Rating Rationale

Strengths:
* Strong market position in the equity broking business
The group, through MOFSL, ranks among the top five equity brokers in India. MOFSL had a market share of around 1.1% of the combined volumes of the Bombay Stock Exchange and National Stock Exchange in both the cash and derivatives segments in fiscal 2019, with gain in market share in the higher yielding cash segment. Blended yields have, however, declined over the previous fiscals due to increased share in the futures and options (F&O) segment. The group has 12 lakh retail broking clients and enjoys pan-India presence through 2,900 franchised/sub-broker outlets and 25 owned branches. 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.

* Earnings profile supported by increasing diversification in financial product offerings
With gradual diversification into fee-based businesses'such as asset management company (AMC), wealth management (WM), private equity (PE), and fund-based business (housing finance) - revenue streams have become more diverse.

Assets under management (AUM) for AMC were around Rs 38,800 crore as on June 30, 2019 (Rs 35,600 crore as on March 31, 2018). These included assets under portfolio management services (of Rs 16,100 crore), mutual funds (MFs; Rs 19,900 crore), and alternate investment funds (Rs 2,800 crore). The PE and wealth management businesses had AUM of Rs 6,400 crore and Rs 18,000 crore, respectively, as on June 30, 2019. Contribution from these above businesses to overall profit (which was 82% in fiscal 2019) has scaled up significantly in the last few fiscals. Many of these fee-based businesses utilise MOFSL's branch network for product distribution, resulting in lower operating expenses ratio and improved return on equity (RoE).

Fund-based business includes housing finance (through Motilal Oswal Home Finance Ltd [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 4,300 crore and Rs 1,610 crore, respectively, as on June 30, 2019.

Overall earnings were, however, constrained in fiscal 2019, largely on account of increased provisioning costs (of Rs 352 crore) in the housing finance business and sluggishness in the equity capital markets. As a result, the group's profit declined to Rs 290 crore (with RoE of 9.7%) in fiscal 2019 as against Rs 623 crore (with RoE of 26.5%) the previous fiscal. With the housing finance company taking corrective measures to address asset quality challenges and becoming profitable again in the quarter ended June 30, 2019, overall earnings of the group improved, with profit after tax (PAT) of Rs 134 crore (Rs 104 crore in the corresponding period of the previous year).

* Healthy capitalisation and financial flexibility
Capitalisation remains healthy driven by healthy cash accrual. Absolute networth and consolidated gearing were Rs 3,230 crore and 1.5 times, respectively, as on June 30, 2019 (Rs 3,094 crore and 1.7 times, respectively, as on March 31, 2019). The housing finance business had gearing of around 4 times on a standalone basis as on June 30, 2019.

As on June 30, 2019, the group had unrealised gains of Rs 600 crore and Rs 120 crore in Motilal Oswal Equity Mutual Fund Products and Motilal Oswal Alternative Investment Funds (PE and real estate), respectively. MTM gains under IND-AS reporting results in increased networth. However, volatility in the timing of the gains and the amount of realised gains remain uncertain. Nevertheless, even after removing unrealised gains from networth, gearing of the group remained comfortable at 1.9 times as on June 30, 2019.

Weaknesses
* 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, brokerage volumes and earnings are highly dependent on the level of trading activity in 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 peers. The group's long-term focus is on diversifying its revenue streams and reducing its dependence on broking operations. However, most of the other businesses, such as investment banking, margin funding, and asset management, are linked to the state of 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 should help diversify revenue mix.

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 3,000 crore as on August 31, 2019, as against overall debt obligation of Rs 1,027 crore (including of MOHFL) till December 31, 2019. Furthermore, MOHFL had collections of Rs 325 crore during the same period.

Rating sensitivity factors
Downward factor
* Adverse regulatory actions on the business segments of the group resulting in significant deterioration in business risk profile of the group
* Significant deterioration in asset quality on a sustained basis impacting group's profitability (with credit costs crossing 5% of the group's assets for a sustained period).