By Harshal Patkar

India Ratings and Research (Ind-Ra) has rated Motilal Oswal Financial Services Limited (MOFSL) commercial paper (CP) as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating

Rating Action

CP

-

-

-

INR2

IND A1+

Assigned

KEY RATING DRIVERS

Consolidated View: Ind-Ra has taken a consolidated view of MOSL and its group companies while arriving at the ratings on account of strong financial and operational linkages among them. The ratings factor in the established brand name and strong positioning of the Motilal Oswal group in the capital market businesses, moderate leverage policy (debt/equity of 1x excluding mortgage lending business, Aspire Home Finance (Aspire)), sizeable liquidity, and well established, self-sustaining and high cash flow generating businesses without fresh capital requirements (other than Aspire). The group’s on-book investments have a market value of INR10 billion; over half of these investments are invested in its equity mutual funds. This compares well with its borrowings of INR50.6 billion. Additionally, it has on-book liquid assets of INR4.6 billion.

The ratings also take into account the inherent cyclicality of the high capital market correlated businesses (e.g. brokerage and investment banking, private equity) which generate around one-third of the group profits. Incrementally, Ind-Ra believes, the share of other businesses such as mortgage lending can grow faster. Additionally, the asset (FY17 share of profits: 46%) and wealth businesses (13%) provide largely steady state fee income, thus reducing direct risks related to the capital markets. Ind-Ra believes an ability to maintain this trend in the medium term while managing the liquidity position would be a key monitorable for the group.

Healthy Capitalisation: MOFSL’s has a sizeable equity base (FY17: INR17.8 billion) and judicious leverage policy (FY17 Tier 1 capital ratio: 39.2%). An incremental equity support is mostly limited to the mortgage lending business which can be largely supported by free cash generated at the group level, thus limiting the incremental borrowings. 

Comfortable Liquidity: Of the company’s current market value of investment book chest, INR3.5 billion can be liquidated on a T+2 basis. The company had INR4.95 billion of unutilised lines for contingencies in addition to INR4.6 billion cash as of June 2017. Meanwhile, the group maintains sufficient lines depending on its daily liquidity stress test output. The group has a common treasury (except Aspire) and the liquidity pool is fungible for liquidity requirements of the group companies. Aspire, the principal lending arm for the group, has its own liquidity buffers in the form of two months of average disbursements in liquid assets.

Improving Profitability: MOFSL’s profitability improved over the 24 months ending March 2017 with consolidated return on equity excluding unrealised gains increasing to 22.74% in FY17 (FY16: 11.9%, FY15: 11.7%) on the back of buoyant capital market activities and high business growth rates in most of its large businesses. Sustained inflows in the asset management business coupled with an improvement in operating leverage in the capital market and leverage businesses, as well as the likely exits in some of the mature investments could continue to aid the profitability. The company’s unrealised gains on mutual fund investments were about INR3.6 billion as of 1QFY18 (FY17: INR3.3 billion).  

High Loan Growth in Mortgage; Vintage Loan Build-Up to Take Time: Aspire remains a pure play affordable housing finance company moving from a regional franchise to a pan India model. It has completed 39 months of operations and maintained a ticket size of INR0.9 million. Its overall loan book increased at a CAGR of 40.8% over FY15-FY17 and is thus unseasoned; the credit cost performance will be visible in the next few quarters. Cumulative infusions from group companies in Aspire amounted to INR6 billion; the group remains committed to providing growth capital for Aspire.  


RATING SENSITIVITIES

Negative: A negative rating action could result from a sharp deterioration in the business viability of any of its large businesses which in Ind-Ra’s opinion could lead to a significant weakening of the group’s profitability and or capital buffers at the parent. A negative rating action could also result from signs of a sharp deterioration in MOFSL’s liquidity and/or access to funding due to unexpected market-wide shock or unexpected losses in the capital market businesses. A breach of leverage levels from Ind-Ra’s comfort levels could also have a negative impact on the ratings. Ability to provide growth capital for Aspire in the long-term without increasing leverage at the group level would also be a key monitorable.


COMPANY PROFILE

MOFSL is a non-deposit accepting non-banking finance company registered with the Reserve Bank of India. It is the ultimate holding company of broker turned diversified financial services firm, which started operations in 1986. Since then, the company has seen various capital market cycles and has a strong hold in the capital market space.

The loans against shares (1QFY18: INR2.5 billion) business line is extended through Motilal Oswal Securities Limited and MOFSL’s entities as a cross sell to existing as well as new customers. Investments in Motilal Oswal Asset Management Company, Motilal Oswal Private Equity and Motilal Oswal Real Estate other than investments in listed and unlisted equity are funded through these entities.

The capital market businesses consists MOSPL’s retail broking arm with over 2,400 franchises on a revenue sharing model spread across 600 locations across India, in addition to 24 self-own branches. Over 40% of the customers use digital platforms to perform transactions. These touch points also extend selling of investment products both in-house as well as competitors’, thereby enabling steady fee income source. The steady flow of domestic funds into capital markets has caused depository assets to increase 78% yoy (1QFY18: INR530 billion) and distribution assets to 147% yoy (INR52 billion). These businesses are subject to volatility with dependence on macro-economic and geo-political scenarios.

The mutual funds business, which took off from 2014, has assets under management of INR113 billion. The business registered an internal rate of return of over 24% since inception, while portfolio management services’ assets under management stood at INR128 billion. Stickiness of funds under management in absence of surplus liquidity market conditions or even a marginal correction in the capital markets needs to be tested. Group investments at cost in these funds were INR6.4 billion as of June 2017. Other business lines include private equity and real estate funds, which reported one-off gains in FY17 and are likely to result in a one-off income in FY18-FY20 as well owing to the lifecycle of each fund.

 

FINANCIAL SUMMARY (CONSOLIDATED)

Particulars

FY17

FY16

Total assets (INR million)

84,269.0

50,732.9

Total equity (INR million)

17,764.7

14,352.3

Profit after tax (INR million)

3,645.3

1,633.2

Return on average assets (%)

5.4

4.1

Equity/assets (%)

21.1

28.3

Capital adequacy ratio (%)

39.3

58.1

Source: Ind-Ra, Company annual report

 

 



COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity indicators.

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Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

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Analyst Names

  • Primary Analyst

    Harshal Patkar

    Senior Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001722

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121