EDELWEISS SECURITIES PVT.
LIMITED
Commercial Paper Programme
Rating
CARE has assigned a ‘PR 1’ [PR One] rating to the
proposed Commercial Paper issue of Edelweiss
Securities Pvt. Ltd. (ESL) of Rs.10 crores to be carved
out of the fund based bank limits, with maturity not
exceeding one year. Instruments with this rating would
have superior capacity for repayment of short-term
promissory obligations.
The rating factors in ESL’s focus on institutional and
HNI segment for its equity brokerage business,
established research capabilities, requisite risk
management practices and profitable operations. The
rating also draws comfort from the liquidity of ESL’s
working capital assets and the back up liquidity support
provided to CP issue through ESL’s unutilised fund
based limits from banks. The rating is constrained by
sensitivity of ESL’s core income to fall in turnover in
equity market, client concentration and its limited
exposure to market risk in its proprietary trades. Highly
fragmented, competitive and compliance oriented nature
of broking industry has also been factored in while
assigning the rating.
Background
ESL is a 100% subsidiary of Edelweiss Capital Ltd.
(ECL). ESL was originally incorporated on 20 th August
1993 under the name ‘Kayjay Financial Services Private
Ltd.’. It was renamed as ‘KJS Securities Pvt. Ltd.’ in
February 1998 and again to ‘Rooshnil Securities Pvt.
Ltd.’ in May 1998. Rooshnil Securities was later acquired
by ECL in Dec 2000 and later renamed as ‘Edelweiss
Securities Pvt. Ltd.’ in May 2004.
ESL is registered with SEBI as a security brokerage firm
and is a corporate member of both BSE and NSE. Its
operations include stock broking, research services,
distribution of financial products, depository services,
and proprietary trading.
CREDIT ANALYSIS & RESEARCH LIMITED
PR 1
Operations of the company
ESL’s operation can be broadly classified into equity
brokerage services and proprietary trading.
Broking Services
ESL focuses on the wholesale equity segment, providing
broking services to Institutional and corporate clients and
high networth individuals. It is empanelled with over 40
leading FIIs, FIs, Mutual Funds, Banks and Insurance
companies. ESL has a strong equity research team, which
covers approximately 50 - 60 companies within 6 industry
categories, with a focus on large and medium cap stocks.
ESL uses its research reports to market its services to
institutional clients. In addition to cash market transactions,
ESL also provides trading facilities to its clients for dealing
in equity derivative products.
ESL’s Head office is located at Mumbai and it has branch
offices at Pune, Chennai and Bangalore. It also plans to
open branches at Hyderabad, Delhi, Ahmedabad, Kolkatta
and Mumbai suburbs over the next few months.
ESL had 1,269 active clients during Q3 FY’05. The top
20 institutional clients accounted for more than 50% of
the total Brokerage income earned during the 9 month
period Apr – Dec 04, which exposes ESL to client
concentration risk. ESL is making efforts to increase its
client base and geographical reach in order to minimize
client concentration risk.
In line with the equity brokerage industry, ESL’s
brokerage revenue is sensitive to fall in transaction
volumes in the securities market.
Proprietary Trading
ESL has an active proprietary investing and trading
desk. The proprietary activities of ESL are classified as
trading book and arbitrage. Arbitrage constitutes about
70% of the proprietary book run by ESL. Most of the
arbitrage transactions are naturally hedged due to the
1 www.careratings.com
inherent nature of the transaction. Also most of the
trading book portfolio is hedged. However, the small
unhedged positions expose ESL to market risk. The
Edelweiss group has a profitable track record of running
the proprietary book.
Other Subsidiaries of ECL are Crossborder Investments
Pvt. Ltd., Edelweiss Insurance Brokers Ltd., and
Edelweiss Capital USA, LLC. ECL holds nearly 100%
stake in all these companies. The current employee
strength of the group is over 200.

Fund Requirements Financial Performance

ESL’s fund requirements arise mainly on account of
working capital requirement on account of deposits to
be maintained with the exchanges for obtaining trading
exposure limits and for meeting funds requirement for
institutional clients. The proceeds of the proposed CP
issue are to be used for the aforesaid purposes.
Brokerage income of ESL has grown at CAGR of 63%
from Rs. 207 lacs in FY01 to Rs. 891 lacs in FY04. The
growth has been particularly strong in FY04 and H1
FY’05, on account of buoyancy in the equity market.
Brokerage income contributed 64% of the ESL’s total
income in FY04.

Unutilized margins paid to the exchanges as on last Total income has grown at 70% p.a. from Rs.287 lacs in
trading day of the month ranges from 16% to 45% during FY01 to Rs.1,394 lacs in FY04. However, from a loss of
the period Apr-04 to Dec-04. However, ESL has to Rs.12 lacs incurred in FY01 (on account of prior period
maintain high margins for its intraday transactions done adjustment, PBT was positive), ESL registered a profit
on its proprietary book and for its clients. of Rs.243 lacs in FY04. Total income and PAT during
H1’FY05 were at Rs. 1,131 lacs and Rs. 293 lacs
As on 31st Dec’04, ESL has fund based bank limits of
respectively.
Rs.2,400 lacs and its average utilization level has been
around 50%. Brief Financials
(Rs. lacs)
Risk Management As on / For the Period 2001 2002 2003 2004
ended 31st March’ 12 Mnth 12 Mnth 12 Mnth 12 Mnth
Credit risk faced in case of Institutional clients is minimal Brokerage Income 207 151 290 891
and even in other cases ESL has specified client-trading Inc from securities & Derivatives 36 121 147 295
limits and specified margins is obtained from the clients Total Income 287 301 587 1,394
before carrying out any trade. There is no margin funding Employee Costs 35 65 100 229
provided by ESL. ESL also has requisite risk Operating and Other Expenses 166 171 286 660
Interest Paid 64 46 63 63
management system in place to manage its operational/
Total Expenses 287 289 462 1,030
compliance risk, however with the opening up of new
PBT 1 11 126 364
branches ESL will be required to strengthen its risk PAT -12 10 104 243
management systems. Networth 527 536 772 1,015
Total Capital Employed 527 1,355 1,559 2,315
In case of proprietary trades, all unhedged trades have SOLVENCY RATIOS
well defined entry and exit points. In case of sharp Overall Debt/ Equity ratio 0.00 1.47 0.96 1.27
adverse movements, the uncovered positions are Interest Coverage ratio 1.01 1.25 2.99 6.77
immediately hedged or squared-off. Current Ratio 1.36 1.79 2.96 1.31
OPERATING EFFICIENCY
Edelweiss Group Operating Expenses/
Total income 0.70 0.79 0.66 0.64
The promoter of ESL, Edelweiss capital Limited (ECL) Interest Expended /
was founded in Nov 1995. It is one of the established Total Income 0.22 0.15 0.11 0.05
Investment Banks in India. ECL provides wide range of PROFITABILITY RATIOS
investment banking and asset management services. It PAT/total income (%) -4.20 3.29 17.69 17.42
has a successful track record of operations and has Return on Networth (%) 1.86 15.87 27.18
Return on capital employed (%) 1.05 7.13 12.54
closed more than 60 transactions to date.

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As on 31st Mar’04 overall gearing of ESL is comfortable
at 1.27. On account of reduction in interest expenses
and improved profitability the interest cover of ESL was
high at 6.77 in FY04.
Operating Expenses (including salaries) as the
percentage of Total income is high at 64% in FY04
although the ratio has declined in the past few years
due to increase in total income.
Profitability Ratios have shown a marked improvement
during past few years on account of buoyancy in the
equity markets. Return on Networth has increased
fro m 1. 86% in F Y0 2 to 5 0 .4 5 % i n H 1 ’ F Y05 on
annualised basis.
Prospects
Expectation of good GDP growth over the next few years
has made equity market an extremely attractive
investment option. Huge untapped investor base
throughout India also provides ESL with good growth
opportunities. To capitalize on these opportunities ESL
is making various efforts. It plans to increase its client
base and geographical reach and hence plans to set up
branches in all major cities. A few branches have already
become operational and others are in pipeline. Other
initiatives include developing franchisee model for tapping
the retail base, providing specialised services and
products to clients, distribution of financial products like
Mutual Fund Products, Insurance products etc.

For Further details please contact at : March 2005

CREDIT ANALYSIS & RESEARCH LIMITED

4th floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (E), Mumbai - 400 022.
Tel. : (022) 5554 3456 • Fax : (022) 5554 3457 • E-mail : care@careratings.com

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based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not,
however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors
or omissions or for the results obtained from the use of such information. Most issuers of securities rated by CARE
have paid a credit rating fee, based on the amount and type of securities issued.

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