Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA/CRISIL PPMLD AA/Stable/CRISIL A1+’ ratings on the long term bank facilities and debt instruments of Motilal Oswal Home Finance Ltd (MOHFL); part of the Motilal Oswal group).
Also, CRISIL Ratings has withdrawn its rating on the long-term principal-protected market-linked debentures aggregating to Rs 233.3 crore and Rs 75 crore non-convertible debentures, at the request of the company and 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 capital and comfortable resource profile. These strengths are partially offset by limited track record in successfully scaling up business.
CRISIL Ratings has also reaffirmed its rating on the long-term debt instruments of the other Motilal Oswal group entities to 'CRISIL AA/Stable'. The group 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 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.
Capitalisation has been healthy, with sizeable networth further, given that large parts of the businesses are fee-based, requirement of incremental capital is not very high - increasing the free cash flow for the group. The group invests this free cash in products - such as MFs, PMS, AIF, and PE funds -- as well as existing businesses for the long term.
The group also has lending operations in the form of housing finance (Motilal Oswal Home Finance Ltd [MOHFL] and LAS. The housing finance business had faced asset quality challenges in the past and the group took corrective measures against them. The GNPA as on December 31, 2022 stands at 2.0% compared to 9.3% as on March 31, 2019. MOHFL has implemented restructuring on around 6.8% of its portfolio is restructured as on December 31, 2022. Going forward, ability of the management to manage collections and asset quality will remain a key monitorable. |
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, with sizeable networth of Rs 6,260 crore as on December 31, 2022 (Rs 5,701 crore as on March 31, 2022). Further, gearing remains comfortable at 1.5 times as on December 31, 2022 (1.1 times as on March 31, 2022)
CRISIL Ratings believes MOHFL is strategically important to MOFSL; the parent has entered the housing finance segment to diversify its revenue profile and mitigate the cyclicality inherent in 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 strong support from its parent. The group has infused Rs 850 crore in MOHFL and will continue to support the company’s 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, 2022, borrowing was Rs 2,820 crore (Rs 2,607 crore as on March 31, 2022). As on December 31, 2022, 49% of the resources comprised term loans, while the rest are NCD/MLD (24%), NHB (17%), Securitisation (5%)and ECB (5%). The company’s weighted average cost of borrowing was ~7.9% as on December 31, 2022, in line with that of peers.
Adequate capitalisation With capital adequacy ratio (CAR) of 46.3% and 48.6%, as on December 31, 2022 and December 31, 2021 respectively (52%, as on March 31, 2022), 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 1,114 crore and 2.5 times, respectively, as on December 31, 2022 (Rs 1,007 crore and 2.6 times, respectively, as on March 31, 2022). Gearing is expected to remain at 6 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 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. |
Liquidity : Strong Against debt obligation of Rs 458 crore over the next 3 months till June 2023, the company had cash and equivalent of Rs 706 crore, unutilised bank limit of Rs 460 crore and line of credit of Rs 500 crore as on March 31, 2023. |
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 3,659 crore as on December 31, 2022. The company offers housing loans to low- and middle-income groups, with average ticket size of around Rs 8.5 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 2023, the company reported profit after tax (PAT) of Rs 104 crore on total income (net of interest expense) of Rs 234 crore, as against Rs 48 crore on Rs 221 crore, respectively, for the corresponding period of the previous fiscal.
MOHFL reported PAT of Rs 95 crore on total income (net of interest expense) of Rs 297 crore in fiscal 2022, as against Rs 40 crore and Rs 257 crore, respectively, for the previous fiscal. |
Key Financial Indicators
^GNPA for March 2021 is as per old methodology |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure - Details of rating withdrawn
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