Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Increasing diversification and scale up across financial services businesses, supporting stability in earnings profile

With gradual scale up of fee-based businesses-such as asset management company (AMC), WM, PE, IB and fund-based business (housing finance)-revenue streams have become more diverse. The group is also focussing on scaling up its distribution business (financial products) through the broking and WM channels. Contribution from these businesses to overall revenue has increased in the last few fiscals. The group’s asset management businesses - AMC, PE -- utilise the distribution network of WM for product distribution, resulting in business synergies and improved return on equity (RoE).

AUM of the AMC business recorded a CAGR of ~20% for the last five years and stood at Rs 49,020 crore as on March 31, 2022, the AUM as on December 31, 2022 was Rs 46,500 crore as the benchmark indices have remained flattish. The group has a niche positioning for its higher-yielding, equity-focused funds – with only 2% of the MF AUM in debt funds. The group has also high focus on passive and international funds. AUM of Rs 46,500 crore for the asset management business as on December 31, 2022 included assets under MF (Rs 29,500 crore), PMS (Rs 11,400 crore) and AIF (Rs 5,300 crore). The PE and WM businesses had AUM of Rs 9,540 crore and Rs 41,300 crore, respectively, as on December 31, 2022 (Rs 10,000 crore and Rs 34,400 crore as on March 31, 2022). As part of PE business, the group has managed four business excellence funds and five real estate funds till now. While business excellence funds focus majorly on unlisted companies for long-term investments, the real estate funds focus on debt funding to reputed developers for mid-market residential housing projects in top eight Indian cities. The group has achieved final close for the fourth business excellence fund of Rs 4,500 crore.

Fund-based business includes housing finance (through MOHFL) and sponsor commitments-cum-investments in equity MF, PE funds, real estate funds, AIFs, and strategic equity investments. Loan book of MOHFL and total quoted equity investments, including mark-to-market (MTM) gains, were Rs 3,659 crore and ~Rs 4,320 crore, respectively, as on December 31, 2022 (Rs 3,492 crore and around Rs 4,050 crore as on March 31, 2022).

Healthy capitalisation

Capitalisation remains healthy, driven by healthy internal accruals. Absolute networth and consolidated gearing were Rs 6,260 crore and 1.5 times, respectively, as on December 31, 2022 (Rs 5,701 crore and 1.1 times, respectively, as on March 31, 2022 and Rs 4,488 crore and 1.3 times, respectively, as on March 31, 2021). Further, as per the group’s risk policy, the maximum gearing will be restricted at 3 times over the medium term. The housing finance business had gearing of around 2.5 times on a standalone basis as on December 31, 2022 (2.6 times as on March 31, 2022).

As on December 31, 2022, the group had unrealised gains of around Rs 1,525 crore distributed among Motilal Oswal Equity Mutual Fund Products (Rs 676 crore), listed equity shares (Rs 219 crore), Motilal Oswal Private Equity Funds (Rs 463 crore; PE and real estate), Motilal Oswal PMS Products (Rs 81 crore) and Motilal Oswal AIF Products (Rs 18 crore). These investments, apart from sponsor contributions as per the regulation, are strategic in nature and follow a buy-and-hold philosophy. This portfolio has MTM impact on earnings under Indian Accounting Standards; however, the timing and magnitude of realised gains remain uncertain. Nevertheless, even after removing unrealised gains from networth, gearing of the group remained comfortable at 1.3 times as on September 30, 2022 (1.6 times as on March 31, 2022).

Strong market position in the equity broking business

The group, through MOFSL, ranks among the top 10 equity brokers based on the number of active clients, as on December 31, 2022, in the highly fragmented broking industry. As on December 31, 2022, the company had 9.0 lakh active customers on National Stock Exchange, as against 8.9 lakh as on March 31, 2022. Business growth has been driven by acquisition of small brokers and partnerships with sub-brokers. The group has 33+ lakh retail broking clients and enjoys pan-India presence through 7,600+ franchised/sub-broker outlets and ~100 owned branches. In additions, they have made various digital initiatives like “Option store” (App with a feature to create customised strategies), 500+ API integration with algo and proprietary traders and a “Research 360” App which has more than 1,50,000 downloads till December 31, 2022.

Retail F&O market share has increased from 2.7% in fiscal 2022 to 3.8% in 9MFY23, but the retail cash market share has reduced from 6.1% in fiscal 2022 to 5.8% in 9MFY23, this is in line with market which has shown exponential growth in F&O volumes as compared to cash segment volumes. Overall turnover of the business witnessed a yoy growth of more than 200% for nine month ended fiscal 2023; with major growth in the derivatives segment. Blended yields have, however, declined over the previous fiscals due to increased share of volumes in the futures and options segment. Average brokerage (defined as gross broking income from retail broking for trailing 12 months by active client) stood at ~Rs 16,900 for the quarter ended December 31, 2022.

Weakness:

Exposure to uncertainties inherent in capital-market-related businesses

A large part of the group’s businesses, especially broking and IB, remains exposed to economic, political, and social factors that drive investor sentiments. Brokerage revenue depends on the level of trading activity in capital markets. Specifically, since March 2020, the stock markets have seen high retail participation and daily trading volume coinciding with the lockdown to contain the Covid-19 pandemic and people remaining at home. A significant proportion of client additions at the industry level are in the age bracket of 25-30 years without relevant trading experience. Upward movement of the key benchmark indices during this period has attracted retail investors to market trading. While this has benefited the broking industry, including the Motilal Oswal group, sustainability of the market momentum will need to be seen. Market position in the institutional broking segment has degrown by ~20% in fiscal 2023. However, the impact on earnings is partially offset by the high share of business originated through franchisees, resulting in a more variable cost structure compared to that of peers. The group’s long-term focus is on diversifying its revenue streams and reducing dependence on broking operations. Further, AM, WM and PE businesses have revenue in the form of management fees as a proportion of AUM, providing some stability to the revenue profile of the group.

Additionally, the group commenced the housing finance business in the first quarter of fiscal 2015 to improve the stability of the group’s earnings via fixed interest income of home loans. While the business faced challenges in the past, corrective measures should support the business performance. Potential improvement in profitability from this segment over the medium term should help diversify the revenue mix of the group.

Limited track record in successfully scaling up the lending business

In fiscals 2018 and 2019, MOHFL faced asset quality challenges due to seasoning of the book, impact of external shocks on the economy, and lack of adequate collection and recovery processes and bandwidth within the company. Gross NPAs increased to 9.3% as on March 31, 2019 from 4.5% as on March 31, 2018 and 0.6% as on March 31, 2017.

However, since fiscal 2019, MOHFL took several corrective measures, including increase in management depth and experience, strengthening of collections and recovery apparatus by creating a 550+ member team, and enhancing credit appraisal and risk monitoring systems. It made significant investment in technologies, processes and people to fill the critical gaps at operational levels to support and enhance business scale up. These measures have reduced slippages to Rs 72 crore in nine month ended fiscal 2023 from Rs 89 crore in fiscal 2022 and Rs 71 crore in fiscal 2021.The slippages were at Rs 601 crore in fiscal 2019. Also, recoveries have picked up in last fiscal following these concerted efforts. As a part of its strategy to clean up the book, it sold gross NPAs worth ~Rs 832 crore and Rs 50 crore in the last couple of fiscals and in nine month ended fiscal 2023 respectively to an asset reconstruction company (ARC), which brought down gross NPAs to 2.0% as on December 31, 2022 from 9.3% as on March 31, 2019.

After facing challenges in asset quality during fiscals 2018 and 2019, the company had curtailed its disbursements in fiscals 2019 and 2020 because of shift in focus towards collections and sale of assets to an ARC. However, disbursements in fiscal 2022 and in the nine months of fiscal 2023 improved to Rs 643 crore and Rs 644 crore, respectively. Loan book improved marginally by 5% to Rs 3,659 crore as on December 31, 2022, as against Rs 3,492 crore as on March 31, 2022. The company intends to grow its loan book prudently over the medium term, while increasing geographical presence. It is expanding its sales team to increase the disbursements and loan book. To manage growth in the loan book, the company will utilise its relationships with lenders and investors. Resources of over Rs 770 crore has been raised in the nine months ended December 31, 2022 (Rs 600 crore in nine months ended fiscal 2022) at competitive interest rates.

Nevertheless, given the current challenging macro-economic environment, ability of the management to scale up operations in a profitable manner will remain a monitorable.