Date of Issuance
Coupon Rate (%)
Size of Issue (million)
7 to 365 days
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.
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
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
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
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.
COMPLEXITY LEVEL OF INSTRUMENTS
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.
ABOUT INDIA RATINGS AND RESEARCH
About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market.
Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies.
Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank.
India Ratings is a 100% owned subsidiary of the Fitch Group.
For more information, visit www.indiaratings.co.in.