| Motilal Oswal Financial Services 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 |
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CRISIL has reaffirmed its 'CRISIL A1+' rating on commercial paper programme of Motilal Oswal Financial Services Limited (MOFSL). |
| Analytical Approach |
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CRISIL has combined the business and financial risk profiles of Motilal Oswal Financial Services Ltd (MOFSL) and its subsidiaries, including 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). |
| Key Rating Drivers & Detailed Description |
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Strengths: * 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 in the highly fragmented broking industry. MOFSL had a market share of around 0.8% (excluding proprietary trading volumes) of the combined volumes of the Bombay Stock Exchange and National Stock Exchange in both the cash and derivatives segments for fiscal 2020, with gain in market share in the higher yielding cash segment (to 2.3% in fiscal 2020 from 2.1% in fiscal 2019). Blended yields have, however, declined over the previous fiscals due to increased share of volumes in the futures and options (F&O) segment. The group has 15+ lakh retail broking clients and enjoys pan-India presence through 3500+ franchised/sub-broker outlets and 80+ 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. * Increasing diversification in financial product offerings, supporting earnings profile With gradual diversification into fee-based businesses'such as asset management company (AMC), wealth management (WM), private equity (PE), Investment Banking (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 channels. Contribution from these businesses to overall revenues has scaled up 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). Assets under management (AUM) of the AMC business has witnessed a steady compounded annual growth rate of 37% for the last 5 years and stood at Rs 29500 crore as on March 31, 2020. 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 improvement in sentiments, equity markets witnessed a recovery in Q1FY21 resulting in increase in the AUM of the group. Its AUM for AMC increased to around Rs 35,200 crore as on June 30, 2020 (Rs 29,500 crore as on March 31, 2020). These included assets under portfolio management services (of Rs 13,200 crore), mutual funds (MFs; Rs 19,600 crore), and alternate investment funds (Rs 2,200 crore). The PE and wealth management businesses had AUM of Rs 6,500 crore and Rs 17,800 crore, respectively, as on June 30, 2020. 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 3,686 crore and Rs 1,270 crore, respectively, as on June 30, 2020. * Healthy capitalisation Capitalisation remains healthy driven by healthy cash accrual. Absolute networth and consolidated gearing were Rs 3280 crore and 1.4 times as on June 30 2020 (Rs 3,123 crore and 1.5 times, respectively, as on March 31, 2020). The housing finance business had gearing of around 3.4 times on a standalone basis as on March 31, 2020 (4.3 times as on March 31, 2019). As on June 30, 2020, the group had unrealised gains of Rs 103 crore and Rs 65 crore in Motilal Oswal Equity Mutual Fund Products and Motilal Oswal Alternative Investment Funds (PE and real estate), respectively. 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, and hence, volatility in the timing and magnitude of realised gains remain uncertain. Nevertheless, even after removing unrealised gains from networth, gearing of the group remained comfortable at 1.5 times as on June 30, 2020. Weaknesses: * Exposure to uncertainties inherent in capital-market-related businesses A large part of the group's 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 also 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 the revenue mix. * Limited track record in profitably 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, in the last 24-30 months, MOHFL took several corrective measures, including increase in management depth and experience, strengthening up of collections and recovery apparatus, 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 52 crore for fiscal 2020 from Rs 601 crore in the previous fiscal. 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 595 crore in the fiscal 2020 to an asset reconstruction company, which brought down GNPAs to 1.8% as on March 31, 2020. In fiscal 2020, loan book declined by 17% to Rs 3,628 crore as on March 31, 2020, from Rs 4,360 crore as on March 31, 2019, because of shift in focus towards collections and sale of assets to an ARC. The company intends to grow its loan book prudently over the medium term, while increasing geographical presence. 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 |
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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 to Rs 2,540 crore as on August 31, 2020, as against overall debt obligation of Rs 1964 crore (including of MOHFL) till November 30, 2019. |
| Rating Sensitivity factors |
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Downward factors * 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) |
| About the Company |
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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. |
| Key Financial Indicators - (Consolidated) | ||||||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| Annexure - Details of Instrument(s) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - List of entities consolidated - (As on March 31, 2020) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| 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 |
| For further information contact: | ||||||
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