Ladies and gentlemen, good day, and welcome to second quarter FY twenty-five earnings conference call of Edelweiss Financial Services Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Priyad eep Chopra, President, Edelweiss Financial Services Limited. Thank you, and over to you, ma'am.
Thank you, Rosetta, and good afternoon, everyone. Wish you all a very, very good, happy Dhanteras. A warm welcome to our earnings call for the quarter ending September 2024. Today on the call, we have Mr. Rashesh Shah, Chairman, MD of Edelweiss, and Ms. Ananya Saneja, Chief Financial Officer of Edelweiss Financial Services. We hope you all have had a chance to review the investor presentation, as well as the strategic overview presentation that we filed with the exchanges today. During the discussion, we will be making references to it. Please do take a moment to review the safe harbor statements in our presentation. We'll be making some statements today that may be forward-looking in nature and hence may involve certain risks and uncertainties. With that, welcoming you all, and I'll hand over now to Rashesh to begin the proceedings of the call. Thank you, and over to you, Rashesh.
Thank you, Priya, and a very good afternoon to all of you and a warm welcome for this earnings call. All of you, I'm sure, have a fairly busy schedule, but the fact that you have taken the time, we are very grateful for that. As Priya said, wishing all of you a very happy Dhanteras. As with earlier calls, we just wanted to keep this call slightly briefer and keep more time for Q&A, because I found that the questions and the interaction with all of you has been actually more enriching for all of us than just the commentary where we repeat what is in the investor presentation. So I hope you have got a chance to see the investor presentation.
But broadly on the call, I think, on the economic front, I think most of us are aware Indian economy has had a little bit of slowdown in Q2, but overall, it is actually relatively doing pretty well as compared to the world. The interest rates are expected to come down. Everybody's waiting for that, but obviously there is inflation tick up and some, you know, some moderation in credit growth and deposit growth. But overall, the economy is in a good health. The banking sector, the RBI finances, the government finances, everything is in a good place. Corporate balance sheets are very healthy. At Edelweiss, we had a good quarter. Consolidated PAT has grown by 45% on a YOY basis to INR 110 crores.
And what we monitor more is the ex-insurance PAT, because we are still investing in the insurance businesses and then there is a loss associated with the insurance businesses. So ex-insurance PAT came at INR 163 crore for the quarter. Overall, our balance sheet continues to become more robust. We have very strong capitalization of all the businesses. As you know, in the last few years, that is the first thing we ensured that we had capital adequacy and solvency across all the businesses. And our customer franchise continues to grow. We have now reached about 91 lakh, more than 9 million customers, and our total customer assets are at 2.2 trillion mark, which has grown at about 12% YOY. I just broadly want to just explain the four blocks of Edelweiss construct.
As you know, we have seven businesses and we have the corporate and a corporate balance sheet over and above that. But we also internally look at our businesses in blocks. So the first block is the asset management block, which has two businesses, alternative asset management, which is EAAA, and mutual fund. And as we have spoken, EAAA has had a good quarter. There is a 20% growth in ARR AUM and a 70% growth in PAT CAGR over four years. So as we've been highlighting, EAAA, the foundation has been laid. Now we are getting ready to significantly grow profit, and we think we should be able to maintain a 20-ish% growth profit CAGR for this business over the next five years.
And it can also bring a lot of free cash flow, because now the funds are of a decent size, the profit has grown. So EAAA is in a good place, good growth. Our strategies, which are yield and income oriented in private credit and real assets are doing well. The other block of the asset management is the mutual fund. So mutual fund also, we are the 13th largest AMC. Our equity AUM has grown by 60% CAGR. As you know, we are focusing on not only overall AUM, but equity AUM. And the idea here is both these businesses, the first block of asset management, both EAAA and mutual fund, have had good creation of what we call intrinsic value. And now ideally, as they grow their profit and in this hockey stick phase, we also unlock some of the value.
We also, by selling some stake, monetizing it, try and also reduce the corporate debt easier. The second block we have is our insurance, the two insurance businesses. We have collectively invested almost INR 4,000 crores across these two businesses, almost INR 2,800 odd crores in the life insurance business, out of which about INR 1,200 is from Edelweiss and the balance, INR 1,600 odd is from Tokio Marine. And in the general insurance business, we have invested closely INR 1,000 crores up to now. So fair amount of very heavy investment is happening in this, INR 3,700 of cumulative capital invested. Both these businesses, the losses have been reducing now, and we are getting closer and closer to the breakeven.
We remain confident to achieve breakeven by FY 2027, and this is going to be an important step to get there. And as we after we get there, unlocking down the value. Our current objective on insurance is to get to breakeven by 2027. Our third block is our credit businesses, which are three of them, ARC, NBFC, and Nido Home Finance. In this business, we are adequately capitalized, or I must say actually, more than adequately capitalized. We have an equity of cumulative of INR 7,500 crore, and we are currently achieving only about 5% collective ROE on that, and last time coming from ARC business. Going on, we need to improve ROE, reallocate capital is required the right size of that.
And the fourth block we have after the credit block is the corporate debt, where we had our peak consolidated debt of INR 40,000 crores. Our current corporate debt is about INR 5,500 crores, which we want to bring down even further, and in the next 18 months, we have to get down to below 3,000 or 2,500 crores. And for that, as we said, the asset management business is both mutual fund and EAAA could be used to sell some stake and use that capital for the reduction of debt. We also, in this current quarterly presentation, investor presentation, have attached an addendum, which is a strategic overview on businesses which highlight some of the things that I've said, and that could also be very useful.
That addendum is for giving a slightly broader strategic view of the businesses, rather than the quarterly performance and the caution and the quarterly parameters. So, a quick update on some of the other important items. On EAAA value unlock, we are working on the 10%-20% stake sale. We are evaluating an IPO, a process on that, and very soon we'll be able to come back to investors and give a timeline and a schedule for the EAAA stake sale and the value unlock. On the RBI order, on ECL Finance and ARC, which came out in the end of May, we are engaged with RBI. Both the boards are monitoring the progress.
Almost everything that RBI would have liked to do, we are implementing it and also giving back proactive to RBI, and we will hope that very soon all the requirements that RBI has in terms of process overall and all in both the businesses will get done, and we will hopefully convince RBI that whatever checks and balances are required have been put. In the meantime, ARC, we are not acquiring fresh assets, but recovery is continuing as planned, and in the first half of this year, we have made INR 2,800 crores of recoveries in ARC. In ECLF, we continue to reduce the wholesale book in the normal course of business, and the book is down by 34% to INR 3,700 crores now. We also have update on each of the of the businesses in the investor deck.
Again, it's the same thing. Both the asset management businesses continue to grow. ARC focused on recoveries. NBFC is working through the RBI orders and reducing the loan sale. Nido Housing Finance is still slowly and steadily scaling up. We remain very bullish on that. This business is very well capitalized, but co-lending is a key factor for growth, and our partners, especially State Bank of India, are putting a lot of things in place which allow the co-lending to grow, and both the insurance business have done well. Zuno in this quarter grew at about 27%, the industry grew at only 8-9%. So we're still growing at two to three times the industry pace in the Zuno insurance business. In the life insurance, we had a 14% growth.
APE is coming at INR 130 crores for the quarter. The AUM has become INR 8,700 crores for the business. And, we focus on persistency, which is at 78%, and claim settlement, which is at 98.8%. So broadly, just executing as per plan. There has been steady growth on all the key metrics across businesses. And, our idea is to say, get the businesses to grow. All the businesses are at different stage. There's different issues to grapple with. And, at an Edelweiss level, focus on reduction of debt, make the balance sheet more robust, you know, maintain more than adequate liquidity. And we think the next five years, from now to 2030, is the horizon we want to take and focus on building the organization and make it ready for that.
So, so along with that, once again, thank you to all of you for being on this call. Also wishing you all of you a very happy Diwali, and, we'll open up for any questions that you may have. Thank you.
... Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, you may press star and one to ask a question now. The first question is from the line of Rahul from StockEdge. Please go ahead.
Hello.
Hello. Hi, Rahul.
Hi. Congratulations on the good set of numbers. I have two questions. First, in your AGM deck, you mentioned about some 6% stake sale in Nuvama for INR 1,500 crore in the last month. So, and we have another INR 1,800 crore stake over there, so are we planning to utilize the entire proceeds towards repayment of debt? And, can we see some decline in Q3?
Yeah. Whether we do it in Q3 or Q4, but yeah, that the remaining stake sale is also earmarked for reduction of debt.
All right, and my another question is, like you mentioned about stake sale in your mutual fund and insurance business. So can you throw some light on that, and what are the expected timelines?
Our current plan is to do both of them in the next eighteen months. Most likely, though, we are still evaluating both a private stake sale option as well as an IPO for EAAA. In the next three or four weeks, we should be able to finalize whether we want to do a stake sale or an IPO. Either way, I think, the EAAA should be in the next two or three quarters, and, the mutual fund should be another two, three quarters after that. In the next eighteen months, we would like to do a stake sale in both the mutual fund and the, and EAAA.
Okay. Thank you.
Thank you. The next question is from the line of Siddhartha, an individual investor. Please go ahead.
Hi, thanks for taking my question. Could you-
Sorry to interrupt, Siddhartha. We are unable to hear you. Mr. Siddhartha, we are unable to hear you. We'll move to the next question, which is from the line of Varun Kumar from Flowering Tree Investment Management. Please go ahead.
Hi, can you hear me?
Yeah. Hi.
Hi. So I had a question about the life insurance business. If you could elaborate on the timeline regarding the breakeven in that business and the path forward.
So, as I said, I think FY 2027, by the third or fourth quarter of FY 2027, we should get the accounting breakeven. As you know, we are already at embedded value breakevens. So about a year ago, we hit embedded value breakeven, so now that, goalpost is behind us. The accounting breakeven, we are expecting in the third or fourth quarter of 2027. We are also hoping that IFRS is implemented for insurance companies. And if IFRS is implemented and we get there, then we think we can get to breakeven about two to three quarters earlier than that also. But current, our target is by end of FY 2027, under the current accounting rules.
Correct. On the EAAA, if I heard correctly, you said two to three quarters is when we would do a stake sale or some kind of a cap, I mean, capital raising in that business.
Yeah. I think we would look at sometime around June of twenty twenty-five. Well, anyway, whether you do stake sale or anything, it takes four-to-five months IPO. It takes four-to-five months for closure and everything, right?
Yeah. Got it. Thank you. Thank you.
Thank you. The next question is from the line of Praveen Agrawal, an individual investor. Please go ahead.
Sure. Thank you for taking my question. So, the first question that I have is regarding the alternative business. So can you give us some insight on the players which are there in the industry, in the alternative asset management space? Who are the typical players, so you know that one can compare Edelweiss to? And also, a lot of fund houses are entering into this space, as you can see in the market. So going forward, do you think there will be a lot of competition there, or what is your view on this?
So, I think it's a good, it is a good question because alternative is, alternatives is a new business, and very few people have, you know, put their arms around, and very few research reports are there.
So I would say we are in alternatives, but in one category of alternatives called income and yield strategies. So, you know, in alternatives we also have private equity, so we are not in private equity. In the private equity, there are a lot of Indian players and foreign players, including Blackstone, Carlyle, and a lot of others, Multiples, True North, you know, ChrysCapital. So they are all in private equity. We are not in private equity. We are in what we call income and yield solutions, which are mainly private credit and real asset funds.
Okay? Now, in this, the Indian players, asset managers who are there, one is Kotak. Kotak is fairly big in this. There is IIFL Wealth, which is 360 ONE Wealth.
They have a few AIFs also in this category, you know, as some private credit fund, absolute return funds, and some real assets fund. Then we have Piramal has a couple of funds on that. So HDFC has for real estate. So in the non-equity alternatives, so one alternative is the private equity and the other is what is not private equity, which are usually income and yield solutions. In that it's mainly Edelweiss, Kotak, HDFC, Piramal, 360 ONE, and the Indian players. Among the foreign players, there are people like Blackstone in real estate, like the REIT business and all. There is Brookfield, there is Actis, then there are people like Oaktree and Carlyle and Cerberus. So there are international players, and there are Indian players.
So it's a fairly robust set of people. There are a lot of people who are also raising funds, but amongst people who have larger size, you know, people who have, let us say, more than a couple of billion dollars, would be all of this. Oaktree, Piramal, Cerberus, Brookfield, Blackstone on the international side, and Kotak, Piramal, HDFC, 360 ONE on the Indian side.
Okay.
In this business, I would look at one parameter, is how many people have crossed one billion dollars of AUM? So a lot of competition is, you know, people who have thousand crore fund, thousand five hundred, two thousand crore fund, and a lot of them can also grow. But to break through to one billion dollar AUM, especially fee-paying AUM or what we call ARR-AUM, is the first threshold that people cross. So if you look at... If you want to analyze competition for EAAA, I would look at people who are in the one billion dollar plus category.
Okay.
Thank you.
I have a follow-up question on this.
Yeah?
Yeah. So, very recently, SEBI has also introduced this new asset class, which is basically alternative products in the shape of smaller ticket investment. Any thoughts on this? Will this, Edelweiss be participating in launching any products in under this category?
That will be in the mutual fund, and we will definitely, I would want to look at it. Our early stage analysis for that category is that a lot of that is gonna be basically proxy or eating into the PMS and equity AIF market. As you know, there are a lot of equity AIFs out there, and there is a PMS where, you know, there's a lot more flexibility out there. Obviously, very similar products on the mutual fund platform, we have the income tax advantages and all that, as compared to AIF. At least on equity AIF, there is a lot of, you know, gray area in terms of the capital gains taxation and all that. And the same with PMS, where there is a client pays tax.
If there can be a full vehicle inside the mutual fund that offers the same thing as equity, equity PMS and equity AIF structure, could be more efficient and could appeal to a very new class of investors and can expand the market. But we think the new asset class under mutual fund is gonna be for equity-oriented strategies.
Got it. Thank you so much.
Thank you. The next question is on the line of Siddharth Shah, individual investor. Please go ahead.
Hi, I hope you can hear me.
Sorry to disturb you, Siddharth, we are unable to hear you clearly.
Is this better?
Yes. Please go ahead.
Hi. So thanks for taking my question. You know, I think you mentioned you're still evaluating the stake sale, maybe through a strategic versus an IPO. So can you, like, help us understand what are the key criteria, you know, you're looking at to make that decision that would, you know, help unlock better value for the shareholders?
Yeah. So on the strategic, there have been two options. One is, you know, strategics who want to be in the alternative asset management business in India, and the other are, you know, PE funds or, or, you know, stake, they are what are called GP stake funds, who like to buy stakes in an alternative asset management, asset manager. So that we've been evaluating, in conversation with some people. The key issues on that are the strategic value and the cost and benefit of that, because a lot of strategic players also come with their own agenda, their own requirements, whether you can access their markets and not access their markets, and all of that, foreign investor money and all that. So there are a lot of complications on that, which we have to evaluate, and that's case to case.
We would ideally like investor buys the stake, but does not put any business restrictions on us on terms of product introduction or market access or even, you know, our ability to do an IPO in the future. There were some strategic players who would like not to IPO at all, and give them an option to buy. So we are looking at all those considerations on that. On the other side, as you know, Indian IPO market is very robust, and the business has also grown in the last two, three quarters as we've been in conversation with some investors.
So the other alternative ways which we are evaluating is to do an IPO in India, which still allows us to do a stake sale, also allows us to maybe sell, you know, 8%-10% to a strategic partner, if we so want. Who can be a partner in that business and help, and 10% we can create opportunities for them. But at the same time, our primary route is IPO. IPO has its own pros and cons, but a year ago, we thought the business was too small and early for IPO. But in the last two quarters, three quarters, the business has grown a lot, and if you look at an IPO in the next three quarters, we expect the business will grow also along with that.
As you know, this business now is at a profit run rate of about INR 250 crores in a year, and can grow at about 10%-25% a year. That trajectory now is very IPO-able. We are just evaluating the pros and cons of IPO on one side, and what I call a private market stake sale on the other side.
Got it and even if, if I understood correctly, even if we choose an IPO, you know, with filings and everything, this will still happen by June 2025 or so?
Yeah, I think three quarters it'll take, whether it's a stake sale in the private market or an IPO. I would expect three quarters from now is what it would take.
Okay. And maybe just one last small question. You know, I think earlier you used to report FPAUM, and you've changed that to ARR-AUM now. Is there any difference between the two?
Yeah. So what happens is, the ARR-AUM is the AUM on which we are earning fee or we will, in the near future, earn fees. While the FPAUM was only the ones where we are where we are currently earning fees. And, so earlier we had AUM, which was a more just a historic number. There was some AUM in that, where we were not going to earn fees in the future because those funds were, had, you know, completed their investment phase. So it was a very. So the AUM did not give a clear picture on what is the fee earning and the fee earning potential of the AUM. So ARR-AUM is where we earn fees or will earn fees, and on that basis, we just calculate the ratio on that.
Because the investor wanted to know what are our yield ratios, or, you know, how much...
Yeah.
- is our fee upon AUM. So either look at AUM or overstating the AUM, fee paying AUM, or understating the AUM. So ARR-AUM is, gives the right picture of what is the fee we are earning and can earn, and what is the, that AUM, in that sense.
Understood that.
That's it.
Thank you so much.
Thank you. The next question is from the line of Niranjan Kumar from Equirus. Please go ahead.
Good afternoon, sir. First of all, congrats for a good set of numbers. Sir, can you please give a brief update on the RBI order in the ARC business? Like, what's the status, and when do we foresee that the regulator to lift that restrictions?
As you know, in ARC business, RBI has said we can't acquire new assets. We can still continue recoveries, and I said recoveries are doing very well. We have recovered almost INR 2,800 crores in the first half. Anyway, asset acquisition was going anyway on a slow burn, because as you know, there are not too many NPAs in the market in any case. RBI wanted us to strengthen some processes, some board level processes, some framework, some, you know, valuation certificate, all of that as part of the deal. Even some of the structuring, when we structure a deal for acquisition, how it is done and all that. So there were a lot of things they've asked us to do. We have completed a lot of that.
Along with that, RBI just completed their annual inspection also, so we were also waiting for them to complete the annual inspection, so even the inspection report will, they give us a draft report very soon, so we are, I think, pretty ready to... We have already submitted to RBI that we are, we meet all the things that they've asked, so if they come back and ask us to do a few more things, we'll have to add that, but it's been about five months and there is no timeline to that. We think we should hopefully get this, again, very hard to say an exact date, but we are very actively engaged with RBI, and we have started with the point that whatever RBI wants us to do, we will complete that as fast as possible.
So given that approach, I do think that we should be able to hopefully get the order lifted from RBI. But we will have to wait and complete all the things that RBI wants.
... Thank you, sir. That's helpful.
Thank you. The next question is from the line of Aman from Dolat Capital. Please go ahead.
Yeah, sir. Hello?
Yeah.
Yeah. Currently, around 50% of alternatives AUM is contributed by offshore clients. Can you give some update on which geographies we are currently operating? Any plans to enter new regions? And on a steady state basis, what will be the ideal offshore to onshore mix? And, is there any difference in pricing for offshore and domestic clients? Thank you.
On the first one, a lot of our current clients are from North America and the European continent. I think almost all our offshore clients are from North America and European continent. We are just getting some early investors from Far East now, but we have been doing a lot of coverage in Australia, Far East and the Middle East also. We do hope that we will get some new clients from this area. In international markets, with institutional clients, the coverage period is about four to five years. We started our coverage for the European market, Scandinavia and the European market in 2011, 2012, and by 2016, 2017, we had about five or six large institutional clients out there.
Same thing in America, we started in about 2012, 2013, and by 2017, 2018, we have some clients in America, North America, Canada, all of that. So we currently are very strong in these two geographies, but last three years, we've been investing a lot in Australia, Far East, and the Middle East. So we hope that in the next couple of years, we should also get there. The nuance of international market versus Indian market is that the international market is largely you have to do your own coverage. You build relationships with institutional investors. Most of the investors are institutions, and it's a more B2B coverage kind of a thing. In India, most investors are high net worth investors and family offices, and usually you go through a wealth manager. The pricing is more or less the same.
The distribution cost in the first one is in-house, while in India it is outsourced. But if you look at the cost, the India cost is slightly higher distribution cost than the international one. But India has some other advantage in terms of tax and all, your other rate and all that are more pre-tax and all of that, because internationally it is after tax and all. So it just makes up for that. The profitability of both these, you know, client base, onshore and offshore, is more or less the same. I must also add that internationally, it's been institutional clients, but now we are starting to see individual and family offices internationally also looking at India alternatives.
And in India, it's been mainly HNI and family offices, but first time we are starting to see institutional clients in India, mainly insurance companies and pension funds also now we are looking at investing in AIFs and all. So it's going to be an interesting journey for the next four, five years. And, as I said, both in-house and third party, which is onshore and offshore, it's a mixture. But we have actually shown that we have covered all of that. You know, our in-house coverage for international clients, third party partners and distributors for Indian clients, so we know how to manage it. There are a lot of dos and don'ts in managing it and all that, and we have currently at least experience on both of them, in-house and outsourced third-party distributor partners.
What will be the ideal offshore to onshore mix then?
I think it will change from year to year, but we think the steady state will be about fifty-five to sixty offshore and forty to forty-five onshore.
Okay, sir. Thank you.
Thank you. The next question is from the line of Ritika Dua from Bandhan. Please go ahead.
So thanks for the opportunity. Some more, you know, basics wanted to check on the, you know, the AIF piece. So firstly, when we actually look at the profitability and just trying to maybe, you know, look at it on a PAT to AUM basis, I know it's a scaling business, but how should we look at like, you know, a scaled up profitability for this entity? Secondly, even in terms of growth opportunities, as you've been alluding, like, you know, you look to maybe diversify on the distribution. On the product side also, what all products can get added here to understand that, you know, how the AUM in this piece can continue to grow? So two questions around this.
And, secondly, on the mutual fund business, obviously we have grown very healthily. Just some numbers around, you know, how do you look maybe, you know, the profitability also maybe catching up on this piece. So that's the second on mutual fund. And lastly, on the ARC, I missed your comments. I think somebody did ask, but some views around... You've written in the presentation that this will also be this will incrementally be an asset-light model. I think another large peer of yours who is also into ARC is getting into asset-light. So where is this industry really getting into from here? And how should we see Edelweiss ARC also maybe, you know, growing? So three questions... And I'll come back. So thank you.
Again, I have to. I will write down all the three ones. So the first one was on the profitability of EAAA. There's, I forgot the second one. Third one I have, ARC.
Yes. So the first is, first was the profitability and growth prospects of EAAA. Second is that how should mutual fund, now that is a considerable size, how should profitability move there? And the third was ARC getting into asset light and even another peer is getting asset light. So where is the industry heading to? So these are the three.
Got it. Got it, got it. So on the first one, the first, see, I think alternatives have two, you know, levers of profitability. One is the fee, and one is what is called a variable fee, that carry part of it. On an average, the an alternative funds on your ARR AUM, you make about 1.5% as your gross yield. As annual revenue, you have a cost-income ratio of about 50%, very broadly. So if you make about between 60-70, and if you study the results of 360 ONE, and even Motilal has a fairly, also an alternatives business. All of them, I think the average profit is between 0.5% to 0.8% of the AUM, that level, that, if you, if you calculate, sorry, PBT level.
So I think PBT is about between 0.5% to 0.8% of the AUM in an alternatives business. If you look at it in the mutual fund, it is usually about 15-20 basis points. In alternatives, it should be 50-80 basis points. We are currently averaging about 70-75 basis points as profitability. And we think that that is, you know, maintainable. Maybe quarterly ups and downs will be there, but overall, on an annual basis, this is the profitability. Basically, PBT upon AUM is what you should get. In terms of growth, we since we have a lot of strategies and we are across private credit and real assets, and we currently have about 11 or 12 strategies, and we're always raising new funds all the time.
So it's not like a private equity where you raise one fund and for four years don't raise any other fund. This is because it's a multi-strategy approach. We have quite a few strategies which are on their own raising money. We are if you look at the last two, three years, we have raised about INR 14,000-15,000 crore every year. We have deployed about 8,000-9,000 crore every year, and we have exited about 5,000-6,000 crore every year, just on an average, if you look at the last. So these are three important parameters to look at from a growth point of view. And when you do all of this in this way, getting a 20% PAT growth is what we think this business is capable of going forward.
To answer your second question on the mutual fund, you are right. We've been investing a lot in scaling up the mutual fund, especially the equities business. If you see the equity AUM in our mutual fund, it is growing pretty well on a ROI basis. Currently, we are making about four basis points of AUM as a PAT. Our target is to get to between 10 to 15 in the next three to four years. Our current cost-income ratio hovers at about 85-86% because we are still investing and the scale-up is happening now. But on a long-term steady state, we would like the cost-income ratio to be around between 55-58% in that business, which is the industry average.
So if you can scale up the AUM, bring down the cost-income ratio, we think the profitability of a mutual fund between 10-15 basis points is achievable. That will take us about 2-3 years. We're also adding more offices. We opened 8 more branches in this first half, so we are also opening more branches. We are now currently present in about 40-odd branches. We want to go to 100 branches. So there's going to be a fair amount of investment we'll continue to make, which will keep maybe profitability slightly lower, but it's a good investment to make in that sense. So that's our plan on the mutual fund side. And on ARC, we also want to be asset-light, but the current problem with ARC is on two fronts.
One is, there are not a lot of good quality assets available that you can buy. And the other is, even if you buy them, your capital is mainly coming from equity, because there is not a lot of borrowing that you can do. So if you think of ARC as also another form of NBFC, it is not able to gear itself. If you look at our ARC also, at the peak was geared 3 to 1, now it is currently geared at 0.2 to 1. So what is happening in ARC, even if you become asset light, you can make about 5-6% ROA, about, you know, 6-7% ROA. But even if you make a 7% ROA, and if you can be geared 1 to 1, you can get to 14% ROE.
But if you can make only, if you can gear only point two, or point three, or point four times, then getting to more than eight, nine, 10% ROE is gonna be harder. So the problem here is gonna be, on one side, there's not a lot of assets available for growth. And the other side is your balance sheet structure, because of the lack of borrowing availability, your ROEs will be subdued, though your ROAs can be very healthy. So that's the current challenge all of us are grappling with it. Maybe if you become asset light, you can increase your ROAs a little bit more, but eventually getting to more than, 10, 10% ROE is gonna be a challenge in this business, and that is currently what the industry is experiencing.
... Sir, if I can maybe ask two more questions.
Mm-hmm.
Sir, on the coming to the just like maybe on the ARC front, any you know expectations on any past I mean you know assets that we had bought, and maybe any write-downs maybe expected of them still? And so what what is the maybe you know from a write-down perspective, any further expected here on the ARC front? And also on similar question on the wholesale book also, it has run down materially, but of this number, if I'm not wrong, some 3,700-odd crore wholesale NBFC, what are that further hits that you expect?
So on ARC, we are fairly okay in the sense because by the time we acquire an ARC asset, it's already an NPA. So usually you can price it, you know, pretty well, because now there are no more unknown unknowns in that sense. Because when an asset is standard, it goes to NPA, the real markdowns and all that happen. Once it is an NPA, then you keep on calibrating the value of the SRs on a quarterly basis in the cash flow. So the book on the whole in ARC is fairly well marked and usually fairly has been consistent in that sense.
Again, I think I think ARC partly gets the money out of the assets it owns, but and partly it gets out of the fee and the incentive and the carry that it gets. So as I said, on that basis, our ARC is making about close to INR 100 crore PBT a quarter. And if you go back and see the last five, six quarters, we have consistently been that, in that range, and we expect to stay there. So ARC will be able to make about around INR 100 crores PBT every quarter. There won't be a lot of growth in that business, as I said, because you know, new assets are getting acquired, but there won't be any significant you know, markdown, because that is not the big thing in ARC. The assets are usually fairly well marked.
And, at a portfolio level, we have not seen any markdown in the last three, four years. So that's on ARC. On the NBFC, we have the wholesale business is now the non-continuing business. So it is now going straight to the balance sheet. We have INR 3,700 crores of the wholesale book remaining, but against that we have INR 3,500 crores of equity also in the NBFC business that we have. So we think the last part of the wholesale book is equity funded, and we do a quarterly mark-to-market on that. So we keep on looking at the cash flow. We keep on marking it conservatively.
As and when we feel that the marks have changed because the cash flows have either got delayed or the quantum is changing, at a portfolio level, we keep on calibrating it every quarter. As of now, we don't see any big, you know, structural things on the wholesale side, but as I said, it is a non-continuing business, so everything is now at the balance sheet level in the wholesale business. In the wholesale-
Thank you. Sure. Thank you so much.
Thank you. The next question is from the line of Kshitiz Sharma from Trust Investment. Please go ahead.
Hi, good afternoon. I'm a little bit new to the company, so pardon me if this is a very basic question. But just wanted to understand the net gain on fair value changes to the tune of 1,300-odd crores. Just thought there is a mark-to-market on MTN, and at the same time in the insurance services, we see another component which is to that tune. But just to understand, what would be the breakdown and how is this reported?
So I don't have the details of the exact breakdown, and if you want offline, our CFO, Ananya, can will be happy to you know take you or anybody through that, on what is the exact of the components of the breakdown. In this quarter, obviously, there was a mark-to-market gain on the Nuvama stake that we are owning, because as you would have seen, the stock has gone up in this quarter. So it was part of that, and we mark-to-market the Nuvama stake, this whole part of that also. So part of that is a fair value gain. We also have all the SRs and all we have, which also get marked. As I said, every quarter they get marked accordingly. So the exact breakup on that, maybe Ananya can give you offline if you contact her.
Sure, sure. That's fine, and on the insurance business-
Mm-hmm?
Yeah. There is an investment income and other income in both Zuno and life insurance. So what sort of investments are sitting here? Because in life insurance, the investment and other income is almost INR 340 crores in this quarter.
I wouldn't know that. Ananya, are you on the call? Can you explain that, the insurance investment income?
Yeah. So, am I audible?
Yeah. Yeah. Go ahead.
Yeah. So the insurance businesses obviously have a, you know, once you collected the premium, you invest a set of assets against the long-term liabilities you have. These investments are held at value and are Mark-to-Market. Okay? So what you're seeing on that line is the Mark-to-Market on the investments that the insurance business holds.
Got it. And primarily treasury sort of assets or, I mean, are these like fixed income generating assets?
No. So it is only investment assets. Okay? So everything according to India, which is fair value and mark to market every quarter, is what you see on that line. That is also true for your other question across all our businesses. So I'm happy to walk you through a, you know, business-wide breakup of that line.
... at a later point. But-
Okay.
My idea is to mark to market. Yeah?
Okay, okay, perfect. That's helpful. Thank you.
Thank you. The next question is from the line of Deepak Agrawal from Param Capital. Please go ahead.
Yeah, good afternoon, sir. Am I audible?
Yes, sir.
Yeah.
Please go ahead.
Yeah. Thank you, sir. So my first question was on the Nuvama lines of business. So obviously, we will be selling our entire stake in whatever, a quarter or two. So some of those fee income line items like broking and wealth, so any thoughts there? Is there any non-compete clause, anything you can share there, sir?
So currently, we don't have any, the Nuvama income doesn't come, because a year ago, when we demerged the business, it was already deconsolidated from Edelweiss. So right now, in the Edelweiss consolidated, there are no line items of Nuvama. The Nuvama shares we own is just an investment, liquid investment category for us, and it's mark-to-market like any other investment instrument. We don't consolidate the Nuvama, results with us since the demerger that happened almost eighteen months ago. Okay?
Right.
So that's on the Nuvama. The Nuvama non-compete we had was up to March 2024. We did the deal in March 2021, and we had a three-year non-compete, though we are not in the wealth management business at all, so we don't have any line items on the wealth management business in our category. We are in this, you know, seven businesses we have, NBFC, Housing Finance, ARC, LI, GI and E triple A and mutual funds. Those are the seven businesses we have. We are not in the wealth management business at all, but we have the stake in Nuvama, but there is no fee income or investment banking income in our balance sheet as of in our operating activity as such.
So what I was referring to is in terms of restarting some of these businesses, which earlier, maybe till, as you said, March 2024, you are not allowed to do as a part of-
Yeah.
non-compete. So can-
See, we have so much on our hands because these current seven businesses also scaling up well. As we have highlighted, there is quite a bit of work to do. We have, as I said, excess capital in the credit businesses, which is not earning good ROE. So we have to get that capital efficiency in the credit businesses. We have to bring the insurance businesses to breakeven, and we have to scale up the, both the asset management business and do a stake sale and hopefully list them in the near future. So since we have our hands pretty full, and we also want to reduce the you know, the overall corporate debt that is there. So we have our agenda pretty focused, and all businesses take about five, 10 years to build.
So it's not that you can start a business tomorrow without having a 5-10-year investment horizon. I personally think to start a wealth management business is a 500-600 crore investment with at least a minimum of 5-6 years kind of horizon you have to take to build the business to get to a certain scale. So any such business, just because the non-compete is over, should not be started. You get started when amongst all the opportunities you have, the capital you have, the bandwidth you have, you want to get into that. We are currently pretty happy with the range of businesses we have, and we want to scale this up and focus on the priorities that we have highlighted.
So got it, got it. So my second question was for the alternatives business. So if we list it separately, instead of... So if we do a demerger like what we did for Nuvama, so that holding company discount which Edelweiss will start attracting, right? Once it gets listed separately. So any thought there, if we directly list it and then let the markets do the correct valuation of the company?
Yeah, I think listing of the E triple A is separate from maybe, you know, demerging it or unlocking the value because there are a lot of optionality on that, which is what we did with Nuvama. So currently, the idea is to sell the stake, you know, to get that capital to reduce our debt and all, and then decide on how to unlock the value, where also there are many options are there. And slowly and steadily, we are seeing that market will give some holdco discount, but the market will also understand the value of the holdco. So it is our job, if the holdco discount is very high, then you can unlock that value in actually quite a few ways, like we have done with Nuvama.
Sure.
Or if it is, you can also sell a stake and do a share buyback also. So there are ways of addressing the holdco discount. Our current priority is not usually focused on how to reduce the holdco discount. It is how to make the asset management businesses scale up, institutionalize, unlock some value out of that, how to get the insurance business to breakeven, how to get the credit businesses to generate a decent ROE, and how to reduce corporate debt. These are the four things we are focused on. Once we get some progress on that in the next three, four quarters, then we can change our priorities and then look at how to reduce the holdco discount and other things. And there are various instruments available for that, options available for that.
Got it, got it. So, and my last question was on the, NBFC, scaling up of NBFCs. Obviously, we have had challenges and, seems like, liabilities, we are constrained on liabilities on that, right? In terms of-
Actually, more than that, we have believed last three, four years, and it is proven to be true. NBFCs, either you are part of a corporate house, where you can take some ALM risk and make some, you know, extra returns because you can be more aggressive in making your ALM assumptions, or you are part of a PE fund or whatever, where you have a lot of backstop capital available to you. Otherwise, NBFC is a much harder business to make it work, and given what is happening in the banking space and I think availability of bank lines and all that, the cost of that, because bank deposits are also not growing, so bank credit to NBFC is also coming down. The large corporate houses, as well as maybe the PE-funded players, have an inherent advantage.
People like us don't have an advantage. Even if we get the credit lines and all, we'll end up holding a lot of capital for ALM, which is also eating into the return. So today, a pure-play NBFC, if you don't scale it up much, can you make 10, 12% ROE? Yes. But can you make 18%, you know, 15, 18% ROE? We think it's harder and harder unless you have a corporate house umbrella or a PE umbrella with you. So our idea is maybe convert this into more of co-lending partnership model. And by the way, that is coming out truly. Look at what the Q2 results are doing, because if you want to make returns, then you go up the risk curve or you take ALM risk.
Both of them, like what is happening with NBFC and unsecured and all, is starting to, you know, show that stress. We do believe that NBFC businesses have some inherent challenges which have come to fore in the last four, five years post IFRS. There are clear advantages that large corporate house NBFCs and PE-funded NBFCs have, which people like us don't have. But we can try and do a co-lending partnership, where instead of competing with banks, we can partner with banks and still achieve aim for a 14%-15% return, but not with an asset-heavy strategy, but with asset-light. More a combination of partly servicing, originate and partner with banks, do co-lending and get the service income.
All of that will allow you to get to a 14-15% ROE, and that will be our ambition in our credit businesses. Can we get to 14-15% ROE, you know, without the without ballooning the balance sheet a lot, without borrowing a lot? Because after seeing what has happened last 4-5 years, even if you borrow, we hold a lot of liquidity. Last 5 years, we have held a lot of excess liquidity at a group level, and collectively, it has costed us about a couple of hundred crores a year in terms of foregone profit or just the holding cost of that liquidity. So in a way, the liquidity management, ALM management is a bigger challenge in an NBFC business than just credit cost anymore.
Right. So that was the whole reason why I was asking-
Sorry to interrupt you, Mr. Agrawal. We will request you to please rejoin the queue.
Okay. Yeah, thank you.
Thank you. Ladies and gentlemen, due to time constraints, we will take the last question, which is from the line of Naman, an individual investor. Please go ahead.
Hi, Rashesh, how are you?
Hi. Hi. We can't hear you very clearly. Can you speak a little louder?
Mr. Naman, we are unable to hear you, sir.
Am I audible now?
Yeah, you're okay. Yeah, go ahead.
Okay. Yeah, so I have one question regarding EAAA, I think which was answered. The question was basically, when can we, as shareholders, expect to get the shares distributed? And second question is, any book you would like to recommend? Any favorite book for this year?
I think I-
People are too busy on the numbers. Yeah, please, go on.
No, like I said, our current priority is the fourth priority I've highlighted for the next three quarters. We have a broader value unlock strategy that we are working on. We're looking at all the rules and regulations and doing it in a way that becomes win-win. And, hopefully in the next, three, four months, four, five months, we'll be able to come up with what is our broad value unlock plan for the shareholders. As you have seen with Nuvama also, our current, our overarching objective is: How do we align the shareholders, you know, being able to enjoy the value that we are creating? And we are all actually thinking like shareholders, because I, myself, am also a shareholder of the company. So we will come up with that. On the books, I mean, there are a lot of books.
The one I like a lot, that I read again and again every year, is The Outsiders, which is about capital allocation and business structure and empowerment and all that. So it's a book called The Outsiders, which I always enjoy reading. But I think I also get recommendations from others on and off. You can send me a name with your book recommendation.
Poor Charlie's Almanack. Poor Charlie's Almanack, the best.
Yes. Yes, that is also a great book. That is also a great book.
Mm-hmm. Thank you so much.
Thank you. Ladies and gentlemen, that was the last question. I would now like to hand the conference back to Ms. Priyad eep Chopra for closing comments.
Thank you all for your time today. It was lovely to listen in to the questions, and thank you, Rashesh, for patiently answering all of them. Please do write into us at Edelweiss Investor Relations for any questions or additional information that you may need. Once again, wish you all and your family members a very happy Diwali and a great festive season ahead. Bye-bye. Thank you for your time.
Okay, thank you, and Happy Diwali to everybody. Bye-bye. Thank you.
Thank you very much. Ladies and gentlemen, on behalf of Edelweiss Financial Services, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.