| Motilal Oswal Finvest Limited | ||||||||
| Rated amount enhanced for Commercial Paper; Long term principal protected market linked debentures Withdrawn | ||||||||
| Rating Action | ||||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||
| 1 crore = 10 million | ||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the existing debt instruments of Motilal Oswal Finvest Limited (MOFL; part of Motilal Oswal group).
CRISIL Ratings has withdrawn its ‘CRISIL PPMLD AA/Stable’ rating to the Rs 50.7 crore long term principal protected market linked debentures of MOFL as there was nothing outstanding against the same. The withdrawal is in line with CRISIL Ratings' withdrawal policy.
Motilal Oswal 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 Motilal Oswal Financial Services Ltd (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 ~15% for the last six years and stood at Rs 45,620 crore as on March 31, 2023, the AUM as on March 31, 2022 was Rs 49,000 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 45,620 crore for the asset management business as on March 31, 2023 included assets under MF (Rs 29,600 crore), PMS (Rs 10,200 crore) and AIF (Rs 5,600 crore). The PE and WM businesses had AUM of Rs 10,300 crore and Rs 52,000 crore, respectively, as on March 31, 2023 (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, PMS, 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 3,810 crore and ~Rs 4,280 crore, respectively, as on March 31, 2023 (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 6,283 crore and 1.6 times, respectively, as on March 31, 2023 (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 March 31, 2023 (2.6 times as on March 31, 2022).
As on March 31, 2023, the group had unrealised gains of around Rs 1,380 crore distributed among Motilal Oswal Equity Mutual Fund Products (Rs 587 crore), listed equity shares (Rs 168 crore), Motilal Oswal Private Equity Funds (Rs 469 crore; PE and real estate), Motilal Oswal PMS Products (Rs 62 crore) and Motilal Oswal AIF Products (Rs 13 crore). These investments 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 2.1 times as on March 31, 2023 (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 March 31, 2023, in the highly fragmented broking industry. It’s ranking in active client group improved to 8th position. As on March 31, 2023, the company had 8.0 lakh active customers on National Stock Exchange, as against 9.0 lakh as on March 31, 2022. Business growth has been driven by acquisition of small brokers and partnerships with sub-brokers. The group has ~35 lakh retail broking clients and enjoys pan-India presence through 8,000+ franchised/sub-broker outlets and ~90 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 March 31, 2023.
Overall turnover of the business witnessed a YoY growth of 182% for 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 17,800 for the fiscal 2023.
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. Market position in the institutional broking segment has degrown by ~15% 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.
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 ~600 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 41 crore in fiscal 2023 from Rs 89 crore in fiscal 2022 and Rs 71 crore in fiscal 2021. 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 84 crore in the last couple of fiscals and in fiscal 2023 respectively to an asset reconstruction company (ARC), which brought down gross NPAs to 1.1% as on March 31, 2023 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 2023 improved to Rs 1,007 crore from Rs 643 crore in fiscal 2022. Loan book improved marginally by 9% to Rs 3,810 crore as on March 31, 2023, 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 1,052 crore has been raised in the fiscal 2023 (Rs 1,433crore in 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. |
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 6,513 crore as on April 30, 2023, as against overall debt obligation of ~Rs 2,649 crore (including MOHFL) till July 31, 2023. |
Outlook: Stable CRISIL Ratings believes Motilal Oswal group will continue to scale up its various product offerings across broking, AM & WM and IB and will continue to maintain healthy capitalisation. |
Rating Sensitivity factors Upward factors
Downward factors
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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 Motilal Oswal Family Trust-collectively owned 69.7% of MOFSL's equity shares as on March 31, 2023.
The group reported a PAT of Rs 933 crore with a RoE (annualised) of 15.6% during fiscal 2023 as against a PAT of Rs 1,311 crore with RoE of 25.8% during fiscal 2022. |
Key Financial Indicators
*Includes fair valuation of unrealised gains in fund-based business |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Yet to be issued
Annexure - Details of Rating Withdrawn
*yet to be issued |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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