By Harshal Patkar

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

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating

Rating Action

CP

-

-

7 to 365 days

INR500

IND A1+

Assigned

KEY RATING DRIVERS

Consolidated View: Ind-Ra has taken a consolidated view of MOFSL and its group companies while arriving at the rating on account of strong financial and operational linkages among them. The rating factors in the Motilal Oswal group’s established brand name and strong positioning 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 INR12 billion; over half of these investments were invested in its equity mutual funds as of 1HFY18. This compares well with its borrowings of INR54.7 billion as of 1HFY18. Additionally, it had an investment book of over INR4.6 billion as of 1HFY18, which can generate liquidity, if required. 

The rating also factors in 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 (13%) businesses provide largely steady state fee income, thus reducing direct risks related to the capital markets. Ind-Ra believes the 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 has a sizeable equity base (1HFY18: INR19.9 billion consolidated) and judicious leverage policy (1HFY18 Tier 1 capital ratio: 48.14%). 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 group’s current market value of investment book chest, INR5.8 billion can be liquidated on a T+2 basis. The group had INR6.37 billion of unutilised lines for contingencies in addition to INR3.7 billion cash as of September 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 a couple of months of average disbursements in liquid assets over and above unutilised contingent lines.

Improving Profitability
: MOFSL’s profitability improved over the 30 months ended September 2017 with consolidated return on equity (annualised) excluding unrealised gains increasing to 26.1% in 1HFY18 (FY17: 22.4%: 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 INR4.1 billion as of 1HFY18 (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 43 months of operations and maintained a ticket size of INR0.9 million. Its overall loan book increased at a CAGR of 74.6% over FY16-1HFY17 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 INR7.7 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 the group’s 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 shocks or 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 rating. The ability to provide growth capital to Aspire in the long-term without increasing the 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 certain broker-turned-diversified financial services firms. Since 1986, the company has seen various capital market cycles and has a strong hold in the capital market space. 

The loans against shares (1HFY18: INR2.2 billion) business line is extended through
Motilal Oswal Securities Limited and MOFSL’s other 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 in India, apart from 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 and to competitors’, thereby enabling a steady fee income source. The steady flow of domestic funds into capital markets has caused depository assets to increase 64% yoy to INR581 billion in 1HFY18 and distribution assets 130% yoy to INR61 billion. These businesses are subject to volatility with dependence on macroeconomic and geo-political scenarios. 

The mutual funds business, which took off from 2014, had assets under management of INR143 billion in 1HFY18 while the portfolio management services’ assets under management stood at INR134 billion. Stickiness of funds under management in the 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 INR6.7 billion as of September 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 (STANDALONE)
 

Particulars

FY17

FY16

Total assets (INR million)

26,673.5

17,482.2

Total equity (INR million)

8,730.3

7,708.6

Profit after tax (INR million)

1,088.1

605.5

Return on average assets (%)

4.9

3.9

Equity/assets (%)

32.7

44.1

Source: Ind-Ra, Company annual report

 

 


RATING HISTORY

Instrument Type

Current Rating

Historical Rating

Rating Type

Rated Limits (million)

Rating

29 September 2017

CP

Short-term

INR2,500

IND A1+

IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

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

SOLICITATION DISCLOSURES

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. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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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