By Apurva Naik

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

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating

Rating Action

CP

-

-

7 to 365 days

INR13,000

IND A1+

Affirmed

 Analytical Approach: 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.

KEY RATING DRIVERS

Group’s Established Franchisee in Capital Market Business: The Motilal Oswal group is an established brand. As it has been in the equity broking business since 1987, the group has witnessed multiple market cycles and idiosyncraticrisk events. With a client base of 1.32 million as of 3QFY20, the group caters to both retail and institutional clients through its 3,151 outlets (branches and franchisees). Despite the broking business being fairly fragmented, MOFSL had a market share of 2.6% in the equity broking business as on 3QFY20. MOFSL has expanded into different verticals of capital markets to provide a wide range of products such as mutual funds, alternative investment funds, equity and derivatives broking, private equity, wealth management, margin funding and investment banking.

Diversification towards Annuity Sources of Income: The businesses that are linked to the capital market expose the group’s profitability matrix to the volatility associated with this market. Broking, which is the largest contributor to the company’s revenue and profitability, has experienced yield compression due to the rising share of lower yielding derivatives volume and stiff competition from multiple players. However, the group is incrementally moving towards providing fee-based services, which would provide a cushion against the aforementioned volatility. Excluding the losses in the housing finance business, the asset and wealth management business contributed 44% to the total profits in FY19 (FY18: 32%). The restructuring of the housing finance business continues to impact profitability in FY20, as sale of NPAs to asset restructuring company (ARC) in 2QFY20 resulted in negligible return on equity (ROE) by the Motilal Oswal Home Finance Ltd (MOHFL); hence, the segment’s steady-state contribution to group profits is yet to be established.

The group reported consolidated ROE of 21% (annualised) in 9MFY20 compared to10.2% in FY19. The improvement in profitability was mainly driven by  marked-to-market gains in the fund-based book, fee income from the AMC business and brokerage income, though the impact of these factors was partly offset by the underperformance of investment banking and wealth management business.

Healthy Capitalisation: The consolidated leverage (debt to equity), excluding the housing finance subsidiary, was conservative at 0.4x as of 3QFY20. As of 3QFY20, MOHFL’s leverage stood at 3.6x post capital infusion on INR 2 billion in FY19. The management has not planned any further capital infusion, at least in the near term. As per the management, the consolidated leverage, excluding MOHFL, is likely to remain below 1x over the long term.  Ind-Ra expects the group’s cash generating businesses i.e brokerage and distribution and wealth management to supplement any further capital requirement of MOHFL, thus limiting any incremental borrowing requirement.

Liquidity Indicator - Adequate: The group’s fund-based book, which houses the group’s investments, had a market value of INR 27.8 billion at 3QFY20, with unrealised gains of INR5.7 billion. The group’s on book equity mutual fund investments had a market value of INR14.3 billion at 3QFY20. Of this, around INR10 billion was placed as margin with the exchange; the amount is in excess of the actual margin requirement. Taking the debt mutual fund investments into account, the on-book liquidity of around INR12.1 billion, (of which unencumbered cash and bank balance of INR3.5 billion) compares well with the commercial paper borrowings of INR12 billion (group level) as of 3QFY20. Equity and debt mutual fund investments can be liquidated on a T+2 basis; besides, the company’s investment in quoted equity and exchange traded funds stood at INR2.7 billion.

The other investments of INR5.9 billion, primarily comprising investment in alternative investment funds, private equity and real estate funds, cannot be sold for immediate liquidity needs. The group had unutilised bank lines of INR13 billion for contingencies at end-December 2019. The group has a common treasury (except MOHFL), and the liquidity pool is fungible for liquidity requirements of the group companies. At end-September 2019, MOHFL’s structural liquidity statement had significant mismatches in the one-year bucket, with a peak cumulative gap (outflows exceeding inflows) of INR5.8 billion. However, the same can be covered by its unutilised bank lines of INR2.2 billion and line of credit of INR5 billion from the parent. The consolidated debt stood at 46 billion in 3QFY20. Of this, INR30.7 billion was attributable to MOHFL, while the balance was mainly used to extend loans, which are sufficiently secured (maximum loan to value of 50%) and short term in nature, against shares for margin trading.

Housing Finance Business Yet to Stabilise: Aggressive loan book growth without a dedicated collection vertical and completely decentralised business model, along with inadequate control from the head office, led to rise in delinquencies for the housing finance business during FY18. Gross non-performing assets (NPA)had increased considerably to 7% as on 30 September 2018 (9.2% including write-offs) from 0.6% at FYE17. The gross NPA increased to 10.4% in 1QFY20 due to further seasoning of book and de-growth in the loan book. Post the sale of NPAs worth INR5.4 billion to an ARC in 2QFY20, the gross NPA reduced to 2.39% (net NPA: 1.8%).

 

Over the last year, there has been an overhaul in the management team and a gradual conversion to a vertical-based model from a branch-based model. The company has formed a dedicated collection team of around 400 employees. The management believes that the disbursements made post FY18 and revamp of credit policies, along with restructuring of systems and processes, would result in lower credit costs. These is partly evident from the controlled slippages (only 11 cases in the delinquent pool out of the total disbursement cases of around 4,500) and lower bounce rates in these accounts. However, this book is yet to see a full seasoning cycle. Therefore, Ind-Ra will closely monitor the developments on this front and its impact on the group’s financial profile. Ind-Ra expects the HFC business to be a drag on the group’s profitability in the medium term, since a profitable ramp-up of the business is yet to be seen.

 


RATING SENSITIVITIES

Negative: A negative rating action could result from a sharp deterioration in the market share and competitive positioning 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. High consolidated leverage (excluding the housing finance subsidiary) such that it crosses 1x levels could also have a negative impact on the rating.


COMPANY PROFILE

MOFSL is the ultimate 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. Since 1986, the company has seen various capital market cycles and has a strong hold in the capital market space.

FINANCIAL SUMMARY (MOFSL, CONSOLIDATED) 

Particulars

FY19

FY18

Total assets (INR million)

103,207

103,974

Total equity (INR million)

28,924

27,961

Profit after tax (INR million)

2,903

6,232

Return on average assets (%)

2.8

6.3

Equity/assets (%)

28.0

26.9

Source: Ind-Ra, Company annual report

 

 

 


RATING HISTORY

Instrument Type

Current Rating

Historical Rating

Rating Type

Rated Limits (million)

Rating

21 December 2018

 

11 December 2017

CP

Short-term

INR13,000

IND A1+

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

    Apurva Naik

    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 40001779

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121