By Pankaj Naik

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

 

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating

Rating Action

CP*

-

-

-

INR13,000

IND A1+

Affirmed

*Details in Annexure

Analytical Approach:
Ind-Ra has taken a consolidated view of Motilal Oswal Financial Services Limited (MOFSL) and its group companies while arriving at the rating on account of strong financial and operational linkages among them.



KEY RATING DRIVERS

Group’s Established Franchisee in Capital Market Business: Motilal Oswal group is an established brand and has a competitive positioning in the capital market business. It has been in the equity broking business since 1987, and since then has witnessed and managed multiple market cycles and risk events. It offers a complete bouquet of products linked to the capital markets such as mutual funds, alternative investment funds, equity and commodities broking, private equity, wealth management, margin funding and investment banking. However, the capital market-related businesses expose the group and its future prospects to market-linked volatility. Broking, which is the largest contributor to the company’s revenue and profitability, has experienced yield compression due to stiff competition from multiple players, and the rising share of lower yielding derivatives. 

Healthy Capitalisation: 
MOFSL has a sizeable equity base (1HFY19 consolidated: INR29.1 billion) and a judicious leverage policy (1HFY19 debt to equity: 1.8x, FY18: 2.4x excluding Aspire Home Finance Corporation Limited (Aspire): 0.5x). Excluding Aspire, the management’s policy is to maintain leverage below 1x level. Business restructuring in housing finance, setting new systems and processes, and clean-up of the loan book, led to significantly lower disbursements, resulting in shrinking of the portfolio. The management has articulated a steady state leverage of 7x for this business and infused equity capital of INR1 billion in November 2018; it plans to infuse another INR1 billion in January 2019. Free cash flow generating businesses such as broking and distribution (1HFY19 profit after tax: INR1 billion), and asset management (INR795 million) can provide incremental equity support to the mortgage lending business, thus limiting the incremental borrowings.

Comfortable Liquidity: 
The group’s on-book mutual fund investments had a market value of INR20 billion at end-1HFY19, of which around INR13 billion was invested in equity mutual funds. Liquid mutual fund investments have been placed as margin with the exchange, though their value is higher than the actual margin requirement. Taking the debt mutual fund investments into account, the on-book liquidity of around INR11 billion (cash worth INR5.7 billion) compares well with the commercial paper borrowings of INR8.5 billion as of 1HFY19. Equity and debt mutual fund investments can be liquidated on a T+2 basis; besides, investment in listed equity stood at INR1.9 billion.

Other investments at INR5 billion, primarily comprising investment in alternative investment funds and private equity, cannot be sold for immediate liquidity needs. The unrealised gain on MOFSL’s equity and mutual fund investments stood at INR4.6 billion at end-September 2018. The group had INR17 billion of unutilised bank lines for contingencies. The group has a common treasury (except Aspire), and the liquidity pool is fungible for liquidity requirements of the group companies. Aspire’s structural liquidity statement has significant mismatches in the one-year bucket but has unutilised bank lines of INR2.5 billion. It also has a line of credit of INR5 billion from the parent.

Volatile Capital Market and Housing Finance Business Impacting Profitability
The rating factors in the inherent cyclicality of the capital market-related businesses (e.g. broking, investment banking and private equity), which results in volatile profitability. In 1HFY19, given the subdued capital markets, MOFSL’s profitability was impacted due to underperformance by the investment banking business and mark-to-market fair valuation of investments. The broking and asset management business supported the group’s profitability in 1HFY19. To increase the proportion of revenue from annuity-based businesses, the group scaled up the asset management business and started the housing finance business. It could successfully ramp up the asset management business; however, due to the asset quality headwinds faced in the housing finance business during FY18-H1FY19, it will take time to contribute to the group’s profitability. The housing finance business was impacted (loss of INR0.5 billion in H1FY19) due to a rise in credit cost to 6.4% (FY17: 0.4%, FY18: 2.8%), resulting from significant write-off (INR1.2 billion) of the delinquent loans. 

Elevated Credit Cost in HFC Business:
 Aggressive loan book growth without a dedicated collection vertical and completely decentralised business model, with inadequate control from the head office, led to rise in delinquencies for the housing finance business. Gross non-performing assets increased considerably to 7% as on 30 September 2018 (9.2% including write-offs) from 0.6% at FYE17. There has been an overhaul in the management team and conversion to a vertical-based model from a branch-based model. Dedicated collection team of around 400 people has been put in place. Ind-Ra expects the HFC business to be a drag on the group’s profitability in the medium term, since profitable ramp up of the business is still to be seen. Ind-Ra would closely monitor the developments on this front and its impact on the group’s financial profile.


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. 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 the holding company of the broker-turned-diversified financial services Motilal Oswal group. The group is present in several businesses such as retail and institutional broking, asset management, private equity, wealth management, loan against shares, margin financing, commodities broking, investment banking, venture capital management and housing finance.

FINANCIAL SUMMARY (MOFSL, CONSOLIDATED) 

Particulars

FY18

FY17

Total assets (INR million)

97,796

84,269

Total equity (INR million)

22,404

17,765

Profit after tax (INR million)

5,623

3,645

Return on average assets (%)

6.2

5.4

Equity/assets (%)

22.9

21.1

Source: Ind-Ra, Company annual report

 

 


RATING HISTORY

Instrument Type

Current Rating

Historical Rating

Rating Type

Rated Limits (million)

Rating

6 September 2018

11 December 2017

CP

Short-term

INR13,000

IND A1+

IND A1+

IND A1+

ANNEXURE

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating

CP

-

-

26 December 2018

INR2,000

IND A1+

CP

-

-

25 January 2019

INR1,000

IND A1+

CP

-

-

01 February 2019

INR1,500

IND A1+

CP

-

-

01 February 2019

INR1,000

IND A1+

CP

-

-

04 February 2019

INR1,750

IND A1+

CP

-

-

05 February 2019

INR1,250

IND A1+

CP

-

-

15 February 2019

INR1,500

IND A1+

Unutilised CP

INR3,000

Total

INR13,000


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

    Pankaj Naik

    Associate Director
    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 40001723

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121