Motilal Oswal Home Finance Limited

Ratings Reaffirmed

 

Rating Action

Total Bank Loan Facilities Rated	Rs.2562 Crore
Long Term Rating	CRISIL AA/Stable (Reaffirmed)

 

Non Convertible Debentures Aggregating Rs.45.3 Crore (Reduced from Rs.295 Crore)	CRISIL AA/Stable (Reaffirmed)
Rs.500 Crore Commercial Paper	CRISIL A1+ (Reaffirmed)

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 debt instruments of Motilal Oswal Home Finance Limited (MOHFL; a part of the Motilal Oswal group).

 

CRISIL Ratings has also withdrawn its rating on Rs 249.7 crore non-convertible debentures, at the request of the company and upon receiving third-party confirmation of the redemption of these debentures. The withdrawal is in line with the withdrawal policy of CRISIL Ratings.

 

The ratings on the debt instruments of MOHFL continue to factor in strong support from its parent, Motilal Oswal Financial Services Ltd (MOFSL), and MOHFL’s adequate capitalization and comfortable resource profile. These strengths are partially offset by a limited track record in successfully scaling up business.

 

MOHFL had an advance base of Rs 3840 crore, marking a three-year compounded annual growth rate of ~3% until March 31, 2023. As December 31, 2023 the advances stood at Rs 3780 crore. In the past, the housing finance business had faced asset quality challenges however, the group has taken corrective measures to address this over time. Resultantly, the GNPA as on December 31,2023 stood at 2.1% as compared to 9.3% as on March 31, 2019. Further, 6.5% of the company’s loan portfolio is restructured as on December 31, 2023. Going forward, the ability of the management to manage collections and asset quality, as the business scales, will remain a key monitorable. Nonetheless, the company’s capitalisation remains comfortable with a tier I capital adequacy ratio of 47.5% on December 31, 2023 and a low adjusted gearing of 2.2 times. For 9M 2024, the company reported a net profit of Rs 100 crore which translates to a return on managed assets (RoMA) of 3. 3% (annualised).

 

Motilal Oswal group, as a whole, operates across broking (retail and institutional), asset management (mutual fund [MF], portfolio management services [PMS], alternate investment funds [AIF]), private equity (PE), wealth management (WM) and retail financial-product distribution (distribution of financial products to high-networth individuals [HNIs] and retail), investment banking (IB) and lending (housing finance company [HFC], loan against shares [LAS] & margin funding – for HNIs). The group has scaled up operations in each of these businesses, supported by increased retail participation in the capital markets.

 

Group’s rating continues to reflect its healthy capitalisation 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

For arriving at its ratings, CRISIL Ratings has considered the standalone credit risk profile of MOHFL and has factored in the support that MOHFL is expected to receive from the parent, MOFSL.

Key Rating Drivers & Detailed Description

Strengths:

Expectation of strong support from parent

MOHFL is the housing finance arm of MOFSL. The Motilal Oswal group holds ~98% stake in the company through MOFSL and its subsidiaries. The parent is one of India's leading providers of capital market services and, along with its subsidiaries, is engaged in retail and institutional broking, asset management, wealth management, LAS, margin financing, private equity and investment banking. At consolidated level, MOFSL has healthy capitalisation, driven by sizable internal accruals. Absolute networth and consolidated gearing were Rs 8,270 crore and 1.52 times, respectively, as on December 31, 2023 (Rs 6,283 crore and 1.64 times, respectively, as on March 31, 2023). 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 net gearing of around 2.0 times on a standalone basis as on the same date (2.2 times as on March 31, 2023)

 

CRISIL Ratings believes MOHFL is strategically important to MOFSL; the parent entered the housing finance segment to diversify its revenue profile and mitigate the cyclicality inherent to capital-market businesses. Furthermore, as most of the parent’s businesses are fee-based and have limited requirement for incremental capital, the housing finance business provides an avenue to deploy capital for long-term returns. Therefore, MOHFL will continue to receive support from its parent. The group has infused Rs 850 crore in MOHFL since acquisition and is expected to continue receiving support for its growth plans. The promoters of MOFSL are on the board of directors of MOHFL and the latter is introduced as a Motilal Oswal group company in all its correspondence and collateral, which increases the parent’s moral obligation to support the company.

 

Adequate resource profile

MOHFL benefits from its association with MOFSL for raising resources. As on December 31, 2023, borrowing was Rs 2,802 crore (Rs 2,889 crore as on March 31, 2023) with 61% of these resources comprising term loans, while the rest were NCD/MLD (7%), NHB (17%), Securitisation (4%) and ECB (12%). The company’s weighted average cost of borrowing was ~8.3% for nine months ended December 31, 2023 as compared to 7.9% for nine months ended December 31, 2023.

 

Adequate capitalization

With overall capital adequacy ratio (CAR) of 47.5% and 46.3%, as on December 31, 2023 and December 31, 2022 respectively (51.6 %, as on March 31, 2023), the company is adequately capitalised. Since inception, the group has infused Rs 850 crore as equity, which also includes the Rs 200 crore infused in fiscal 2019. Absolute networth and gearing stood at Rs 1,253 crore and 2.2 times, respectively, as on December 31, 2023 (Rs 1,148 crore and 2.5 times, respectively, as on March 31, 2023). Standalone gearing is expected to remain within 5 times on a steady-state basis. MOHFL plans to maintain its capital adequacy well above the norms prescribed by the regulator. The parent is likely to provide capital to support its subsidiary’s growth and cover for asset-side risks over the medium term.

 

Weakness:

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 adverse macro-economic factors, and lack of adequate collection and recovery processes and bandwidth within the company. Gross NPAs increased to 9.3% by March 31, 2019 from 4.5% as on March 31, 2018 and 0.6% as on March 31, 2017.

 

However, since fiscal 2019, MOHFL has taken several corrective measures like increasing management depth and experience, strengthening of collections and recovery apparatus by creating a 550+ member team, and enhancing credit appraisal and risk monitoring systems. Significant investment has been made in technologies, processes and people to fill the critical gaps at operational level to support and enhance business scale up. As a result of these measures, slippages have reduced to Rs 80 crore in nine months ended fiscal 2024 (2.1% of opening advances) from Rs 89 crore (2.5%) in fiscal 2022 and Rs 71 crore (2.0%) in fiscal 2021. This marks a material improvement over fiscal 2019 during which slippages amounted to Rs 601 crore. Also, recoveries have picked up in the last fiscal following these concerted efforts. As a part of its strategy to clean up the book, MOHFL sold gross NPAs worth ~Rs 832 crore in the last few years of which Rs 50 crore was sold in fiscal 2023 to an asset reconstruction company (ARC), which brought down gross NPAs to 2.1% as on December 31, 2023 from 9.3% as on March 31, 2019.

 

In light of legacy asset quality challenges and its shift of focus towards improving collections and selling of the bad pool to ARCs, the company had curtailed its disbursements in fiscals 2019 and 2020. However, as credit mechanisms and operational controls within the company has been strengthened, its disbursements have shown gradual traction since then. However, the overall growth still remains muted. Loan book declined marginally by 2% to Rs 3,780 crore as on December 31, 2023, as against Rs 3,840 crore as on March 31, 2023 due to run down of the legacy book high prepayments.

 

The company intends to grow its loan book prudently over the medium term, while increasing geographical presence and, has expanded its sales team to accomplish the same. Given the current evolving macro-economic environment, ability of the management to scale up operations in a profitable manner will remain a monitorable.

Liquidity: Strong

Against debt obligations of Rs 188 crore scheduled for repayment till May 2024, the company had cash and cash equivalents of Rs 29 crore, unutilised bank limit of Rs 460 crore and line of credit of Rs 500 crore as on February 29, 2024. Over nine months ended December 31, 2023, the company has raised Rs. 958 crore (including short term funds) as funds from external sources at an incremental cost of 8.3%.

Outlook: Stable

CRISIL Ratings believes MOHFL will continue to benefit from the strong financial, managerial and operational support of the parent.

Rating Sensitivity Factors

Upward factors

• Upward revision in CRISIL Ratings’ credit view on MOFSL
• Significant scale up in market position of the financial services businesses while maintaining asset quality (gross NPA <1%) and earnings profile on a sustained basis

 

Downward factors

• Reduction in the expected support to MOHFL by MOFSL, or a downward revision in CRISIL Ratings’ credit view on MOFSL
• Deterioration in asset quality with gross NPA increasing to above 5%, over an extended period, thereby also impacting profitability.

About the Company

MOHFL, the housing finance arm of MOFSL, was incorporated in October 2013 under the Companies Act, 1956, and received its certificate of registration as a housing finance institution (regulated by the NHB) in May 2014. The company started operations on May 22, 2014. The loan portfolio was Rs 3,780 crore as on December 31, 2023. The company offers housing loans to low- and middle-income groups, with average ticket size of around Rs 10 lakh. Lending to the affordable housing segment accounts for its entire existing loan book. It is present in twelve states/UTs through 108 branches. 

 

For the nine months ended fiscal 2024, the company reported profit after tax (PAT) of Rs 100 crore on total income (net of interest expense) of Rs 251 crore, as against Rs 136 crore on Rs 313 crore, respectively, for the year ended fiscal 2023.

Any other information: Not Applicable