Why Credit Suisse likes Indian counterparts

Shares of Edelweiss Financial Services and IIFL Holdings on Wednesday hit 52-week highs, gaining six per cent and 10 per cent, respectively. The rally is being attributed to foreign brokerage Credit Suisse, which has given an ‘outperform’ recommendation for both the stocks. The brokerage has pegged a target price of Rs 220 on Edelweiss and Rs 650 on IIFL. The upside on both the stocks after the rally is about 7-12 per cent over the next 12 months. 

In fact, Credit Suisse’s report, which reiterated the strengths of the Indian wealth management business, rubbed off on other listed brokerages such as Geojit Financial Services, Emkay Global Financial, Motilal Oswal Financial, Centrum Capital and JM Financial, which rose by 2.5-7 per cent on Wednesday.

In a report captioned ‘Rise of mini financial conglomerates’, Credit Suisse notes both IIFL and Edelweiss, which come from a capital market background, have built new businesses of scale. "We see a path to improving profitability and return on equity (RoE) for both," the note says. As for IIFL, the analysts, led by Sunil Tirumalai, highlight the non-banking financial company (NBFC) is among a few younger lenders to have already built a retail book and is a market leader in the wealth management business, which contributes to 30 per cent of profit before tax. "We see continued growth, leading to 36 per cent growth in earnings per share," the analysts add. For Edelweiss, even as value isn't attributed to its life insurance business as it is in a nascent stage, Credit Suisse notes that Edelweiss' key position in structured mid-corporate credit, agri-financing and its asset reconstruction company, the largest in India with comfortable capital position, are the important earnings drivers. 

IIFL enjoys a diversified retail distribution with 1,112 NBFC branches, over 1,200 service locations for the capital market business and 33 offices, including seven major global financial centres, for its wealth management business. Edelweiss, on the other hand, has 71 offices in 61 cities for its life insurance business, with retail lending presence in 52 cities and 3,100 villages and also has over 80 offices for the wealth management business. While the diversified operations is the moot point for Credit Suisse's positive recommendation, the brokerage also makes an interesting observation that the leading Indian wealth managers like IIFL already report revenue yields and profitability on a par with global leaders. "While some pressure on yields can be expected due to competition, the Indian wealth management industry is graduating away from plain 'custody' products to higher value products. This could help protect revenue yields for the industry," the report highlights. 

A similar argument holds true for Motilal Oswal Financial Services. Ambit Capital, which recently initiated coverage on the stock, says the NBFC's earnings predictability and longevity will improve in the coming years, with the increasing share of its asset management and housing finance companies.

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