Rating Rationale
December 19, 2017 | Mumbai
Motilal Oswal Financial Services Limited
Rating Reaffirmed 
Rating Action
Rs.250 Crore Commercial Paper Programme CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its rating on the commercial paper programme of Motilal Oswal Financial Services Ltd (MOFSL; holding company of the Motilal Oswal group) at 'CRISIL A1+'.
The rating reflects the group's strong market position in the equity broking business, improving earnings profile supported by increasing diversification in the financial product offerings, and healthy capitalisation and financial flexibility. These rating strengths are partially offset by the group's susceptibility to uncertainties inherent in capital-market-related businesses.

Analytical Approach

For arriving at the rating, CRISIL has combined the business and financial risk profiles of all the Motilal Oswal group companies because of their high degree of operational integration, common promoters, and shared brand name.

Key Rating Drivers & Detailed Description
* Strong market position in the equity broking business
The group, through MOSL, ranks among the top five equity brokers in India. MOSL had a market share of around 1.0% of the combined volumes of the Bombay Stock Exchange and the National Stock Exchange in both the cash and derivative segments in fiscal 2017,  with further gain in market share in the higher yielding cash segment. Blended yields however declined marginally over the previous fiscal due to reducing yields in the F&O segment. The group has a large customer base of 10 lakh retail broking clients and enjoys a pan India presence through around 2284 franchised/Sub Broker outlets and 28 owned branches. It also continues to have a healthy market position in the institutional broking segment despite increasing competition, backed by an established track record, strong execution capabilities, and well-recognised research team. CRISIL believes these will enable the group to maintain its leading position in the equity broking segment over the medium term.
* Improving earnings profile supported by increasing diversification in the financial product offerings
Motilal Oswal group's earnings is improving mainly driven by increasing diversification into fee-based businesses such as asset management (AMC), wealth management private equity, and fund based business such as housing finance. These businesses have scaled up significantly over the last few years, with contribution from these to overall profits increasing to 57% in fiscal 2017 from 16% in fiscal 2014. The same is also reflected in improved RoEs (return on equity) for the group. RoE increased 22% in fiscal 2017 from 6.5% in fiscal 2014.
Assets under management (AUM) were around Rs 33,000 crore as on September 30, 2017 (Rs 23380 crore as on March 31, 2017). These include assets under portfolio management services (Rs 13,400 crore), mutual fund business (Rs 14,300 crore), alternate investment funds (Rs 1100 crore), and assets under advice for private equity funds (Rs 4200 crore). Besides, the group also has a wealth management business which had an AUM of Rs 12,900 crore as on September 30, 2017. The group's housing finance company (HFC), Aspire Home Finance Corporation Ltd (Aspire), had a loan book of Rs 4820 crore as on September 30, 2017. Aspire's asset quality has witnessed some stress in H1 fiscal 2018 with reported gross NPAs increasing to 2.8% as on September 30, 2017 (0.6% as on March 30, 2017) mainly due to portfolio seasoning, , impact of external factors like demonitisation, and challenges on the collection front. The company is taking necessary corrective measures to address the challenge, however, asset quality performance will be a monitorable. Nevertheless, CRISIL believes that any increase in credit costs on the housing finance portfolio in the near term, will not have any material impact on the earnings profile of the group. CRISIL believes that Motilal Oswal group will continue to gain traction in these fee and fund based businesses over the medium term.
* Healthy capitalisation and financial flexibility
The net-worth is large in relation to the nature of its business and risks undertaken therein, and a gearing is low. The group had an absolute net worth of Rs 2000 crore and consolidated gearing of 2.8 times, as on September 30, 2017 (Rs 1786 crore and 2.6 times, respectively, as on March 31, 2017). The housing finance business has a gearing of around 5 times on a standalone basis. Also, CRISIL believes the group will not bear any liability for the exposure of its clients to National Spot Exchange Ltd (around Rs 200 crore as on March 31, 2017). Furthermore, any impact of the ongoing investigation by the regulator in this case is expected to be limited to the small commodity business. CRISIL will continue to monitor developments in this regard.
As on September 30, 2017, the group had investments of Rs 670 crore in Motilal Oswal Equity Mutual Fund Products and Rs 290 crore in Motilal Oswal Alternative Investment Funds (Private Equity & Real Estate). IRR of the equity mutual fund investments since inception is ~29% as on September 30, 2017. However, timing and amount of return from these investments remain uncertain.
* Exposure to uncertainties inherent in capital-market-related businesses
The group's main businesses remain exposed to economic, political, and social factors that drive investor sentiments. Given the cyclical nature of the business, the group's brokerage volumes and earnings are highly dependent on the level of trading activity in the capital markets. 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 its peers. The Motilal Oswal group's focus is on diversifying its revenue streams and reducing its dependence on broking operations. However, most of the group's other businesses such as investment banking, asset management et cetera are also linked to the state of the capital markets. In order to reduce its dependence on capital markets related business streams, the group commenced the housing finance business in fiscal 2015. The housing finance business contributed 22% to profits in fiscal 2017 up from 2% in fiscal 2015.
About the Group

The Motilal Oswal group is one of India's leading providers of capital-market-related services; it offers a number of services, such as retail and institutional broking, asset management, wealth management, loan against shares (LAS), margin financing, commodities broking, investment banking (IB), and private equity. The group commenced housing finance business through a separate company, Aspire in May 2014.
The group consists of MOFSL and its subsidiaries: Motilal Oswal Securities Ltd (MOSL), Motilal Oswal Commodities Brokers Pvt Ltd (MOCB), Motilal Oswal Private Equity Advisors Pvt Ltd (MOPE), Motilal Oswal Investment Advisors Pvt Ltd (MOIA), Motilal Oswal Insurance Brokers Pvt Ltd (MOIB), India Business Excellence Management Co. (IBEMC),  Motilal Oswal Real Estate Investment Advisors Private Limited (MORE), Motilal Oswal Real Estate Investment Advisors II Private Limited (MOREII), Motilal Oswal Capital Markets Pvt Ltd (MOCM), Motilal Asset Management Company Ltd (MOAMC), Motilal Oswal Wealth Management Pvt Ltd (MOWM), Motilal Oswal Trustee Co Ltd (MOTC), Motilal Oswal Securities International Pvt Ltd (MOSIPL), Motilal Oswal Capital Markets (Hong Kong) Pvt Ltd (MOCM HK), and Motilal Oswal Capital Markets (Singapore) Pte Ltd (MOCM SP). MOCM, MOAMC, MOWM, MOTC, MOSIPL, MOCM HKMOCM SP and Aspire are wholly owned subsidiaries of MOSL. IBEMC, MORE & MORE II are subsidiaries of MOPE.  
The group is carrying out an internal restructuring as part of which, the broking entity, MOSL, will merge with the parent (MOFSL), and MOFSL's LAS business will be moved to a new NBFC subsidiary. The changes will be effective 1-April-2018. CRISIL does not expect any impact to the credit profile of the Motilal Oswal group on account of the restructuring.
MOFSL, incorporated in 2005, is a non-deposit-taking non-banking financial company, providing margin financing services to the group's retail broking clients. The group's promoters, Mr. Motilal Oswal, Mr. Raamdeo Agrawal, their family members and Passionate Investment Management Private Limited (PIMPL), collectively own 70.86% of MOFSL's equity shares.
The Motilal Oswal group reported a profit after tax (PAT; after exceptional and extraordinary items) of Rs 360 crore on a total income (net of interest expenses) of Rs 1,376 crore for fiscal 2017, against a PAT of Rs 169 crore on a total income of Rs 919 crore for fiscal 2016.
For the six months ended September 30, 2017, the group reported a PAT of Rs 248 crore on a total income (net of interest expenses) of Rs 1032 crore, against a PAT of Rs 186 crore on a total income of Rs 735 crore for corresponding period in previous fiscal.

Key Financial Indicators (Consolidated)
As on / for the half year ended September 30   2017 2016
Total Assets Rs crore 8439 5090
Total income Rs crore 1291 930
Profit after tax Rs crore 248 186
Gross NPA (HFC) % 2.8 0.3
Return on assets (annualized) % 5.3 4.0
Gearing Times 2.8 1.9

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Cr) Rating Assigned with Outlook
NA Commercial Paper Programme NA NA 7-365 days 250 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  250  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Links to related criteria
Rating Criteria for Finance Companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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