Rating Rationale
September 04, 2018 | Mumbai
Motilal Oswal Financial Services Limited
Rating Reaffirmed 
Rating Action
Rs.250 Crore Commercial Paper Programme CRISIL A1+ (Reaffirmed)
Rs.1050 Crore Commercial Paper Programme* CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
*Transferred from MOSL to MOFSL upon amalgamation of the former with latter with effect from April 1, 2017.
Detailed Rationale

CRISIL has reaffirmed its rating on the Rs 250 crore commercial paper programme of Motilal Oswal Financial Services Limited (MOFSL; holding company of the Motilal Oswal group) at 'CRISIL A1+'. CRISIL has also reaffirmed its 'CRISIL A1+' rating on the Rs 1050 crore commercial paper programme consequent to the amalgamation Motilal Oswal Securities Limited (MOSL) with MOFSL.

The rating continues to reflect the group's strong market position in the equity broking business, improving earnings profile supported by increased 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.

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% of the combined volumes of the Bombay Stock Exchange and the National Stock Exchange in both the cash and derivative segments in fiscal 2018, with gain in market share in the higher yielding cash segment. Blended yields, however, declined over the previous fiscals due to increased share of the F&O segment. The group has 10 lakh retail broking clients and enjoys pan-India presence through 2,284 franchised/sub broker outlets and 28 owned branches. Market position remains healthy in the institutional broking segment (despite increasing competition), backed by an established track record, strong execution capabilities, and well-recognised research team.

* Improving earnings profile backed by increasing diversification in financial product offerings
Earnings are improving due to increasing diversification into fee-based businesses such as asset management, wealth management private equity, and fund-based business (housing finance). Contribution from these businesses to overall profits has scaled up significantly over the last few fiscals, to 43% in fiscal 2018 from 15% in fiscal 2015. Many of these fee based businesses utilize MOFSL's existing branch network for product distribution, resulting in lower operating expenses ratio and improved RoEs (return on equity) for the group. RoE increased to 27% in fiscal 2018 from 11% in fiscal 2015.

Assets under management (AUM) were around Rs 37400 crore as on June 30, 2018 (Rs 23,380 crore as on March 31, 2017). These include assets under portfolio management services (Rs 15400 crore), mutual fund business (Rs 19400 crore), alternate investment funds (Rs 2600 crore). Besides, the group also has a wealth management business which had an AUM of Rs 15300 crore as on June 30, 2018. Its housing finance company (HFC), Aspire Home Finance Corporation Ltd (Aspire), had a loan book of Rs 4800 crore as on June 30, 2018. Asset quality has been stressed with reported gross non-performing assets increasing to 6.8% as on June 2018 (4.5% as on March 30, 2018) mainly due to seasoning of book, impact of external shocks in the economy and lack of adequate collection and recovery processes and bandwidth within the company. Though Aspire has taken corrective measures to address the challenge, asset quality performance will be a monitorable. Nevertheless, 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, which will continue to gain traction in its fee- and fund-based businesses over the medium term.

* Healthy capitalisation and financial flexibility
Absolute networth was large at Rs 3,020 crore and consolidated gearing strong at 1.9 times, as on June 30, 2018 (Rs 1,786 crore and 2.4 times, respectively, as on March 31, 2018). The housing finance business had 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, 2018). 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 June 30, 2018, the group had unrealised gains of Rs 570 crore in Motilal Oswal Equity Mutual Fund Products and Rs 120 crore in Motilal Oswal Alternative Investment Funds (private equity and real estate). Marking-to-market of these gains under IND-AS reporting resulted in a one-time gain in networth. However, timing and amount of realised gains 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 long-term 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, margin funding, 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 the first quarter of fiscal 2015. Potential improvement in profitability from this segment over the medium term will help diversify revenue mix.
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. The group commenced the housing finance business through Aspire in May 2014.

The group comprises MOFSL and its subsidiaries: Motilal Oswal Commodities Brokers Pvt Ltd, Motilal Oswal Private Equity Advisors Pvt Ltd (MOPE), Motilal Oswal Investment Advisors Pvt Ltd, Motilal Oswal Insurance Brokers Pvt Ltd, India Business Excellence Management Co (IBEMC), Motilal Oswal Real Estate Investment Advisors Pvt Ltd (MORE), Motilal Oswal Real Estate Investment Advisors II Pvt Ltd (MORE II), 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). Entities MOCM, MOAMC, MOWM, MOTC, MOSIPL, MOCM HK, MOCM SP, and Aspire are wholly owned subsidiaries of MOSL; while IBEMC, MORE, and MORE II are subsidiaries of MOPE. 

As a part of group's internal restructuring, the broking entity, MOSL, has amalgamated with MOFSL after the NCLT order on July 30, 2018. The changes will be effective August 21, 2018 and effective date of the amalgamation is April 01, 2017. MOFSL's LAS business will be incrementally carried out through a new non-banking financial company wholly owned by MOFSL. The amalgamation will facilitate greater synergies and better flow of funds for expansion of business activities within the group.

The group's promoters, Mr. Motilal Oswal, Mr. Raamdeo Agrawal, their family members and Passionate Investment Management Private Limited (PIMPL), collectively own 70.5% of MOFSL's equity shares.

The Motilal Oswal group reported a profit after tax (PAT); after exceptional and extraordinary items) of Rs 542 crore on a total income (net of interest expenses) of Rs 2288 crore for fiscal 2018, against a PAT of Rs 365 crore on a total income of Rs 1491 crore for fiscal 2017.

For the three months ended June 30, 2018, the group reported a PAT of Rs 115.4 crore on a total income (net of interest expenses) of Rs 582 crore, against a PAT of Rs 146.8 crore on a total income of Rs 531 crore for corresponding period in the previous fiscal.

Key Financial Indicators - Motilal Oswal Financial Services Limited (Consolidated)
As on/for the quarter ended June 30 Unit 2018 2017
Total Assets Rs crore 8480 7770
Total income Rs crore 712 658
Profit after tax* Rs crore 115.4 146.8
Gross NPA (HFC) % 6.8 1.6
Return on net worth (annualized) % 17.1 30.1
Gearing % 1.9 2.2
*Includes fair valuation of unrealised gains in fund based business

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 1050 CRISIL A1+
NA Commercial Paper Programme NA NA 7-365 days 250 CRISIL A1+
*Transferred from MOSL to MOFSL upon amalgamation of the former with latter with effect from April 1, 2017.
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  1300.00  CRISIL A1+      19-12-17  CRISIL A1+  21-12-16  CRISIL A1+  18-11-15  CRISIL A1+  CRISIL A1+ 
                    24-09-15  CRISIL A1+   
                    13-07-15  CRISIL A1+   
                    27-03-15  CRISIL A1+   
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Finance Companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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