Ladies and gentlemen, good day, and welcome to Fourth Quarter FY23 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, please signal an operator by pressing star then zero on your touchtone phone. Please note 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.
Thank you, Yashashri. Good afternoon, everyone, and a very warm welcome to our earnings call. Today, I have with us on the call Mr. Rashesh Shah, Chairman and Managing Director of Edelweiss, Ms. Ananya Suneja, Chief Financial Officer, Edelweiss Financial Services Limited, and Mr. Ashish Kehair, MD & CEO of Nuvama Wealth Management. We hope you've had a chance to review the investor presentation as well as the addendum on the demerger of our wealth management business that we filed with the exchanges on Friday. During the discussion, we will be making references to it. Please do take a moment and review the safe harbor statement in our presentation. We will also be making some statements today that may be forward-looking in nature and hence may involve certain risks and uncertainties. With that, I'll now hand over to Mr. Rashesh Shah to begin the proceedings of the call.
Thank you, and over to you, Rashesh.
Thank you. Thank you, Priya, and a warm welcome to all of you who are on this earnings call for our quarter and year ended March 23. It's good to get one more opportunity to interact with all of you. As you know, we have always found this very useful. Your inputs, your questions, your feedback has always been a very important input for us as we go around thinking about Edelweiss in the coming years and executing on that. Always grateful for this opportunity, and thank you to each and every one of you who has taken the time out to be on this call. First of all, I think, obviously, I'm supposed to speak about India, but I think most of you know how well India is doing at the moment from an economic point of view.
I think after the last two, three years of the COVID and everything, India seems to be a bright spot amongst global economies. There is a global recession on, but India seems to be much stronger because of our local demand. Our own cycle and our cadence is slightly different from the global demand. There are certain aspects of our economy which are connected to the global economy, but the last part of India is fairly unconnected, as well as the financial services sector, which is what we are concerned about. I think in my long career, I have seen the, you know, not as good an environment as I'm seeing now. India, whether from macroeconomic point of view or from microeconomic point of view, is very well-placed. The same thing goes with the financial services industry.
If you look at, you know, the credit environment, if you look at stress, if you look at bank balance sheets, how strong they are, corporate balance sheets, how strong they are. Overall, I think we expect that even the CapEx cycle should start in this year. Overall, I think from the FIs also back to investing in April and May, especially foreign investment has been very strong. I think financial services sector as a whole is very well poised. You must have seen our results, FY23. We had the tax insurance pack, because insurance is still in investment phase, was around INR 610 crores for the year. Of course, this includes our share of the profit from the Nuvama Wealth Management business, which will go away from FY24.
The share of the Nuvama Wealth Management is something that will not continue going forward. The current year of profit, ex insurance of INR 610 crore, includes the Nuvama profit. We are very confident that given the growth in other businesses and given the reduction in borrowing, and I'll speak about that, we should be able to bridge this gap in earnings that will automatically happen because of the demerger. Friends, first of all, FY23, again, a very interesting year for us. It's been an inflection year because we are still changing our architecture. We are still pivoting from the old Edelweiss, which was one unified company with multi-businesses and with NBFC as the core of that.
We are basically pivoting to an investment company with some great stories in insurance, asset management, retail credit, ARC, and also wealth, which is getting spun off. I think we have changed the architecture. We are still in the midst of that, and I'll speak about it. First, talking about FY23, a lot of puzzles, and obviously, as happens with all of us, a few things were not as per our expectation. They were slower than that. I will highlight those also to you. First, I think what we are happy about, the puzzles. There is continuous reduction in borrowing. Our debt borrowing is now close to INR 16,000 crore as of April, and it will go down even further in this quarter, or it's already going down.
If you remember, friends, at the peak, we were almost close to INR 50,000 crore as a consolidated borrowing. We have almost reduced INR 55,000 crore of borrowing in the last four years, which has been a herculean task. It has come at some cost of earnings and some cost of not having a large balance sheet. I think overall, it has made the company stronger, it has made our balance sheet stronger, and it has allowed us to really position ourselves for the growth opportunities that we already have in our businesses. The second important plus this year is the Nuvama demerger, which has gone as per schedule. As you would have seen, we will be allotting the shares to the shareholders of Edelweiss after the record date on June 2nd. I think the Nuvama demerger was a complicated one.
You would have seen in the presentation, there were many steps that have gone into that. It is almost a 30-month effort to get this from start to finish. I'm happy we're close to the last mile on that. Thank you to all of you for being patient with that. It's been a long journey to get the Nuvama demerger out there. My colleague, Ashish, also out there. A lot of the shareholders of Edelweiss will also automatically become shareholders of the Nuvama Wealth Management business. He's also there to give more color on the business and answer any questions that you may have. The third important achievement this year is we're continuing to work on the wholesale book reduction.
As you know, we have been growing and de-growing at the same time for the last few years. Last four years, we have grown in asset management, wealth management, ARC, insurance, all of that. In the credit business, we keep growing because we wanted to reduce the wholesale book, because the way wholesale book and the wholesale credit business is panning out, to do this in an NBFC is just unnecessarily posing a lot of ALM and credit risk to an NBFC. It is maybe a good business to do in a fund where there is no ALM issue and where the ability to structure and ability to hold is much higher. This reduction in wholesale book has been going on, which was the large part of Edelweiss.
If you look at five years ago, a large part of our profits came from NBFC and the wholesale credit business. We've been de-growing on that, but we've been growing on the other parts. The last, this year also, we have continued to grow in insurance and in asset management. Especially in asset management, our alternate asset business has had a very strong year, both from growth and profitability point of view, and we think this business is at a takeoff stage now. A lot of strategies, we have quite a few credit strategies in our alternate asset business. We are one of the leading players in private credit, market in India. Quite a few strategies, and a lot of the strategies are now in their fund 2, fund 3 stage.
We are now starting to see the carry income and the size of fund two, fund three are much larger. The track record is established, the performance has been good. The business is now almost 11, 12 years old. We are now getting close to INR 50,000 crores of AUM, which itself is a fairly good size in the alternate asset business, and we think that this business is now close to takeoff. We have seen this in other businesses. We saw that in the best management about three to three and a half years ago, that after a lot of the, you know, foundation building, the business was taking off. I think alternate asset management business and in the mutual fund both have had a good year, and we think they could have some significant growth runway ahead of them.
The other interesting achievement this year was our life insurance business achieved embedded value breakeven, which is a year ahead of planned schedule. We were supposed to get embedded value breakeven after 2024. We achieved it in 2023. As quite a few of you know, about the life insurance business, embedded value is the most important one, and getting embedded value breakeven is a precursor to getting cash breakeven, accounting breakeven. In fact, accounting breakeven is more around rules, like if there was IFRS rules, which are applied to NBFC, were to be applied to insurance companies, a lot of insurance companies will achieve accounting breakeven a lot earlier under IFRS. Under the old rules, the insurance companies continue under the old Indian GAAP. They have not yet adopted IFRS. Under the old Indian rule, even the accounting breakeven is pushed out.
We expect our accounting breakeven and cash breakeven in the next three years. For us, embedded value breakeven was a very important step in that direction. I'm very happy about that. Given that, what was a bit slow this year, our wholesale recoveries were slightly behind plan, partly because some of the NCLT cases are taking longer. Plus, you know, the economy is doing well, but cash flows on a lot of projects are coming in a staggered way. Though we expected almost about INR 3,000 crores of recoveries from the real estate book, we were INR 300-400 crores short in our recoveries in this year. We hope to make it up in this year.
We don't think this has created any credit quality issue. I think from a cash flow point of view, we have had to hold extra cash because of that. Our retail credit book scale-up has been slightly slower. Again, on the disbursements, I think we are about INR 400-500 crores lower than what we had planned. For the year, we achieved almost INR 1,000 crores of disbursement between housing, finance, and SME, a large part in co-lending. It is slightly behind schedule. We do hope to catch up on this in FY24 also. Our partnerships for co-lending are very strong. They are getting stronger. As we speak, the scale-up has been slightly behind schedule in the retail credit business.
Third, our profit and loss amounts still have some drags in that, partly because of the extra liquidity we are holding, partly because of the slower growth in the retail credit business. We are also providing capital and liquidity to the retail credit business so people can grow faster. We are holding some cash for that. Our insurance investments continue. Lastly, our architecture is still being changed, because last few years, a lot of the costs were at the Edelweiss Financial Services entity level, which are slowly getting downstreamed. As we are unbundling and as we are making the businesses stronger, there are some costs which are still attached. In this year, we had the demerger in Nuvama, restructuring costs that also came in. If you look at the business profits, they are very good.
When you consolidate, there is some amount of complexity that creeps in, which is also reflected in the notes to accounts and all. We expect that this is the last year of this change in architecture, and at the end of this year, our new architecture will be in place. we, and as a result of that, the EFSL P&L will be an automatic consolidation of the underlying P&L. Currently, EFSL has a lot of other costs, like this restructuring and the extra liquidity and all that we are holding, that is still continuing, which we hope will go away. we will also make the not only the P&L stronger, as the, as we have done with the balance sheet.
Last four years, I think the large effort has been to make the balance sheet very strong, because obviously after the crisis and the liquidity crunch, it was very, very important that we focus on the balance sheet, the liquidity, the reduction in debt, the reduction in wholesale book. As a result of that, there are some drags on P&L, but we do expect that in the coming years, those P&L drags also will go away. In a way, we prioritize strengthening the balance sheet versus trying to optimize the P&L at the same time. As I said, and part of this also was because we were changing architecture and we were growing and degrowing at the same time. We have degrown our wholesale credit business, and we continue to degrow that while we continue to invest and grow our other businesses.
Overall, I think, all said and done, the balance sheet remains strong. As you have seen in one of the slides, our businesses are very well capitalized. The capital adequacy for credit businesses are more than 30%. We have a fair amount of equity, because we have not drawn equity, we have not used equity, and because we have not grown, the equity has accumulated, and it's free. There is more than 30% capital adequacy in the credit businesses. Insurance business solvency also remains strong. In the last four, five years, in spite of all the challenges that have been there, I'm very happy that we continued to invest in our insurance and asset management business and made sure that our credit business was fairly well capitalized. The equity was strong in that business.
Lastly, our growth in customer franchise continues. We added 15 lakh customers this year. We now have a customer reach of 6.7 million, 67 lakh, which has grown by almost 5x in the last five years. The retailization of all our business is also underway. Total customer assets, including Nuvama, has crossed INR 40,000 crore. That's a big achievement. Just a few update on the key priorities before we open up to the Q&A. On the Nuvama demerger, we have filed an addendum with some clarity. Ashish is there on the call, if you have any more questions. As I said, the important part is to unlock value, because we believe that Edelweiss stands for creating value and also unlocking value for the shareholders of Edelweiss. The addendum has a lot of the key data points and how this
and the entire structure and the reason for the demerger. There have been many questions that have been asked about Nuvama. I think it is clear in the presentation, but just the three highlights are: the shareholders of Edelweiss will get approximately one share for approximately 100 shares of Edelweiss. If you own 100 shares of Edelweiss, you will approximately get one share of Nuvama. Nuvama, obviously, is an INR 10 share, while Edelweiss is an INR 1 share. As you've seen, Nuvama has an EPS of INR 92 for this year, and it has a book value of INR 643. For the year-ending March, Nuvama has a net worth of INR 2,259 crore and has a PAT of INR 305 crore.
That is the value of Nuvama from the financial parameters point of view. Obviously, the qualitative side, the way it has grown the wealth management business, the team, the strategy, the execution we have had has been also something that has been very encouraging. Broad questions, financial questions on Nuvama are these five key parameters. Shareholders of Edelweiss will get one of the Nuvama shares for approximately 100 of Edelweiss shares. Nuvama has made a EPS of INR 92, has grown at more than 20%-25% in the last three, four years. The book value is about INR 643 crores, and it currently has an equity net worth of INR 2,259 crores and a profit after tax of INR 305 crores.
After the Nuvama demerger, the other priority item has been reducing the wholesale assets. We have highlighted that. Total wholesale assets were closer to INR 30,000 crores. We are now down to below INR 10,000, including the loans and the SRs and all together. We do think we will reduce this by INR 3,000 crores every year. In the next three years, we are expecting the wholesale book to come down to zero. Hopefully, it will be faster than that. The wholesale book currently has been provided for over the last four years, we have done quite a bit of provisioning. The total impairment and provisioning are more than INR 4,500 crores now, and the remaining book at book value is now fairly well collateralized.
Our asset cover, collateral cover on the wholesale book as on current book value is close to 1.4 times. We are fairly well collateralized, and given that real estate prices are going up, the real estate market has come back very well. We do think that the collateral cover we have will ensure that from the current margin we have, we should not have any more impairment at all. There should be hopefully some upside, but that will be a function of how fast and how well we focus on recoveries moving forward. The third important item has been reduction of the loan, or of the credit, our debt, as I said, has come down to close to INR 16,000 crore on a net basis. We will continue to scale this down.
We expect another INR 3,000-4,000 crore for a reduction in this year also. Our idea has been to become asset light, make the balance sheet stronger by reduction in borrowing and focus on the businesses which are not using a lot of balance sheet, but which allows you a much more ability to add value on a, in an asset light manner. Lastly, I think liquidity we have, we as on April 1st, we had INR 2,900 crore of liquidity after the Nuvama demerger, which is approximately 50% of the gross debt that we have. For this year, we expect that between the outflows and a very conservative estimate of inflows, we should have a gap of about INR 900 crore. We have INR 2,900, so we are very, fairly well covered.
We have planned some fresh borrowings. Some have happened in this quarter also. On the whole, I think we will use fresh borrowings for largely for new disbursements in our retail credit business in this coming year. For otherwise from a liquidity on the, on the wholesale front and all, we are fairly well covered. We have been holding more liquidity than required, which has partly affected our earnings. I think we expect we expect the past three, four years, the liquidity holding cost has cost us about close to INR 200 crores per year in earnings. We hope that after FY24, as we reduce the debt, the need for holding the liquidity will come down and hence will allow us to at least not have this earnings drag that has been there for the last few years.
Lastly, I think as I spoke earlier, asset management insurance continues to do well. Our GI business has been rebranded. It is called Zuno, and we do almost 53% in GDPI this year. It has been one of the fastest growing insurance, fastest growing general insurance business. We expect that to break even in FY26. The live insurance business, ETLI, achieved a value breakeven, ETS cross INR 500 crores. We are strong on that. I think going forward, we will continue to focus on the priorities. I think there will be extra focus and as we speak through this year, we will be able to give you more an update on the extra effort we're going to make on three items. Focus on wholesale recoveries. We have done quite a bit of things internally.
Use our ARC platform to expand wholesale recoveries. ARC platform has been very good on recoveries because they are the experts, they are the market leaders. On their own business, ARC this year had recoveries of close to INR 7,500 crores. For our wholesale to real estate, we have aligned with the ARC capabilities to also pitch in making sure the wholesale recoveries are robust and strong and we continue as we plan. Second, we'll scale up the retail credit and the co-lending business in this year. The last quarter, the fourth quarter was actually pretty good, we do think that now things are falling in place with the co-lending partnerships and all, and we should be able to grow that.
Lastly, reduce the P&L drag and complexity that is there because of the architecture restructuring and the Nuvama demerger. A lot of that will go away. These are three special focus items, besides the items like reducing debt, growing asset management business, and all of that. To sum up, I think the balance sheet continues to become stronger. We have spent four years strengthening our balance sheet. That is actually one of the primary focus areas for us. Profitability is improving, will continue to improve. The businesses are taking off. While we de-grew on the credit business, if you look at the last three, four years, the growth in mutual fund, the growth in otherwise alternate asset management business, the growth in insurance, the growth in ARC also has been fairly well balanced.
While we did focus on NBFC business because of the environment, we did insulate and allow the other businesses to continue their growth path. I think this year, the numbers and the results have highlighted that. We continue to focus on that, strengthen balance sheet, simplify the P&L, you know, make it stronger. I think, as I said, India continues to be in a very sweet spot. It has been in one of the sweeter spots in our careers that we have seen. Inflation is down, Forex reserves are good, government tax inflows are strong, the balance sheets are strong. All of that is falling in place, so we do hope that we will be able to capitalize on that. With that, thank you, all of you, once again, and we now open up for questions.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star 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. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants are requested to press star one on their phone to ask a question.
Uh, yeah
I'm sorry, sir. Please go ahead.
No, no. I was just asking Priya, if you want to ping Ashish, who's on the other line, and he wants to add some comments while we are waiting for questions. If the questions are there, we can go ahead with that.
We have our first question from the line from Vedant Advisory. Please go ahead.
Hi, sir. My question was with regard to the value unlocking of Nuvama that you mentioned. Can you give a brief overview on how the process was exactly, and what are the steps going ahead? Are we waiting for any approvals or something at this point?
I think the final approval from the court NCLT and all has come. Now we will launch the share, and then we have to only get it listed in the exchange, which will require the exchanges and the SEBI approval. That's usually just a process because we meet all the norms out there. In fact, whenever you do a demerger of this kind, there is a SEBI rule which says you have to list the shares, because they don't want the minority shareholders to be stuck in an unlisted company. The listing is the only last part remaining. We started this journey about 30 months ago, and our idea was first, step was to capitalize the business. We raised about close to INR 700 crores inside the Nuvama business.
As a result of that, you can see that Nuvama is capitalized at close to INR 2,159 crores as of now. Nuvama, first we said, "Let's capitalize the business then." Edelweiss sold a stake to PAG to get some liquidity for Edelweiss that we have used to repay our debts, and that has been used to also invest in our insurance business and others. Thirdly, we are allocating the shares. 30% of Nuvama will be allocated to the shareholders of Edelweiss. Nuvama is about 3.5 crore shares. Almost 1 crore shares will get allotted to the Edelweiss shareholders after June 2. We expect that if we do the allotment in the first week of June, it should take about between 30-45 days, ideally, for the listing to happen.
As you said, now we have all the parameters of Nuvama, EPS and all that. On that basis, I think, after second June, I expect Edelweiss shares to trade ex-Nuvama, and Nuvama shares will get traded about 45 to 50 days after that.
Okay. Thank you, sir.
Thank you. We have our next question from the line of Lalit Deo from Equirus Securities. Please go ahead.
Yeah. Hi, sir. Good afternoon. Sir, just, we see that this business has been granted to Nido Home Finance and Zuno General Insurance. Should we see this as a preparation for a potential value unlock in the business as well in the coming years? Like, could you also shed some light, like, from moving away from a probably a central brand, like the Edelweiss Financial Services to a decentralized brand, like Zuno brand?
I could not hear your question clearly. If you can repeat, there is some echo in the background.
Yeah. Sir Deo, could you use your handset, please?
Yes, sir. Is it audible?
Yeah, I can hear you now.
Yes, sir. Sir, like, firstly, it was on the general insurance and the housing finance business. We see that, like, we have granted this business to, like, Nido Home Finance and Zuno General Insurance. Should we see this as a preparation for a, like, a potential value unlock, like, in the coming years? Like, as you mentioned, like, general insurance should achieve breakeven in the next three years. For three years, like, should we see there is a potential value unlock in these businesses? As well as, also, like, what is the rationale before moving away from a decentralized brand to a from a central brand to a decentralized brand?
Actually, it's an interesting question, and we debated a lot. You know, like, for example, the Zuno business, the general insurance business, we started that five years ago. It's a very fintech, completely digital native kind of a business. Obviously in the market where there are a lot of other players like Acko, Tata AIG and all. For it to be continued to be called Edelweiss General Insurance Business, did not really reflect the new age-ness of that business. Edelweiss is very well known in the corporate markets space and all that, but I think, for that kind of a business, they had to compete. They needed to attract people, talent, customers, and be in the right position for that.
Lastly, I think just one brand for all businesses, they all are in different, like the other example you gave, housing finance. Housing finance, we are very much into affordable housing in basically tier 2, tier 3 cities. With that also to be called Edelweiss Housing Finance, where there are so many other quality housing finance companies who all have, you know, brand names and all that. What is we realize that the businesses, by just giving Edelweiss to them, was putting, you know, a lot of restrictions on how they position their businesses. The second is, if everybody's going to use Edelweiss name, then we will also have a lot of restrictions on what they can't do, what they can do, how the logo will be designed, what color code will be used, all of that.
That also reduces the flexibility, the cost, approval time, because we have to monitor, because we are obviously the custodians of the Edelweiss brand. Some booking of the housing finance company in will also have to be approved by us. That also puts a lot of restrictions on that. In India, we have seen, you know, everybody talks about it, but there have been so many companies which have had, you know, multiple brands. Tata Group has got brands like Croma and Titan and Taj and also, and we have seen that with the Aditya Birla Group, where they have Hindalco, Grasim, UltraTech. The Murugappa Group has got different names. There are advantages of having one common name and there are disadvantages.
We evaluated that, and on that basis, we have given a choice to all the businesses that they can create their own branding. Our approach has been, we want to help the businesses grow, we want to create value, we want to build out them, we want to give all the resources. We provide capital. Like in general insurance business, we have given more than INR 500 crores of equity in the last five years. While all this NBFC headwinds were going on, we, you know, we were making sure that that business was well capitalized. Our idea has been that after we do that, after we help the businesses grow, they should be able to have their own, their own growth positioning.
If we have to unlock the value, that will be good for us and the Edelweiss shareholders, plus it will also be good for the business, because it will allow the business to use inorganic growth acquisition opportunities to grow on their own. We see these businesses over a 20, 30, 40-year horizon. We don't think the first 10 years is where everything in the business has happened. Like even in the Nuvama case, it's a 20-year-old business for us, but there is a lot of growth over the next 20 years also. By giving it independence, by giving it a spotlight focus in the balance sheet, allowing a currency, it's been good for the business. Why it has been good for Edelweiss and Edelweiss shareholders, because we do have a lot of opportunities to continue to invest in the business.
Since we have only X amount of capital, reallocating capital and by unlocking value is going to be an important part. We are not a holding company. We are not going to hold shares in the underlying companies forever. We want to create value. We want to unlock them in a way that is good for the business, that is good for Edelweiss and the shareholders of Edelweiss, because we also all of us are also shareholders of the company. So we want to find that nice balance in unlocking between what is good for business, what is good for Edelweiss, and what is good for the shareholders of Edelweiss.
Sure. Thank you. Thank you. Thank you so much for the detailed answer.
Thank you. We have our next question from the line of an individual investor. Please go ahead.
Hello, ma'am. Thank you so much for the detailed discussion about the demergers. I have one more question about it. After the demerger and distribution of the Nuvama shares, as you rightly said, even EFSL will lose the fact of share in Nuvama. Which businesses do you think will be filling up the gap in the loss of profitability? After this, I have one more question, which is slightly on a different business. Again, it's always hard to give any forward-looking statement. As you were saying, I think the growth in our asset management profitability has been fairly significant. As we said, a lot of the funds are now hitting their carry targets and all that. I think alternate asset management business.
You would have seen the life insurance business also, the loss is coming down. That will also be a help to the profitability, because we don't expect any further increase in the insurance P&L, you know, P&L hit that is there. It will only come down. Thirdly, the corporate also, as we said, we have been holding security. There was a demerger cost, a restructuring, demerger cost, all of that. Even that will should come down. Fourth, I think NBFC, as you can see, the housing finance business and the NBFC total has a capital of close to INR 4,800 crores of equity, and currently they are not even making 3%-4% ROE. As we de-grow the wholesale business, ROE has come down, obviously.
As we grow the retail credit business with co-lending, we expect that profitability also to go up. The trend has been there in the last quarter also. We do hope that these are the four, five drivers of growth in profitability. The retail credit scale-up, the reduction in drag at a corporate level as our borrowings come down and we don't hold as much excess liquidity as we've been holding, the insurance drag coming down and asset management growing. I think we have all the drivers in place.
Sure. Thank you so much. One more question. Congratulations on the debt reduction part on the wholesale side. Can you also throw some more color on the key drivers driving that reduction? And what is the kind of asset quality do you see the underlying assets that are there?
As you see, a large part of the wholesale now is real estate. A lot of these are housing projects. Mainly, they are housing projects, which are for some reason, some were stuck, some were counterparties were weak. They have the land, but they are not able to construct. Those kind of places. Some we have taken to NCLT, some we are getting some other refinancing, some new developers are coming in. Five cases in this year, a new stronger developer has come in and also repaid part of our loan and also actually ensured that the project is getting completed and going forward and all. We saw a few of those also in this year. As the real estate market is strong, a lot of this is coming back.
I think our approach to recoveries in wholesale is basically two-pronged. One is the organic recovery. As the projects are getting done, we have escrow, the cash flow, we basically keep the cash flow, it gets repaid. The other is where we think that the project is good, the collateral is good, but it might need a little bit of holding power of, say, 18 months and all that. Instead of restructuring, we are averse to restructuring, doing one-time restructuring, giving any concessions to any of the developers.
If the underlying value of the collateral is there, then we partner with some of the global funds. We partner with them that they create structure which creates holding power in an AIF or a ARC structure, which allows the project to get completed and us to not have to take any haircut, in fact, recover also a good amount of money. We do both organic and inorganic. Our, our bias is organic, because I think, as I said, we should get around INR 3,000 crores a year coming off from organic. These are about 80 odd real estate projects which are there in the portfolio. About 30-35 out of them have been doing well, so that become naturally.
The others have got some issues or the other, which have all got restructured, new developer coming in, you know, some new fund coming in. All of that is going on, but it's case to case. Each one takes time. A few of them we've taken to NCLT because underlying collateral is also very good and we're getting a lot of offers in NCLT. That is our approach to recovery on this, that basically we don't like to do one-time settlement and give a haircut to the borrower if the underlying quality of the assets has been there. In most of them, we have marked down taken impairment so that the current price is conservative. Our current holding price is conservative as compared to the recovery value that is there.
We focus on recovery because, as you know, we have an ARC also. We know how to recover. Our ARC in the last five, six years has recovered more than 40,000 crores from the NPAs of the bank that they acquired. We do understand the recovery process. Sometimes it takes time, but I think the underlying asset values are there.
Sure, sir. Thank you. Thank you so much.
Thank you. We have the next question from the line of Mona Khetan from Dolat Capital.
Yeah. Hi, good evening. My question was related to Nuvama again. Just wanted to understand what differentiates this entity, Nuvama Wealth, from its competition? I mean, how are we seeing this differentiator contributing to profitability and growth going forward?
Ashish, if you are there, do you want to take an attempt on answering this, Ashish?
Yeah, I can.
Mona, I'm sorry to interrupt. Can you please mute your line? There's background noise coming from your line.
Sure.
Please go ahead, sir.
Yeah. Essentially, what we have done over the last, you know, seven, eight years, have invested significantly in creating a differentiated platform on wealth management. While this is on two fronts. One is the entire offering, which is given to the client. We have capabilities to execute on the exchange. We have a call NBFC, which can give loans against securities and shares. We have a distribution business, we have advisory, and we also have an investment banking outfit which can help in that as well. The, the universal platform, which can basically help the relationship manager to add value across the entire client wallet, which will include his business and his delivery.
Most of the competitors would normally operate only in the distribution line. This is a monoline business where they distribute third-party products, which is under the pressure due to regulatory changes and so on and so forth. The second thing which we have done is also differentiated across the client segment. If you look at our peer group, they largely operate in a segment which is called ultra HNI, which in our industry is considered 25 crore + in terms of investable surplus. We have actually invested there, we have built a very, very strong affluent client business, which is 5-25 crores, which most of the competitors are focusing now.
We took about 10 years, that's a business which takes longer to build, because it operates with, lower-cost relationship model, leverages technology more as physical presence across the length and breadth of the country. It's a longer breakeven business, but once you break even and you build the platform, its profitability is a very strong breakup, and we are in that part of the breakup. Last two, three years, both these businesses have grown more than 30% year-on-year. Even with the regulatory changes, tax changes which are there, maybe we'll settle in the coming year and then the growth will see again start.
Sure, got it. When you mentioned about this ISO INR 25 crore client segment, this refers to their investable wealth?
Yes, that's right.
Oh, thank you. Thank you. That's it.
Thank you. We have our next question from the line of Sumit Bhalotia from Emkay Global. Please go ahead.
Yeah. congratulations on the good set of numbers. I wanted to have some more understanding on the alternate asset management business that you have. can you help with the broad economics there in terms of what is the gross yield that you make, and on average, what is the carry structure there? also, you know, next to three years, what is the visibility in the front end?
As you, as you would have seen in the presentation, on the alternative asset management, there are two numbers on AUM. One is obviously the AUM and one is the fee-paying AUM, because a lot of in private credit, the way it works is that you get fees on only the capital that is employed, not on what is AUM. When you raise an INR 10,000 crore fund, and in the first year, if you deploy only INR 3,000 crore, you want fees only on INR 3,000 crore. There is a little bit of backhandedness to you and the fee part of it. In the early years of a fund, a private credit fund, you end up losing money because you end up also paying distribution costs.
Distribution costs usually can be approximately between 1.5%-3% of the amount expense, and a lot of that is accounted on a maybe amortized business, but from a cash flow point of view, is usually paid up front. The first two-three years usually are investment years because your fees start kicking in. Year three, four is where you get fees which are more than cover the expense and there is a profit. Years five to seven is where the carry comes in. On an average, if you make a 14%, 15% return, you should expect to make about 1.25% as fees and another 1.25% as carry. That is how this broadly works. Each fund strategies are different, all of them.
As you can see, if you have INR 46,000 crore of AUM, INR 46,500, half of it, approximately INR 23, is fee-paying. You have INR 23. Currently, undeployed AUM, that the moment we deploy, it will start paying fees to us. As you saw in the last quarter, we deployed about INR 1,000 crore. We expect to deploy about between INR 5,000 crore-INR 7,000 crore in a year across all the strategies. Each deal is about INR 400 crore-INR 500 crore. This quarter we did deals, but we usually do the three odd deals every quarter. In a year, across strategies, again, this is not one fund. You know, these are about 11-12 funds across all the strategies onshore, offshore, all of them.
Our target is to raise about, you know, INR 10,000-INR 15,000 every year of new AUM, which will be deployed gradually. Idea is to deploy about INR 6,000-INR 7,000 crores in a year, and exits will be about INR 4,000-INR 5,000. If you saw in the last quarter, we exited INR 1,500 crore in the last quarter. That is how this business broadly works, that AUM, fee-paying AUM, how much you deployed, how much you realized, and there is a carry element to that. I think across all our funds, in the year, as the funds are getting, in the year four, five, six, seven, the carry starts coming in on that.
Sure. Broadly, 1.25% of fee and 1.5% of carry over a period of time is what you're saying? This doesn't, this is without the distribution cost, the 2.5% that you mentioned?
Yeah, I think after you amortize the distribution cost, your net revenue will be about 1 - 125 basis point, out of which your expenses will be there. Usually when you get to fund 3, the expenses are covered in fund 2, in the fund 1, fund 2. Fund 3 usually will have a different economics than fund 2, if you know, because it's the same management team that works on that. It's actually very hard to see it fund by fund. At a business level if you see on this, in this quarter, you would have seen we had a total net revenue of almost INR 400 crore in this year, with on approximately INR 23,000 crore fee paying revenue.
That came to about 1.5, and there were expenses and all on that. Out of this, I think revenue we expect going forward at a gross level, about INR 200 crore-INR 250 crore of carry will come in every year, but against carry, there is expense also. Usually a third of the carry is paid to the fund managers. That also gets included in this. When you get the carry, you also pay to your fund managers accordingly. This, what I look at is the profit after tax. What is the net that you make on a fund? In a fund, on an average, over a seven-year period, you should make 7% of the corpus as your PAT. The seven is not linear, as you know, 1% every year.
Usually the first two years you will be -1, -1, 3rd year will break even. The fourth year onwards, you make, you know, you know, 1% going up to 2%, 3.5% a year. That is how it works. It's a different from a normal mutual fund.
Sure. I think there is a little bit of volatility in terms of quarter number, you know, we wanted better understanding. Last quarter you said you have INR 5,000 crore of assets, and that's, you know, next, even though you plan to be on a net basis, the interest? The AUM has not moved up, is that your citation?
Exactly. Because I think we had more exits again, because we have to look at risk also. When the exit is right, we will also be exiting some of that. It's not a business. In fact, all of Edelweiss is not something you can look at it on a quarter-to-quarter basis. I think increasingly Edelweiss is becoming like something that can be looked annually, because you might close a deal at the start of the quarter and earn the fee for the whole quarter, or you might close a deal end of the quarter and not earn the fee, so it might show up as a fee-paying AUM. I think overall, after 10-15 years, business parameters become stabilized.
If you look at a lot of global firms like Blackstone and Apollo and others, I think usually about 1% of your AUM should be equal to PAT. 80 basis points to 100 basis points is what usually firms make after you have three, four, five funds in the same strategy on this, because then you get fee, you get expenses which are defrayed over three, four funds. I think by 2024 onwards is where a lot of this will start stabilizing. There'll be some idiosyncratic income because of carry and all that, but overall, we think alternative asset management business should make a PAT of about 80 basis points of your average fee-paying AUM.
Thank you. We request you to join back the queue for follow-up questions. We have our next question from the line of Vishal Kakani from Vishal Enterprises. Please go ahead.
Yeah, hi. Good afternoon, Rashesh. My question is about the business. We have seen a robust AUM growth for the past year. Your AUM is predominantly debt-based and more of a passive fund, which are low. Is there any plan to change this proportion to more towards equity so that you earn better margins and any guidance on the, you know, AUM profitability?
Guidance on profitability will be hard to give, yeah, you're absolutely right. I think, our focus is on. Basically, I think the bond ETF and all were great products and are actually our signature product. We do think there is a huge opportunity in bond ETFs and all in India, especially what has happened and the way interest rates are, and there is a lot of, I think, yield-seeking investments which are there. That will always remain part of that. Any mutual fund should have a robust equity business. Our current equity as a percentage of AUM is about 22%. The industry's average about 25%-40%, if you look at most of the mutual funds, equity AUM.
Instead of looking at how much is bond ETF or passive, I think the other way to look at it, the inverse way of looking at it is how much is equity as a percentage of total AUM. We are 22, which is below the industry average, which I think is about 25, you know, between 35%-40%. Our endeavor will be to get to 35%, but as the AUM is also growing and growing equity along with that is hard work, but we are focused on that. If you see last four years, and if you see the trend of equity as a percentage of total AUM, we are now, about 20. Our endeavor absolutely is going to be increased, not because it is more profitable. I don't think we are guided by that.
What we are guided by is that we need to offer all the, you know, the entire range to our partners, our distributors, our. Actually, our funds, our equity funds have done pretty well. Our small cap and mid cap equity fund performance has been, you know, quartile one across the board. We are very enthused by that, and we do think that the economy is coming back, interest in small cap and cap is coming back. We would want to capitalize on that, but let us see. You are right, not for profitability reasons, but to complete our offering and making sure that we are also, you know, around between 20%-40% equity AUM as a percentage of total AUM is what our endeavor is and will be.
Thanks, Rashesh.
Thank you. We have our next question from the line from 1729 Capital. Please go ahead.
Hi, Rashesh. Congrats on a strong quarter, and we're especially sort of impressed with alternative assets and looking forward to the Dharma IPO. My question was on sort of net debt. If you look at it, your overall net debt has come down, which is obviously a positive. It appears that at the parent company level, it's gone up this year versus, say, 12 months ago, and that's more than offset by at the subsidiary level, that it's come down. How are we to think about that sort of moving forward in terms of coming up with an NID of the business? Also a couple of months ago, you had a sum of parts valuation. Do you plan to update that at some point?
Yeah. I think on the sum of parts, we did that at our AGM, because we do think, I think even all the shareholders, including retail shareholders, should get a complete view of the picture. Our plan is, and also we will, we work with feedback from people like all of you to do the sum of parts once a year and present it at the AGM every year so that, you know, investors get a view, there is no point in doing it, on a quarterly basis, because we are looking at long-term intrinsic value. Of course, there are assumptions in that. We will disclose the assumptions under which the intrinsic value is being worked on, and we constantly stress-test it and talk to people in the private equity market, investment bankers.
to see, you know, whether our assumptions on intrinsic value are true or not. AGM every year, this is something we plan to make it as part of the AGM event.
Okay.
Some of our intrinsic value. We internally follow an intrinsic value mechanism. It is not for the stock price or anything, but it is to really tell our shareholders, our, you know, our investors, what we think are the intrinsic value, where we have created value, where the intrinsic value has come down, like in a wholesale credit book. Intrinsic value has come down over the last four years because of the environment and because of cost degrowing that business. We want to be transparent about it, and we will do that every year. That's the second answer to your second question. Your first one is important. I think we have been holding some amount of reserves at the HoldCo level.
Even with the Nuvama demerger, we wanted to make sure that, you know, any restructuring costs and all that, we have enough cushion out there. We have continued to invest in our asset management and insurance business. Though asset management is breakeven, when we deploy the capital, we also have to keep pumping, you know, the GP contribution. I'm sure as you understand, being a fund, that there is always a GP contribution. Just think about it. If you have deployed INR 22,000 crores and average GP contribution is about 4%-5%, we have almost INR 1,000 crores that we have deployed as LP alongside the other LPs as our GP contribution. Our earlier funds used to have GP contribution of, you know, 15%, 20%, even going up to 25%.
We are now down to about 5% GP contribution in most of our funds, in the new funds. We also had to make some GP contribution in this year. We continue to invest in our insurance businesses, and we are also holding some liquidity that we have given to the retail credit businesses also, so that they can ramp up their co-lending. Co-lending has a usually a three-month kind of a cycle, there is short-term working capital required. While all these changes have been going on to making the company more independent, we wanted to make sure that another INR 500 crore-INR 600 crore of extra liquidity that we have, it just enables the growth.
As I said, from this year onwards, we are pushing all the businesses to do their own borrowing, to be on their own and use us as the last resort. Up till now, we have made sure that we have, we are able to support them from the, from the EFSL level.
Okay, thanks.
Thank you. We have our next question from the line of Sahil Kumar from HDFC Securities. Please go ahead.
Yeah, hi, good evening, everyone.
Hi.
Thanks for the opportunity. Sir, I have one question. As a shareholder, how should we be looking at the demerger? Should we see this as a value-intensive deal in the long term? I would like to hear some comments how the management is seeing this.
I would think so. I think that the reason to do the demerger is, one, to ensure that the Edelweiss shareholders directly participate in this exciting wealth management business we have. We have said on a long-term basis, we don't want to be a holding company where shareholders are, you know, very passive and they are a step away from value, from enjoying the value that we create. I think it is part of that. We do think if you look at the parameters that Edelweiss, excluding Nuvama, after Nuvama goes away, we still will continue to have, seven businesses, which includes life insurance, general insurance, HFHC, housing finance, ARC, mutual fund, and alternate business. Each of them, you have the information parameters on that. All of them have exciting growth.
Ahead of them, the challenges on the wholesale credit are largely behind us. We have actually done everything that we were supposed to do, and we continue to do that. That will ensure that the drag of the wholesale credit business goes away, and, along with that, we keep on growing the other businesses. I think it is up to the market and the shareholders and investors to decide whether this is appropriate or not. Our assumption is that it should be appropriate because Edelweiss, excluding Nuvama, is also has got a lot of growth businesses in that. While Nuvama itself, with the kind of EPS and growth is ahead, should get valued appropriately in the market by the, by the shareholders. A lot of the shareholders will be Edelweiss shareholders also.
Since it's standalone, I think one of the things we've been told is it's hard to value Edelweiss with all these businesses. It's a conglomerate of multiple businesses which are all at different stage, which have different, you know, profitability drivers, all of that, which we understand. That's why we try to do SOTP, which is the value unlocking is also a way of saying that, you know, we are also putting some value directly in the hands of people. And even I do think wealth management has a great growth opportunity in India, not just for us, but for the whole industry. I do hope that Edelweiss shareholders will enjoy participating in that and enjoy upside on that.
Right. Thanks for the statement as well. Thanks.
Thank you. We have our next question from the line of Rishikesh Oza from RoboCapital. Please go ahead.
Hi, sir. Thank you for the opportunity. Sir, my question is on the BMI and corporate debt of INR 6,300. Firstly, sir, why was it taken? You know, secondly, like, when and how will it be paid? Will it be, like, transferred to any operating company?
I think out of this, as you saw the last time in the ATM, we had also given a detailed listing. Currently, the corporate owns about investment assets and credit assets and all about INR 3,000 crore-INR 3,500 crore, which are all getting liquidated. As I explained, we have our LP investments, we have all of that. We have also given some group loans to our, you know, businesses and all. The corporate has about up against the INR 6,000 or loan, about INR 3,500 is the credit and investment portfolio, which will be self-liquidating. Part of it will get paid out of that. A lot of that is also earning money, so that money.
In a way, as I said, Edelweiss is not purely currently, we still have an investment portfolio, because historically it was Edelweiss that was getting all the investment, that was co-investing in the credit, you know, some of the credit loans and all. That is one part of it. Along with that, the corporate also owns the office buildings and all. We have real estate and property worth another INR 1,500 crore. Again, it will also be borrowed, but it's the Edelweiss House, office building, Kovind House, all of that. We have a lot of the real estate is owned by a lot of our earlier assets, and all were owned by the corporate. We have that part also.
That is also part of the loan, which we may continue, or if you want to do a sale and lease back, we can always use that for that. That accounts for about approximately INR 5,000 crores of the loan. Another INR 1,300 crore is the loan at the HoldCo level that we think either we can keep it permanently or we'll also be getting dividend from the businesses. Like in the wholesale credit NBFC business, we have total of about close to INR 4,000 crores of equity, out of which INR 3,000 is currently allocated to the wholesale credit. As we run down the wholesale credit for INR 3,000 crores will become free, and we can lend it up and lease it out.
We do think that is also, after all this, the property debt as well as the investment and the credit book debt, we'll have about INR 1,000-INR 1,500 crore of debt that can always be paid off either by the income and dividend of the underlying businesses, the excess capital in the underlying businesses that we can stream upstairs or, and/or we can do stake sales. Like, as you know, we will own 14% of Nuvama, we own 100% of the general insurance business, we own 100% of the mutual fund business, we own 100% of the alternate asset management business, we own 100% of the housing finance business. If we sell stakes in those also, they will also come as a whole, right? As we have done in the past.
The holding company, out of the INR 6,000 odd crore, about INR 5,000 crore is paid, that is directly assigned to assets. The balance, about INR 1,000-1,500 crore will be either earnings from businesses, dividends from businesses, excess capital for businesses, or stake sales from businesses. This is what if you want to repay all the debt. I think at the HoldCo level, we are comfortable about INR 3,500 crore of debt we can manage and sustain other than ongoing business. Currently, it is about, as I always said, we have INR 2,000-3,000 crore of extra debt as a HoldCo, because over the years we've been building liquidity, holding liquidity, all of that. Part of that will get repaid in the next 2-3 years in a gradual way.
Okay. Are we not looking to repay all of it? Because I think in earlier AGM slides, if I see FY26, you're expecting to, you know, zero it down.
Yes. That is the plan. As I said, in that, you would have seen there is a stake sale also planned in insurance and housing finance in that AGM presentation we made. There the answer was that if you want to go to the zero, but this is how we'll go to zero. The investment credit book will be run down, which will anyway be run down. That is not, you know, a choice. That is, we are doing automatically. The real estate assets we can keep own or we can transfer to the businesses that are using it, because ultimately all the office properties are also used by businesses. They're paying us the rent on that, but we can transfer it to them. They are eight businesses. They can take, you know, whatever assets they are using.
That is on the real estate side. After that, another INR 1,500 from either insurance stake sale or housing finance stake sale or stake sale in asset management is what we can do. We also expect to get some equity freed up from the wholesale credit book that will come up. If you look at the AGM presentation, it outlines the plan on that. As I said, every year in AGM, we'll give you the update on the plan and the status we stand on the plan every year. We want to make this a natural exercise.
Okay. Just, you know, a follow-up on this only. Are we, like, serious to paying it down or we are okay to keep it like because the comments look like that?
No, no. We want to pay it down. I think, see, the history is, the, you know Edelweiss Financial Services was like a conglomerate holding company also. As per RBI rules, if you are a CIC, you can borrow two and a half times your net worth. For example, if your net worth is INR 8,000 crore, you can borrow up to INR 20,000 crore. At the peak, is what you are currently referring is on INR 6,000 crore, debt was more than INR 11,000 crore debt. We brought it down to INR 6,000 crore. Even when we sold our stake in the wealth management business, we get, you know, down the debt. We have 40% of the Nuvama Wealth Management business also, which also is a liquidable asset. We are very committed to paying it down.
We want to pay down. Whether we go to zero or INR 1,000 crore is what we will see after two and a half years. Between now to the next two and a half years, as we have said earlier, The EFSL, the corporate debt, it should come down because the corporate increasingly wants to fund itself with equity. We don't want to borrow. As I said, only companies are allowed to borrow up to two and a half times. We had used that. We have decided to stop using that.
Thank you. We have our next question from the line of Sidharth Shah, an individual investor. Please go ahead.
Hi, thank you for taking my question. I just had two. One, in the presentation, it shows that management shareholding has come down from 5.6% in the previous quarter to 2%. I just wanted to ask, is that just a reclassification or is it like an actual sale?
Which slide are you referring to? This is surprise to me because I don't think there has been any sale at all. Which slide are you referring to? If you can show it to me.
Yeah, sure. It's slide 54.
One second. I'm going to open it, so just give me a couple of minutes.
Sure.
Okay. These are actually employees who may have quit. Basically, as you know, we had Rujan Panjwani, who was a long-standing employee. He turned 60 and retired this year. His shareholding, as you know, over the years, we had given almost 18%, 20% of shareholding to the management who are non-promoters. As a few of them would have retired, the main one would be Rujan Panjwani, I think his shareholding pattern is also there in the actual filing of the shareholding. I think part of the fall is because Rujan has been declassified as management and has become because he's now retired from the company. Nobody. The promoters have not sold shares.
Some of the management may have sold shares for maybe exercising ESOPs or repaying loans, but, a lot of that is reclassification, I would think.
Got it. Thank you very much.
Promoters have not sold any shares.
Thank you for clarifying that. I just had one more question. you know, in the wholesale business, I think our wholesale assets quarter-on-quarter have reduced by about INR 2,000 crores, from INR 7,800 - INR 5,700. The debt reduction is much less than the NBFC, you know, as is the kind of increase in liquidity. I just wanted to, you know, kind of bridge that gap, because I see the assets have come down by about INR 2,000, but debt has only been reduced by INR 700, and liquidity has only increased by about INR 300 crores.
I think part of it has also gone into growing the retail credit business, as I said overall. Just to clarify on the earlier question, I just got the answer. The Nuvama employees were also earlier classified as management. They are now no longer classified as management anymore. The reduction in management you're seeing is also the Nuvama employees no longer being classified as management, just to complete on that. I don't have the triangulation of the reduction in wholesale book versus the debt, but it is actually in sync with that, because we are using whatever we are getting to repay, either hold liquidity for future requirements or just repaying the debt. We are keeping a little bit of money for the retail credit businesses.
I don't know whether this is co-mingled with ARC or not, because ARC also has been accumulating cash to repay. If you want, we can give you the triangulation offline to. I'm actually very confident because we are not. Because if we are reducing assets, then either we are getting cash or we are repaying debt, right? It could be either of the two. We'll be happy. Ananya can give you the triangulation on that.
Thank you. Ladies and gentlemen, this is saying all things. That was the last question for today. I now hand over the call back to Ms. Priyadeep Chopra for closing comments. Over to you.
Thanks, Yashaswi, and thank you very much, everyone, for your time today. Always lovely to listen in to all of you and take your questions. Please do write to us at Edelweiss Investor Relations for any further queries. Once again, thank you for your time and have a good day ahead.
Okay, thank you, everybody.
Thanks, Ashish. Thank you for joining the call.
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.