| Motilal Oswal Financial Services Limited | ||
| Rating Reaffirmed | ||
| Rating Action | ||
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| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programme of Motilal Oswal Financial Services Limited (MOFSL).
Group’s rating continues to reflect healthy capitalisation of the group and strong market position in the equity broking business. These strengths are partially offset by susceptibility to uncertainties inherent in the capital-market-related businesses, and limited track record in successfully scaling up the lending business. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of MOFSL and its subsidiaries, including Motilal Oswal Finvest Ltd (MOFL), Motilal Oswal Wealth Ltd (MOWL) and Motilal Oswal Home Finance Ltd (MOHFL). That is because the entities, collectively referred to as the Motilal Oswal group, have significant operational, financial, and managerial integration and also operate under a common brand name (Motilal Oswal).
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
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, however, with benchmark indices down around 10% in Q1FY23, it has come down to Rs 43,400 crore as on June 30, 2022. 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. Around 34% of MF AUM as on June 30, 2022, was managed by passive funds. AUM of Rs 43,400 crore for the asset management business included assets under PMS (Rs 12,000 crore as on June 30, 2022), MFs (Rs 27,400 crore), AIF (Rs 3,800 crore) and offshore funds (Rs 200 crore). The PE and WM businesses had AUM of Rs 11,400 crore and Rs 34,400 crore, respectively, as on June 30, 2022 (Rs 7,400 crore and Rs 34,400 crore as on March 31, 2022). As part of PE funds, the group has managed five real estate funds and four business excellence funds till now. While the real estate funds focus on debt funding to reputed developers for mid-market residential housing projects in top eight Indian cities, business excellence funds focus majorly on unlisted companies for long-term investments. The group has achieved second close of Rs 4,000 crore 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 3,520 crore and ~Rs 3,840 crore, respectively, as on June 30, 2022 (Rs 3,492 crore and around Rs 4,050 crore as on March 31, 2022).
Capitalisation remains healthy, driven by healthy internal accruals. Absolute networth and consolidated gearing were Rs 5,650 crore and 1.1 times, respectively, as on June 30, 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 (excluding borrowings for financing initial public offering for HNIs) over the medium term. The housing finance business had gearing of around 2.5 times on a standalone basis as on June 30, 2022 (2.6 times on a standalone basis as on March 31, 2022).
As on June 30, 2022, the group had unrealised gains of ~Rs 1,390 crore distributed among Motilal Oswal Equity Mutual Fund Products (Rs 390 crore), liquid equity shares (Rs 490 crore), Motilal Oswal Private Equity Funds (Rs 420 crore; PE and real estate), Motilal Oswal PMS Products (Rs 58 crore) and Motilal Oswal AIF Products (Rs 14 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 1.5 times as on June 30, 2022 (1.6 times as on March 31, 2022).
The group, through MOFSL, ranks among the top 10 equity brokers based on the number of active clients, as on July 31, 2022, in the highly fragmented broking industry. As on July 31, 2022, the company had 9.1 lakh active customers on National Stock Exchange, as against 5.6 lakh as on March 31, 2021. Business growth has been driven by acquisition of small brokers and partnerships with sub-brokers. The group has 30+ lakh retail broking clients and enjoys pan-India presence through 7,000+ franchised/sub-broker outlets and 90+ owned branches.
The group had an active client market share of around 2.4% as on July 31, 2022. Its market share of the average daily turnover of the combined volumes of the Bombay Stock Exchange and National Stock Exchange, in both the cash and derivatives segments, for the fiscal 2022 was around 0.6%, with higher market share in high-yielding cash segment at 2.1%. Overall turnover of the business witnessed a yoy growth of 99% for fiscal 2022; with a growth in turnover of equity segment at 5% and derivatives segment at 106%. 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 by three months lagged active client) stood at ~Rs 3,800 (not annualised) for the quarter ended June 30, 2022. Market position continues to be healthy in the institutional broking segment (despite increasing competition), backed by an established track record, strong execution capabilities, and well-recognised research team.
Weaknesses:
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. 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.
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 47 crore in fiscal 2022, Rs 70 crore in fiscal 2021 and Rs 52 crore for fiscal 2020 from 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 709 crore in fiscal 2021 and fiscal 2020 to an asset reconstruction company (ARC), which brought down gross NPAs to 2.2% as on March 31, 2021 from 9.3% as on March 31, 2019. However, on account of impact of second wave of Covid-19 in the economy, gross stage 3 assets for the company stood at 2.2% as on June 30, 2022 and the restructured advances stood at 7.8% of the loan book as on June 30, 2022.
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 2021 and in fiscal 2022 improved to Rs 273 crore and Rs 643 crore, respectively. It stood at Rs 167 crore for the quarter ended June 30, 2022. Nevertheless, loan book remained flat at Rs 3,520 crore as on June 30, 2022 (Rs 3,492 crore as on March 31, 2022), as against Rs 3,512 crore as on March 31, 2021. 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 1,433 crore has been raised by the company in fiscal 2022 (Rs 1,400 crore in fiscal 2021) 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. |
Liquidity: Strong Liquidity should remain supported by a large proportion of fee-based businesses. Cash and cash balance, unutilised bank lines, and liquid investments aggregated to ~Rs 4,280 crore as on July 31, 2022, as against overall debt obligation of ~Rs 2,802 crore (including MOHFL) till September 30, 2022. |
Rating Sensitivity factors Downward factors
Environment, Social, and Governance (ESG) Profile CRISIL Ratings believes that MOFSL’ Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.
The ESG profile of financial institutions typically factors in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on environment and other sustainability related factors.
MOFSL has demonstrated an ongoing focus on strengthening various aspects of its ESG profile.
MOFSL’ key ESG highlights: MOFSL took various initiatives to lower its power consumption, such as migrating to LED lights, adoption of aluminum fin for refraction of sun rays, motion sensor-based lighting system, etc. the Company emphasizes on reducing dependence on paper communications and encourages use of electronic means of communication which serves towards environmental protection and sustainable growth. Around 1000+ trees were planted by the employees through various volunteer programs.
There is growing importance of ESG among investors and lenders. MOFSL’s commitment to ESG will play a key role in enhancing stakeholder confidence, given substantial share of foreign investors as well as access to domestic capital markets. |
About the Motilal Oswal Group The Motilal Oswal group is one of India’s leading providers of capital market-related services, such as retail and institutional broking, asset and WM, LAS, margin financing, commodities broking, IB, and venture capital management. It commenced the housing finance business in May 2014.
The promoters-Mr Motilal Oswal and Mr Raamdeo Agrawal along with their family members, and Passionate Investment Management Pvt Ltd-collectively owned 69.5% of MOFSL's equity shares as on June 30, 2022.
The group reported a PAT of Rs 31 crore with a RoE (annualised) of 2.2% for the quarter ended June 30, 2022 as against a PAT of Rs 221 crore with an ROE of 19.4% in the corresponding period previous fiscal.
PAT was Rs 1,310 crore with RoE of 25.8% for fiscal 2022, as against Rs 1,260 crore and 33.1%, respectively, in fiscal 2021. |
Key Financial Indicators (Consolidated)
*Includes fair valuation of unrealised gains in fund-based business |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated (as on March 31, 2022)
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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