Exclusive: How Edelweiss Built A Long Run Businesses?

Though Edelweiss has failed to get a banking licence, it has built sufficient headroom to grow in multiple businesses. For now, that should be enough.

At the 15th floor boardroom of Edelweiss House in Mumbai’s Bandra-Kurla Complex financial hub, Rashesh Shah, chairman and group CEO of Edelweiss Financial Services Ltd (EFSL), walks us to the large glass windows and asks us to glance at the sprawling, open MMRDA grounds below. “We get a great view of open spaces,” says the 51-year-old co-founder of the diversified financial services group. “Closer to the edge, the view might be better. But we don’t need that. I can stay three steps away and the view is still as good. I don’t need to go to the edge,” he points out. 

As it is with views from windows, so it is with business. This philosophy—which Shah calls the ‘margin of safety’—has not only saved Edelweiss the blushes (of possible financial losses) but has, in fact, become its mantra for success.

Shah explains this with the example of wholly-owned subsidiary Edelweiss Commodity Services Ltd, set up in 2006 as part of their strategy to diversify from being a capital market-led firm nearly two decades ago. The commodity subsidiary sources, distributes and helps in the financing of agri-commodities and precious metals, earning it a 14 percent annual return. In a country where commodities change hands frequently, evaluating them and managing risk are critical.

In 2013, some of India’s large brokerage firms suffered losses in the fallout of the Rs 5,690-crore financial imbroglio at the Jignesh Shah-promoted National Spot Exchange Limited (NSEL). Contracts were sold to investors without necessary collaterals in place, resulting in defaults and losses.

It is in this context that Edelweiss’s risk philosophy—of staying away from the edge, despite the better view—worked for the company. 

Edelweiss’s risk management team had considered the attractive brokerage fees that could have potentially come their way. “In fact, there was one client who was upset that we did not provide him with the opportunities to make good returns,” an Edelweiss insider said, requesting anonymity. But Edelweiss chose to stay away. “We stayed out of broking at NSEL because we understood that on the warehouse side, risk management is the most critical. We prefer a situation where we manage the collateral and then fund it,” Shah says, rather than the reverse.

Today, Edelweiss is among the few financial firms of its type: Set up by a couple of entrepreneurs in late 1995 with its roots in the capital markets, it has, two decades later, branched out into a well-diversified financial services group. In the process, it has not followed the same path as that of experienced, niche players, such as Shriram Transport and Muthoot Finance, which operate largely as commercial vehicle financiers and provide loans against gold respectively. 

Edelweiss, as its name suggests—with no founder or family name attached to it—is one of those rare financial companies that are completely independent of the backing of large conglomerate groups like Tata, Birla, Bajaj, Reliance or Kotak.

It is primarily strategic decision-making, and in some cases luck, that has brought Edelweiss to where it is today—and it is a happy place to be in. In FY2014, Edelweiss Financial Services Ltd, the parent listed company, posted consolidated revenues of Rs 2,556 crore and a profit after tax of Rs 220 crore. (In FY2007, revenues were at Rs 372 crore and profit at Rs 110 crore). In the last three years, Edelweiss has been growing at a CAGR of over 35 percent.

The Edelweiss group, in which Shah has a 28 percent stake and co-founder Venkat Ramaswamy 10 percent, now has five businesses— capital markets, asset management, credit, commodities and insurance. But Shah prefers to look at the company as one which is, mostly, credit-led. “In credit, we are at about Rs 12,500 crore of total assets [of the total Rs 23,000 crore],” says Shah. Credit thus forms about 55 percent of the balance sheet, as of December 2014. 

The agency-led business is in the range of Rs 3,000-4,000 crore. Another Rs 4,000-5,000 crore is in the form of liquidity and treasury management while Rs 2,000-3,000 crore include its corporate assets, investments in its insurance joint venture with Japan’s Tokio Marine Holdings and the Edelweiss office building. By 2020, Shah is confident that Edelweiss will be an 80 percent credit-led group, with the balance in non-credit businesses.