| Motilal Oswal Wealth Limited | ||
| Rated amount enhanced | ||
| 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 (IPO Financing) of Motilal Oswal Wealth Limited (MOWL, part of Motilal Oswal group; formerly, Motilal Oswal Wealth Management Limited;).
On July 30, 2021, CRISIL Ratings revised its outlook on the long-term debt instruments of the other Motilal Oswal group entities to 'Positive' from 'Stable'.
Revision in outlook factors in the gradual scale-up of operations with greater diversification and presence across multiple segments in financial services and the expectation of resultant stability and improvement in core earnings. The group has a presence across broking (retail and institutional), asset management (mutual fund, portfolio management services {PMS}, alternate investment funds {AIF}), private equity, wealth management and retail financial-product distribution (distribution of financial products to high-networth individuals {HNIs} and retail), investment banking and lending (housing finance company {HFC}, loan against shares {LAS} & Margin Funding – For HNIs). Over the last few years, the group has scaled up its operations in each of these businesses. The increased retail participation in the capital markets has also supported this growth.
The rating also continues to reflect the group's healthy capitalisation and its strong market position in the equity broking business. These strengths are partially offset by the group's susceptibility to uncertainties inherent in capital-market-related businesses, and limited track record in scaling up the lending business.
The group has a healthy capitalization level with a sizeable networth of Rs 4610 crore as on June 30, 2021 (Rs 4488 crore as on March 31, 2021). Further, the gearing of the group remains at a comfortable at 1.1 times as on June 30, 2021 (1.3 times as on March 31, 2021). Excluding the unrealised gains from the investment book, the gearing would still be comfortable level at 1.6 times as on June 30, 2021 (1.8 times as on March 31, 2021). Further, given that large parts of the businesses are fee-based, incremental requirement of capital is not very high– increasing the available -cash flows for the group.
The group remains among the top 10 brokers in terms of number of active clients. Further, in line with the industry, the business has witnessed a strong growth over the past 12-18 months. Revenue from the broking business have grown by 49% year-on-year in Q1 of fiscal 2022 to Rs 512 crore (40% in fiscal 2021 to Rs 1709 crore and Rs 1225 crore in fiscal 2020). Revenues from broking and investment banking businesses are closely linked with the activities in the capital markets. While asset management and wealth management are also linked to capital markets, structural scale up in these and private equity businesses provide some stability to the core earnings of the group via management fees charged on the assets under management (AUM). The AUMs in these businesses have registered a compounded annual growth rate (CAGR) of 34%, 31% and 48%, respectively, over the last 5 years. Consequently, earnings and the profitability of these businesses have improved over the last few years.
The group also has lending operations in the form of housing finance (housed in Motilal Oswal Home Finance Ltd {MOHFL}) and loan against shares (LAS). The housing finance business had faced asset quality challenges in the past and the group has taken corrective measures against the same. However, the business has witnessed increase in gross non-performing assets (gross NPAs) over the last one year on account of pandemic related challenges.
While collection efficiency in MOHFL was impacted during the initial months of the last fiscal due to moratorium provided to borrowers, collections, thereafter had gradually improved towards pre-Covid levels by the end of the fiscal. However, the second wave of Covid-19 pandemic resulted in intermittent lockdowns and localised restrictions. This led to some delays in April-June 2021 but July collections have improved significantly. However, any change in the behaviour of borrowers on payment discipline can affect delinquency levels. Under the RBI’s August 2020 Resolution Framework for COVID-19-related Stress, as on June 30, 2021, MOHFL has implemented restructuring on around 4.9% of its portfolio. Going forward, with the second wave of Covid-19 pandemic, the ability of the management to manage collections and asset quality will remain a key monitorable |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Motilal Oswal Financial Services Ltd (MOFSL) and its subsidiaries, including MOWL, Motilal Oswal Finvest Ltd (MOFL) 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 Increasing diversification and scale up across financial services businesses, supporting stability in earnings profile With gradual scale up of fee-based businesses-such as AMC, WM, PE, IB and fund-based business (housing finance)-revenue streams have become more diverse. The group is also focussing on scaling up of its distribution business (of financial products) through the broking and wealth management channels. Contribution from these businesses to overall revenues has scaled up in the last few fiscals. Group’s asset management businesses - AMC, PE utilise the group’s distribution network of WM for product distribution, resulting in business synergies and improved return on equity (RoE).
Assets under management (AUM) of the AMC business has witnessed a steady compounded annual growth rate of 34% for the last 5 years and stood at Rs 46300 crore as on June 30, 2021 (Rs 45500 crore as on March 31, 2021). The group has a niche positioning for its higher-yielding equity-focused funds – with only 2.6% of the mutual fund AUM in debt funds. The group has also high focus on passive and international funds. Around 32% of the MF AUM as on June 30, 2021 was managed by passive funds. In fiscal 2020, AUM of AMC and WM witnessed a decline after a sharp fall in the equity markets in the month of March 2020, due to Covid-19 outbreak. However, with benchmark indices gaining ~70% from Mar-2020 levels, the AUM of the group has increased. Its AUM for AMC increased to around Rs 46300 crore as on June 30, 2021 and Rs 45,500 crore as on March 31, 2021 (Rs 29,500 crore as on March 31, 2020). These included assets under portfolio management services (of Rs 15,100 crore as on June 30, 2021), mutual funds (MFs; Rs 28,400 crore), and alternate investment funds (Rs 2,800 crore). The PE and wealth management businesses had AUM of Rs 6900 crore and Rs 28,800 crore, respectively, as on June 30, 2021 (Rs 6,600 crore and Rs 25,300 crore, respectively, as on March 31, 2021). As part of PE funds, the group has managed four real estate funds and three business excellence funds till now. While the real estate funds focusses on debt funding to reputed developers for mid-market residential housing projects in top eight Indian cities, business excellence funds focusses majorly on unlisted companies for long-term investments. The group is in a process to complete the raise of its fifth real estate fund of ~Rs 1000 crore (out of which Rs 810 crore has been raised by June 30, 2021) and launch its fourth business excellence fund of Rs 4000 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 3480 crore and ~Rs 3200 crore, respectively, as on June 30, 2021 (Rs 3,503 crore and around Rs 3100 crore, respectively, as on March 31, 2021).
Healthy capitalisation Capitalisation remains healthy driven by healthy internal accruals. Absolute networth and consolidated gearing were Rs 4610 crore and 1.1 times, respectively, as on June 30, 2021 (Rs 4488 crore and 1.3 times, respectively, as on March 31, 2021 and Rs 3,123 crore and 1.5 times, respectively, as on March 31, 2020). Further, as per the group’s risk policy, the maximum gearing for the group 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 3.0 times on a standalone basis as on June 30, 2021 (3.1 times on a standalone basis as on March 31, 2021.
As on June 30, 2021, the group had unrealised gains of ~Rs 1400 crore distributed among Motilal Oswal Equity Mutual Fund Products (Rs 590 crore), liquid equity shares (Rs 340 crore), Motilal Oswal Private Equity Funds (Rs 370 crore; PE and real estate), Motilal Oswal PMS Products (Rs 70 crore) and Motilal Oswal AIF Products (Rs 30 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 IND-AS; 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 1.6 times as on June 30, 2021 (1.8 times as on March 31, 2021).
Strong market position in the equity broking business The group, through MOFSL, ranks among the top ten equity brokers by active number of active clients, as on June 30, 2021, in the highly fragmented broking industry. As on June 30, 2021, the company had 6.5 lakh active customers on NSE, a sharp jump of ~71% from 3.8 lakh as on March 31, 2020.The growth in the business has also been driven by acquisition of small brokers and partnerships with sub-brokers. The group has 20+ lakh retail broking clients and enjoys pan-India presence through 5500+ franchised/sub-broker outlets and 90+ owned branches.
The group had an active client market share of around 3% as of June 30 2021. Its market share of the combined volumes of the Bombay Stock Exchange and National Stock Exchange in both the cash and derivatives segments for fiscal 2021 was around 0.8%, with higher market share in high-yielding cash segment at 2.1% in fiscal 2021. Overall turnover of the business, in line with the industry, witnessed a strong growth in fiscal 2021 at 87%; with a growth in turnover of equity segment at 57% and derivatives segment at 90%. Blended yields have, however, declined over the previous fiscals due to increased share of volumes in the futures and options (F&O) segment. 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 Exposure to uncertainties inherent in capital-market-related businesses A large part of the group’s businesses, especially broking and investment banking, remain exposed to economic, political, and social factors that drive investor sentiments. Brokerage revenues are dependent 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. The upward movement of the key benchmark indices during this period has attracted retail investors to market trading. While this has benefited 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 its dependence on broking operations. Further, AM, WM and PE businesses have revenues 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 scaling up the lending business In fiscal 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. Its gross non-performing assets (GNPAs) 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 up of collections and recovery apparatus by creating a 450+ member team, and enhancing credit appraisal and risk monitoring systems. It has made significant investment in technologies, processes and people to fill the critical gaps at operations levels to support and enhance business scale up. These measures have reduced slippages to Rs 71 crore in fiscal 2021 and 52 crore for fiscal 2020 from Rs 601 crore in fiscal 2019. Also, recoveries have picked up in last fiscal following concerted efforts. As a part of its strategy to clean up the book, it sold GNPAs worth ~Rs 709 crore in the last couple of fiscals to an asset reconstruction company, which brought down GNPAs 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 in the economy, GNPA of the company increased to 4.7% as on June 30, 2021,
After facing challenges in the asset quality in fiscal 2018 and 2019, the company had curtailed its disbursements in fiscal 2019 and 2020. However, the disbursements in fiscal 2021 witnessed a growth of 42% to Rs 270 crore from Rs 190 crore in fiscal 2020. Nevertheless, its loan book declined by 3% in fiscal 2021 to Rs 3,503 crore as on March 31, 2021, from Rs 3628 crore as on March 31, 2020, because of shift in focus towards collections and sale of assets to an ARC. Going forward, 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 the growth in the loan book, the company will utilize the relationships with lenders and investors. It raised resources of over Rs 1400 crore in fiscal 2021 at competitive interest rates.
Nevertheless, given the current challenging macro-economic environment, the ability of the management to scale up operations in a profitable manner will remain a monitorable. |
Liquidity: Strong Liquidity of the group is strong, supported by a large proportion of fee-based businesses. Cash and cash balance, unutilised bank lines, and liquid investments aggregated to Rs 3,250 crore as on July 30, 2021, as against overall debt obligation of Rs 1332 crore (including of MOHFL) till October 31, 2021. |
Rating Sensitivity Factors Downward Factors
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About the 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 wealth management, loan against shares (LAS), margin financing, commodities broking, investment banking, and venture capital management. It commenced the housing finance business in May 2014.
The promoters - Mr Motilal Oswal, Mr Raamdeo Agrawal, and their family members, and Passionate Investment Management Pvt Ltd (PIMPL)—collectively owned 70.7% of MOFSL's equity shares as on June 30, 2021.
For the quarter ended June 30, 2021, the group reported a PAT of Rs 221 crore with a RoE (annualised) of 39.4% for fiscal 2021 as against a PAT of Rs 169 crore with an ROE of 21.1% in the corresponding period previous fiscal.
The group reported PAT of Rs 1260 crore with a RoE of 33.1% for fiscal 2021 as against a PAT of Rs 190 crore with an ROE of 6.1% in the previous fiscal. |
Key Financial Indicators
*Includes fair valuation of unrealised gains in fund-based business
*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, 2021)
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
Criteria Details
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