next one year and if we want to be on the safe side, we can always do asset sales.

But we have -- even without that, even SRs, the recovery has been pretty good. In fact, if you want to get a proxy of that, you should look at the ARC part of the business. ARCs first half of this year was at INR 5,000 crores of recoveries. Total recovery really is made is INR 5,000 for the first half of this year. So the real estate market is improving as the economy is also improving. I think recovery is a little easier and all. Even SRs, some of the projects which have gone to NCLT regarding resolution, the money is coming in and we have quite a few cases where stock proceeds as we got paid back and all after they were in SR form. So we do, do a detailed estimate, and we are always very conservative on ALM so that we have on a rolling 12-month basis, we're always more than comfortable on liquidity is that approach.

[Operator]

Next question is from the line of [ Anand ] from Prabhudas Lilladher.

[Unknown Analyst]

My first question is that we are seeing a lot of new entrants in the mutual fund industry. So how do you see this industry evolving in the next, let's say, 3 to 5 years?

[Rashesh Shah, executive]

Again, I will invite Radhika to answer that. I think Radhika, we grappled with a lot, but she has got a lot of views on how the industry could evolve and how the competition will evolve. Radhika, over to you.

[Radhika Gupta, executive]

Yes. So I think the industry has always been a competitive place. There has have been 40, 45 players. And now you see you probably had 6 to 8 new entrants come a pipeline of 5 to 7 new entrants. Firstly, I always say that, that is a sign that you are never to let to start in the AMC business. India is so early in this space, mutual fund to AUM to GDP is still about 16% in India when the global average is 80%. So there's a lot of scope for penetration. And I think that is why you are seeing new entrants. I mean, once you start building a book, it can become a very meaningful and profitable business. So I think new entrants are always welcome.

And most new entrants are actually adopting very different strategies. So it's not that you can say the new entrants are only low cost and new entrants are only active, the new entrants are only passive. We really see more entrants come in all mixes. Now as far as our business is concerned, I think we have a laser eye on execution. What we are seeing over the last 5 years, in our industry and with our own business some of the data is also in the addendum that we put out is that there is a meaningful opportunity for a young player who's got a product and distribution proposition right to see disproportionate growth.

And I think that is what our journey from INR 8,000 crores to the INR 115,000 crores that we are at today. So we continue to be laser focused on product innovation, on the quality of performance in our funds and deepening distribution depth. We do believe that, again, as with where India is in penetration, there is more than enough room for everyone, but we continue to be laser focused on execution.

[Unknown Analyst]

Just a follow-up question. So do you see any impact on the margins, given the increasing competitiveness? Your current profitability seems a bit muted for the scale you operate at. So what steps can be seen in the near term to address the same?

[Radhika Gupta, executive]

So let me answer the 2 questions. One is our current profitability and second is margins in light of new players. Let me take both those questions a little bit separately. So if you look at our trajectory over the last 5 years, you can break our AUM really into 2 parts. There's a BHARAT Bond AUM, which was, I think, A customer acquisition exercise. And there is what I call a core AMC AUM. Now we started out with disproportionate growth in fixed income that has really helped up scale. But if you look at the non-BHARAT Bond or core AMC AUM, in the last 5 years, we've grown from about INR 8,000 crores to INR 52,000 crores, of which INR 35,000 crores is equity, and that is very, very meaningful.

So our product mix continues to improve and our margin profile continues to improve. In fact, if I look at the revenue yield of the core AMC that it's about 30 basis points, and it's well in line with many of our peers in the top mix [ 7, 8 ]. So it's very much in line. We, of course, don't have the advantage of a back book that some of the larger established players have. But as our focus on equity keeps growing, as equity AUM keeps growing, I think you will see operating leverage playing out.

We're already seeing that, and PAT yields will continue to improve. So that is on our current profitability. It's muted because of the large base. But if you look at our profitability on our core AUM, it's in line with our peers. In fact, yield will continue to get better. As far as how new players influence our margin profile, I really think it is about having discipline in how you raise money. So we always focus on striking a balance between growth and profitability. We are not ones to do new fund offers at very, very raise up in margins. That's not something we want to do. And I think old players, new players, all kind of players and do very, very attractive pricing tactics to those money. For us, it's really about finding the balance, and that's what we have tried to demonstrate over the last 5 years.

[Unknown Analyst]

Okay. And just last, can you throw some light on the evolving regulatory stand on commissions and TER? So how are you seeing this impact on Edelweiss?

[Radhika Gupta, executive]

So great question. I think the noise about a revision in TER stance has been there for about 6 months. The regulator has had multiple rounds of consultation papers and taken a lot of data and feedback from the industry. And a final consultation or a final draft of regulation is just to go out. So we don't know the counters of that.

However, from our perspective, in whatever drafts that we have seen, we don't see any adverse impact of that on an AMC of our scale and size. If anything, the impact could be marginally positive. So the potential adverse impact would be on players that are large that had more than INR 1 crores to INR 2 lakh crores of equity AUM. We don't see any adverse impact from the paper that we have seen so far.

[Operator]

Next question is from the line of Mona Khetan from Dolat Capital.

[Mona Khetan, analyst]

So my question is on the NBFC. So the capital adequacy for the NBFC remains in the higher side. So are there any plans of equity release and its redeployment as well? And given that the insurance business is nearing a breakeven, any new lines of business that are being planned?

[Rashesh Shah, executive]

I think as I said earlier, our current focus is for the next couple of years to focus on these 3 priorities: get the asset management profitability up; get the retail disbursements up; and thirdly, we get the insurance to breakeven. And we are currently very, very laser-sharp focused on that. We think it will take us up to March '25 to be extremely -- to have actually progressed a lot of this as we can come back and say now this is done. We'll now have group priorities. So in our current priorities, there is no -- and just so I think on starting new business as you know because there is enough work we need to do in this and its exciting, the businesses are doing very well. On the NBFC side, we have excess capital. But currently, our idea is -- our priority is to reduce the wholesale book.

And as the retail, especially MSME disbursements scale up, if it needs more capital, we have more than enough capital. But as I said, on a long-term basis, by '26, we expect MSME business in NBFC to use about INR 1,000-odd crores of equity and housing finance to use about another INR 1,000 crores. So balance could be excess capital. We can see how to use it, maybe make an acquisition, maybe do other uses of that, but that we will decide only after March '25. From now to March '25, we want to reduce the wholesale book, reduce the debt [indiscernible] that the Insurance breakeven and make sure that the decrease in scaling of our digital disbursement. So this remains our priority.

[Mona Khetan, analyst]

Got it, sir. Just a related question. So given that the capital adequacy so strong, why are we still going to the co-lending model? Because as I understand, it's more beautiful in a case where there are capital issues or thereabouts.

[Rashesh Shah, executive]

Actually, it's a good question, and I was if you ask that. Thank you for asking that. Actually, co-lending is not because of capital or liquidity shortage. We do think co-lending is a new model. It will take some time. But as you know Edelweiss, we started ARC in 2008 when and until '13 ARC did not take off. It took about 5 years. We started our private credit when nobody heard of private credit, and you must have seen last 3, 4 years, private credit is a hot sector all over the world, not just in India. But we started this in 2011.So if there is a problem, sometimes we are early with the trend.

But we do think that co-lending is stand-alone NBFC strategy. It's not like the own balance sheet with lending or co-lending when you don't have capital on liquidity. It is a stand-alone business. It's a different business than a normal NBFC, which is lending money. That is what we also used to do and the various elements of that, maybe in one of the future dates when we do an NBFC update, we can give a lot more color on this. But we do believe that co-lending, even if we had liquidity, you want to follow co-lending, that is underwriting is a lot better.

I think your overall capital returns are a lot better. Your discipline is a lot higher. And when you have good partner banks, I think there are 2 kinds of NBFCs, which are there. One are NBFCs, which we compete banned and the second is NBFC's retail partner with banks. You have to choose to be one or the other. You can't say I will compete. You can compete it banks, you can borrow from banks and still compete with that. That's the whole model, which also I think is a good model. It's a valid model, but it is a different model of being a balance sheet lender.

When you are not following what is what we call to be a partner with bank you have made a decision and you can flip flop which is the true and very hard to go do both. So either you have to be NBFC, which is using its own balance sheet to land that you are borrowing from the bond market and bank or you are saying they are partner with banks and we put all our energies on working together with banks and developing underwriting models, making sure we are much stronger on origination, underwriting servicing in partnership at banks and not using balance.

And there are a lot of differences like in the first one, you first go and raise the liability tenure in the asset. Here, you first raise the asset and you have to keep the liability in mind because the asset is back to back linked to that. So it's a very lot of changes to make in your model bottom, a lot of changes you make in approach. A lot of you changes you make in internal processes also, which we have done.

So we believe in co-lending. We want to do that. It is a little bit slow to take off because banks also getting used to it, but we are very, very comfortable. And we think in the next 2, 3 years, it will take time. This will become a very exciting business model within the NBFC space. But it will be different from what we have seen NBFC as a stand-alone using their own talent.

[Operator]

Next question is from the line of [ Roshan Sharma from Sharma Enterprises ].

[Unknown Analyst]

Okay. So I have 2 questions. One with respect to co-lending only. So can you just explain the new trend that is setting in with respect to co-lending? I just wanted to understand, what is the initial experience on the economics of the business with respect to yield asset quality and spreads? And how does the risk reward equation work in these partnerships. So Edelweiss only serve the book or it will be even done by a partner. And what about the processing fee? Will it be total income for you or will it be split with your partner?

[Rashesh Shah, executive]

So the way co-lending works is on a similar program because now there is a blended cost approach, and we are not borrowing from banks and taking money on our balance sheet, managing the ALM on lending it to clients like you will do in a normal NBFC business. In a co-lending, what you are effectively doing is the origin was the loan to give the money to the client and the 80% of that is sent down to the bank.

Like a lot of NBFCs do sell down portfolios with the bank as we would have seen in the that direct assignment or the PTC structure. But usually, that is done after 180 days because there's a minimum holding period. In co-lending, as for the program, whatever loans you have given as per the program to your partner bank, you can actually offer 80% of that to the bank the next day morning. So your money is turned over a lot faster. And you are at 20, the bank is at 80. But now effectively, our cost of fund is also your cost of fund on 20 and bank's cost of fund on 80. On an average program, customers there have a lower cost of about 100 to 125 basis points.

So there is a 100 to 125 basis point advantage to the customer in the co-lending product offering that we do is even not to do co-lending and if we were to do on our own with our own balance sheet. Usually, the interest rate charge would be 100 to 120 basis points higher. Like and an average on an SME business loan, if we are charging say 13% and banks are charging 10%, here, we'll be able to do it for the customer at about 11%, 11.5% so the banks get slightly better. We get slightly better, and the customers get slightly better because now we have reduced the capital required on the balance sheet, we don't have the ALM risk. We don't have to have the treasury because when we borrow from banks and on lend date for 30, 40 days of money is idle in your and it has also has a cost. So when you add up all the costs, all 3 of you are better off.

However, the co-lending because it's a partnership model and banks are still evolving, understanding, we are also understanding how banks think plus the work involve is much higher because you have to originate a lot more. So the way I explain co-lending is co-lending is about 50% better from a returns and the efficiency of your capital point of view, efficiency of a risk point of view, but it is about twice the work. So you'll have to work almost 2x for a 1.5x kind of a return, but your capital ROEs are better. Your risk is better. You don't carry ALM risk because more than credit cost is the ALM risk that we all really worry about those.

Our markets are still evolving. There could be a exceptions. So having a lighter balance sheet makes you more agile, makes you more efficient on an overall basis, but it will require more work. So and it's like anything else. It's like I think having a lot of capital on our balance sheet and deploying it versus raising money and deploying it in an asset management formula is much harder. Proprietary capital is always easier. So in the similar vein, co-lending is a more execution-intensive model but with much better returns. And it's still new trend in India. We do think it will take another couple of years for it to really catch on, and there is a lead time of 2 years to 2.5 years.

And as I said, I give examples of private credit and ARC and all. I think all these businesses we started early and we saw 3, 4 years of the build out is before the business model became very obvious and very interesting from a scale part of.

[Unknown Analyst]

Okay. Thank you sir for that detail that and [ design ] on this business. I have one more question related to your retail credit business. Can we give us some [ labels ] on the disbursal trends and any time lines for scaling up this business?

[Rashesh Shah, executive]

So as I said, we've been growing this business disbursement in this business by 30% to 40% for the last couple of years on a small base, obviously, because effectively, we have restarted this business. Both these businesses are like start-ups in the Edelweiss internal system. It's not that they are own businesses because this is a new model, the co-lending.

We are currently at a disbursal rate of about INR 1,100-odd crores, INR 1,000 crores to INR 1,100 crores for the MSME annual disbursement so slightly under INR 100 crores for the MSME business, and we are at about INR 1,500 crores for the housing finance business, annual disbursements. So between both of them, we are at about INR 2,500 to INR 3,000 range, annual divestment.

Our eventually target is to be INR 11,000 crores to INR 12,000 crores annual disbursements, INR 5,000 to 6,000 in the MSME business and about INR 6,000-odd crores, INR 6,000 crores, INR 6,500 crores for the housing finance business. It will take us another 2 years to get there.

[Operator]

Ladies and gentlemen, due to opportunity of time, we need to conclude the call and hand the conference back to Ms. Priyadeep Chopra for closing comments.

[Priyadeep Chopra, executive]

Thanks, Heera. Thank you all very much for your time today. Please do write in to us at Edelweiss Investor Relations for any questions or additional information, which you may need. Once again, wish you all a very happy Diwali and a great weekend ahead. Thank you.

[Rashesh Shah, executive]

Okay. Thank you, everybody. Thank you once again for being here with us. Bye.

[Operator]

Thank you very much. Ladies and gentlemen, on behalf of Edelweiss Financial Services, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.