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LETTER FROM THE CHAIRMAN:
Dear Fellow Shareholders,
In a year of mixed fortunes, I am happy to report that your company has turned in a good performance with sustained increase in Gross Income and Profit After Tax (PAT).
Our Consolidated Revenues for the financial year ended March 31, 2013 were Rs. 2,184 crore (USD 376 million), an increase of 31% over FY12. PAT grew at 40% to Rs.178.5 crore (USD 30.77 million) as compared to Rs.127.7 crore (USD 22 million) in FY12. The company's PAT was adversely impacted by about Rs.65 crore (USD 11.2 million) due our continued investments in our life insurance business. Shorn of this impact, the PAT for FY13 would have been in the region of about Rs.243 crore (USD 41.9 million). I am happy to note that we have shown steady growth over the last six quarters starting from Q2FY12 all the way upto Q4FY13.
We continued to scale up our newer businesses – Retail Finance, Commodities and Life Insurance, while maintaining our market share in mature businesses like Financial Markets. Two of our new businesses –– Retail Finance and Retail Financial Markets –– have broken even and started making positive contributions to your company's bottom line.
Edelweiss today has touch points in 545 cities including 280 tier 3 to 6 towns. This includes our own 211 offices in 106 cities. This presence helps the Group service a wide spectrum of over 450,000 clients ranging from clients in the rural and urban economically weaker sections of society to mass retail, mass affluent & HNIs, corporate, Private Equity Funds, Domestic Institutional Investors, Foreign Institutional Investors and International Sovereign Funds.
Understanding our Strategy
Since inception we have followed a strategy of moving into adjacent spaces and steadily expanding our product and service offerings. Starting with Investment Banking in FY96 we set up our Institutional Equities business in FY01, soon establishing our leadership position. In the last five years we have launched seven businesses –– Corporate Credit in FY08, Commodities and Retail Financial Markets in FY09, Retail Credit in FY11, Life Insurance in FY12 and SME and Small Ticket Housing Finance in FY13.
In each of these businesses, we entered mature markets. Yet through a combination of a well–thought out strategy, excellent execution, cutting–edge research and investments in people and technology, we have managed to build a leadership position in our mature businesses. I am confident that even in the newer businesses these strengths will stand us in good stead.
Launching and scaling up these businesses in the last five years –what I call Edelweiss 2.0 –meant we had to go through a period of investment. Since this coincided with the global economic crisis and slowing growth at home, the period has been a challenging one. While we have always remained profitable, some of our ratios like Return on Equity have suffered. However, given our focus on long–term growth of the company, we opted to suffer short–term profitability pains.
At the end of this investment phase we have emerged a much stronger company. This strategy of diversifying across asset classes, product and consumer segments and expanding geographical reach has helped us increase our relevance while at the same time de–risked our business model significantly. This is also reflected in our Book Value per Share which has increased at a CAGR of about 48% over the last ten years to touch Rs.36.11 at the end of FY13. We have also maintained our profitability track record since inception – 17 years ago –– with a compounded annual growth of 81% in profitability over the last decade.
More critically, this diversification strategy has given us huge headroom for future growth. According to our estimates, by diversifying across asset classes, we have increased our total addressable revenue pool by 20 times. The Management expects this pool to grow five times by 2020. What this means is that from where we were in 2008 to where we and the industry are likely to be in 2020, our total addressable revenue will have increased 100 times.
Overview of FY13
The first half of FY13 was marked by a growing concern over India's inability to tackle its economic woes. While WPI inflation continued to hover around 7% and Consumer Price Index (CPI) inflation into double digits, GDP growth slowed down to a decadal low. Current Account Deficit (CAD), driven by rising oil and gold imports rose to an all time high of about 5% of GDP. Exactly around the time the economy most needed foreign investments, investors were spooked by GAAR and a retrospective tax regime.
However the second half of the year, saw the government taking a series of steps including liberalizing FDI regime for certain sectors, rationalization of retail fuel prices and reining in fiscal spending. These steps, some of them taken at the cost of political support, have stabilized the macro environment to some degree.
For Edelweiss, FY13 was the year we launched the next phase of our growth story –– what I call Edelweiss 3.0. This phase will see consolidation leading to non–linear growth. This is being done by focusing on increasing efficiencies, continuing investment in technologies, robust risk management systems, stabilizing newer businesses and supporting a high quality leadership pool.
As we go forward, we are clear that Edelweiss will be defined by four dimensions–Diversification, Efficiency, Growth and Quality.
Diversification: We have managed to achieve this across products, asset classes and businesses and at the organization level. This has de–risked our business model and laid the foundation for secular growth in the future.
Efficiency: This has always been a hallmark of Edelweiss operations. However during the investment phase, we had necessarily taken a hit on efficiency parameters. In the latter half of FY12 and entire FY13 we have managed to improve almost all our efficiency metrics through relentless focus on bringing back efficiency. We have invested in technology, processes, communication and execution. This has seen our ex–insurance Cost–Income ratios improving for six straight quarters. We will continue to push on this vector.
Growth: In the last few years, during our investment and diversification phase, while Total Income had grown we had taken a hit at the PAT level. In FY12 our diversification strategy started to pay early, albeit modest dividends. In FY13, we have strengthened this trend. Future growth will be more distributed, balanced and better paced.
A key element in this process will be decentralization. Each of Edelweiss' businesses has reached a stage where they need to function as standalone companies. It is incumbent that they have the necessary control over the functions that impact their ability to execute well. Given the opportunities that lie ahead, the hope is that in the next few years, each of these businesses becomes "Edelweiss" in its own right. We took the first steps towards this during FY13.
But key to the success of this decentralization process is also retaining common values, a common culture, flexibility in leadership and financial resources and central oversight over compliance and risk. It is a difficult task, but not an impossible one. Successful conglomerates have achieved this quite well, both in India and abroad.
These first three will give us the numbers, but Quality will define us. In a hyper–competitive market, where innovation is only incremental, a high quality organization – made of high quality products, businesses and people is what will give us lasting competitive advantage. We need to focus intensely on this. This means further strengthening our culture of collaboration, compassion and empathy, innovation, customer centricity, great execution and high self–aspiration and self–expectations.
The key business highlights for FY13 are being dealt with at some length in the Management Discussion & Analysis (MD&A) and I would urge you to go through it carefully to understand our strategy and our achievements for FY13. I would instead like to share with you a few of the initiatives that will have a bearing on the long term growth and strength of your company.
Treasury and Balance Sheet Management
As a large diversified financial services group, Edelweiss requires sizeable working capital for various businesses and day–to–day liquidity management becomes a critical function. In addition, as the housing finance portfolio scales up the asset side duration lengthens, requiring greater attention to management of liabilities.
Edelweiss' Treasury & Balance Sheet Management Unit, therefore, manages the Group's liquidity in a way similar to a commercial bank ensuring that maturing liabilities are repaid smoothly. It also manages key components of the balance sheet, monitors interest rate sensitivity in the portfolio and takes pre–emptive steps to mitigate any potential risks.
Over the last two years we had embarked on a strategy of reducing our dependence on short term (less than three months) liabilities as a percentage of total liabilities; thereby insulating your Company from volatility in the credit markets. We have simultaneously diversified our sources of borrowing and reduced dependence on debt markets. This has been a focus area in FY13 and we have successfully realigned our ALM to ensure that our assets and liabilities have similar tenure. Our liquidity management efforts have made the balance sheet stronger in this year reflected by the fact that our borrowings that are due for maturity within the next three months (excluding the asset–backed borrowings) constitute only 16% of our total liabilities while dependence on debt markets has reduced by a third as on March 31, 2013 during the past two years.
Edelweiss has made significant investments in people and technology for risk management. The Group employs over 120 dedicated risk professionals who use state–of–the–art technology to remain ahead of the curve.
This focus on Risk has ensured that at the end of FY13 the Gross NPAs in the credit business – our largest business – are under control at 0.43% of the total loan book. The Group holds an average collateral cover of 2.4 times on wholesale loans and Loan–to–Value Ratio in case of Housing Finance is just 56%.
In FY13, your Company retained global risk consulting firm, Towers Watson, to conduct an enterprise–wide survey to assess Edelweiss employees' attitude to and understanding of Risk. Among the first such surveys to be conducted across every member of the staff of any Indian financial services group, the findings are being used to further strengthen the Risk Culture within the Organization.
Edelweiss has always believed in leveraging technology to give it a strategic competitive advantage, improve productivity, performance, efficiency and autonomy while enabling development and management of new businesses that rely on state–of–the–art technological solutions. In your Company, Information Technology has emerged from being computational intensive; powering tasks and transactions alone to being collaboration intensive, powering inter–organizational processes and relationships. As we diversified our financial services offerings, we have leveraged technology effectively to enable growth, build robust risk management and provide enhanced customer experience for its Credit, Financial Markets, Commodities and Life Insurance business.
These technological skills give us a critical competitive edge which will become even more relevant as we expand our businesses across product and service offerings, geographies and customer segments.
We continue to invest time, effort and resources in upgrading skills of our people. Edelweiss has one of the most comprehensive Learning and Development initiatives in the Indian financial services industry. During FY13, 2,615 (67% of the total employee strength) Edelweiss employees were covered under these initiatives was with 7,235 participant man–days.
We invest in nurturing and developing leadership among employees. Your company follows a four–tiered leadership architecture that covers over 5% of the total employees and consists of the Management Committee, Senior Leaders (SL), Advancing Leaders (AL) and Emerging Leaders (EL). Specialized training and mentoring programmes ensure that these leaders are equipped to play progressively larger and more important roles within the organization.
Edelweiss has always focused on its customers' needs. In all our businesses, understanding customers' objectives and providing real solutions has been paramount. During FY13, we embarked on an ambitious and far–reaching programme of Customer Centricity covering the entire Group. A series of training programmes have been conducted to "train the trainers" who so far have trained over 700 employees across the Group. The goal is to have each employee of Edelweiss trained in the tenets of customer centricity over a period of three years. This process will help us institutionalizzation the approach and provide clients a unique 'Edelweiss experience'
Corporate Social Responsibility
From its very inception, Edelweiss has believed in giving back to society. In the last five years, these efforts have been channelised through EdelGive Foundation, which was founded in FY09.
EdelGive Foundation's mission is to leverage the resources of Edelweiss for the benefit and empowerment of the social sector. Its investments in non–profits, which are evaluated through an intensive due diligence process, are in the form of financial support and, more importantly, capacity building support.
Tapping into the expertise and skills of Edelweiss' mid–to–senior management, it provides a range of non–financial assistance to include strategic and business planning, mentoring as well as business and technological solutions. EdelGive also builds partnerships with foundations, trusts and corporates for effective philanthropy. This investment banking and venture capital approach to the social sector ensures that EdelGive Foundation's involvement is not just restricted to the disbursement of funds, but also becomes a catalyst for social change.
All support is measured through the impact it achieves through tangible frameworks, which include emphasis on measurable outcomes, achievement of objectives, financial accountability and management competence.
Every employee of Edelweiss is encouraged to directly spend time with any of the NGOs that EdelGive engages with. In the last five years, over 700 employees have volunteered with EdelGive and have provided over 6,500 hours of pro bono support. Since 2010, we have seen a growth of over 167% in the number of volunteers.
One of the key focus areas for EdelGive Foundation has been supporting NGOs working in the area of financial inclusion. EdelGive investee NGOs like Rajasthan Shram Sarathi Association (RSSA), Chehak Trust, Pratham, Make a Difference, Mann Deshi Foundation, AROEHAN, Sabuj Sangha and Samaritan Help Mission have been working on a range of programmes on financial literacy, bank linkages and financial linkages like insurance and pension schemes to disadvantaged populations in urban and rural areas as well migrant populations in Rajasthan, Maharashtra, Bihar and West Bengal.
Our strategy of growing in a calibrated and cost–efficient manner while concentrating on areas like Corporate Governance, Risk Management, Leadership Development and Customer Centricity has started attracting increasing favourable attention globally. This is evident from the fact that Edelweiss has recently won two coveted awards.
Your company was voted India's "Best Managed Mid Cap Company" by Asia's leading financial publishing house, Finance Asia in its 13th Annual Poll on Asia's Best Companies.
Edelweiss also won the award for "Best Corporate Governance, India 2013" from the London–based Capital Finance International magazine.
Challenges and Opportunities
While overall, FY13 has been a good year of consolidation for Edelweiss, there are several challenges and opportunities that lie ahead.
The Indian economy is not out of the woods. High CAD and fiscal deficit together present some of the most serious challenges to bringing Indian economy back on the path of growth. The slowdown has been the result of confluence of factors–lingering administrative bottlenecks and associated delays in project clearance, large fiscal spending, tight monetary conditions and weak external demand. The government will have to continue to show political will to address these structural problems, though looming general elections means that its manoeuvring room will probably get limited.
On the internal front, your Company's management will continue to focus on challenges of improving profitability, strengthening the organisation structure and culture even as we continue to expand in terms of businesses, people and geographies.
Vision for the Future
Our long term vision for Edelweiss is to be a group with cutting edge businesses in the Financial Services space. We believe that our core lies in identifying new and exciting long term opportunities in this space and building great and differentiated businesses in those niches.
There is no magic wand for this that one can wave and achieve results. It is a slow grind that requires focus on the end objectives, excellent execution, continuous process of leadership development and ensuring that each and every new employee of Edelweiss imbibes the key tenets of our Guiding Principles.
Stanford University professors James Collins and Jerry Porras came across a common theme when they conducted a study about most admired companies. These were companies which had "a powerful drive for progress that enabled them to change, adapt and grow without compromising their cherished core ideals."
That in sum and substance is also our vision for the future of Edelweiss.
Date: May 15, 2013