>EDELWEISS CAPITAL: Financing book comes to the rescue (ICICI DIRECT)

Edelweiss Capital reported disappointing numbers from its core broking and treasury operations. This signifies the pressure on yields, which fell from 6.2 bps in Q3FY10 to 5.6 bps in Q4FY10. Treasury yields fell to a low of 11% in Q4FY10. Both these factors led to only 34% contribution of broking and treasury income to total income, which ranged at ~50% in the previous three quarters. The company closed 17 deals during the quarter in investment banking (IB), which led to a five-fold QoQ jump in IB fees in Q4FY10. The significant jump in the loan book led to higher interest income and resulted in 43% YoY and 14% QoQ rise in total income to Rs 262 crore.

■ Broking volumes fall, market share sinking
The broking volume of the market fell ~3% QoQ to Rs 95,985 crore but Edelweiss reported ~17% QoQ fall in its ADT to Rs 3,913 crore leading to a 70 bps fall in the market share to 4.1% in Q4FY10 and 4.5% in FY10. We expect the market share to stay stable at current levels without factoring in volumes that will be added after the Anagram acquisition.

■ Finance income recoups bottomline
The loan book of the company grew 191% YoY and 78% QoQ to Rs 1,837 crore. Of the total loan book, promoter funding is ~Rs 1,000 crore while margin funding and the corporate book constituted ~Rs 250 crore each. We do not expect a drastic change in the composition of the funding book over the next couple of years. The management expects a significant scaling up of the financing book by FY12E. We expect this segment to contribute over 40% to the total income of the company.

Valuation
At the CMP of Rs 404, the stock is trading at 12.2x FY12E EPS, which is at a 6% discount to the multiple we have assigned to India Infoline and Motilal Oswal. We are now valuing all three companies under our coverage at par and not assigning any premium to any player. We,
therefore, value Edelweiss at 13x FY12E EPS and downgrade the target price to Rs 429. Our target multiple does not capture any upsides for the company after taking over Anagram Capital, which will give it a diversified retail clientele that was lacking in its portfolio.

To read the full report: EDELWEISS CAPITAL