By Jinay Gala

India Ratings and Research (Ind-Ra) has assigned 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*

-

-

-

INR2,000

IND A1+

Assigned

CP

-

-

7 to 365 days

INR13,000

IND A1+

Affirmed

*Yet to be issued

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 idiosyncratic risk events. With client base of more than 1.45 million as of 1QFY21, the group caters to both retail and institutional clients through its 4,467 outlets (branches and franchisees). Despite the broking business being fairly fragmented, MOFSL had a market share of 3.0% in the equity broking business as of 1QFY21. 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.

Capital Market Segment Expected to be Highest Contributor to Revenue and Operating Profits: Although MOFSL focussed to diversify and de-link majority of its revenue and profits from capital markets exposed business to fee-based annuity based sources of income in the last two to three years, the capital markets segment contributed 45% and 60% to the total revenue and operating profits in 1HFY21 (FY20: 48% and 44%, respectively). The company recorded an all-time high retail broking revenue in HFY21, led by strong surge in volumes and market share gain across cash and derivative segment. In 1HFY21, its overall equity broking market share (ex-prop) increased to 3.1% (FY20: 2.5%). MOFSL added 86,900 and 117,000 new clients in the retail broking business in 1QFY21 and 2QFY21, respectively. The management estimates the trend to continue in 2HFY21 as well, thus leading to the capital market segment likely being the major contributor to the revenue and profits in FY21.

The group reported consolidated return on equity of 36% (annualised) in 1HFY21 (FY20: 7.39%). The improvement in profitability was mainly driven by marked-to-market gains in the fund-based book and brokerage income. Although the impact of these factors was partly offset by the underperformance of investment banking and wealth management businesses.

Healthy Capitalisation:
The consolidated leverage (debt to equity), excluding the housing finance subsidiary, was conservative at 0.4x at 1HFYE21. At 1HFYE21, MOHFL’s leverage stood at 3.6x post capital infusion on INR2 billion in FY19. The management has not planned any further capital infusion in the near term. As per the management, the consolidated leverage, excluding MOHFL, is likely to remain below 1.0x over the long term. Ind-Ra expects the group’s cash generating businesses - brokerage and distribution and wealth management - to supplement any further capital requirement of MOHFL, thus limiting any incremental borrowing requirement. The company may raise short-term debt for working capital needs, if required.

Liquidity Indicator - Adequate:
The group’s fund-based book, which houses the group’s investments, had a market value of INR28.68 billion at 1HFY21 with unrealised gains of INR4.00 billion, which supports liquidity buffers of the company. Taking the fixed deposits into account, the on-book liquidity of around INR17.2 billion, of which unencumbered cash and bank balance of INR7.22 billion, compares well with the CP borrowings of INR14 billion (group level including home finance business; excluding home finance business CP borrowing  outstanding was INR10.25 billion) as of 1HFY21.

The group had unutilised bank lines of INR13 billion for contingencies at end-September 2020. The group has a common treasury (except MOHFL), and the liquidity pool is fungible for liquidity requirements of the group companies. At end-September 2020, MOHFL’s structural liquidity statement had minimal surplus as a percentage of total inflows in the up to one-year bucket. Also, it has access to unutilised bank lines of INR1.6 billion and line of credit of INR5 billion from the parent. The consolidated debt stood at 46 billion in 1HFY21. Of this, INR31 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 Undergoing Transition:
MOHFL has established itself as an affordable housing financer with focus on lending sub-INR2.5 million ticket-sized properties. The customer segment is mixed with self-employed constituting around 45% and the rest being salaried. The book has historically been largely dominated in Maharashtra, Gujarat and Madhya Pradesh. However, MOHFL’s has shifted its focus towards diversifying pan-India, with increased focus towards the southern states. MOHFL has a network of 110 branches across nine states, with a focus on the better utilisation of the existing branch network, thereby moderating its concentration across few branches and growing branches in southern India. The sourcing channel comprises broking franchise owners, connectors and internal sales team with minimal reliance on the direct sourcing agents’ network. The IT system and the underwriting standard operating procedures have been established; nevertheless, its efficiency needs to be tested with the scalability and seasoning of the new book. MOHFL has a four-layer credit approval structure with loan sanctioning authority at the cluster, regional, state level and national levels with no authority of sanctioning at the branch level.

Since FY19, there was an overhaul in the management team and a gradual conversion to a vertical-based model from a branch-based model. Earlier, a major part of the employees had been from a common company, leading to an on-boarding of the previous organisation culture. The new team established has a fairly diversified organisational mix; however, aligning the new team to the group strategy and retaining the senior management will be a rating monitorable in the medium term. The emphasis has been made on establishing the verticalisation of business channels such as sales, collection and underwriting credit with minimal overlap. The company has formed a collection team of around 400 employees. The management believes the disbursements made post FY18 and the revamp of credit policies, improved control on branch sales and collection team, revamped monthly information systems, along with the restructuring of systems and processes, should control credit costs better. These are partly evident from the controlled slippages (only 10) cases moving to the 90+ days past due, of the total disbursement cases (around 6,000) and the low bounce rates in these accounts. However, this book is yet to see a complete seasoning cycle; therefore, establishing credit cost remains a challenge. Ind-Ra will 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 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 increased beyond 1.0x 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 (CONSOLIDATED)
 

Particulars

FY20

FY19

Total assets (INR million)

99,609

103,207

Total equity (INR million)

29,365

28,924

Profit after tax (INR million)

2,154

2,903

Return on average assets (%)

2.1

2.8

Equity/assets (%)

29.5

28.0

Source: Ind-Ra, Company annual report

 

 


RATING HISTORY

Instrument Type

Current Rating

 

Historical Rating

Rating Type

Rated Limits (million)

Rating

28 January 2020

21 December 2018

 

11 December 2017

CP

Short-term

INR15,000

IND A1+

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.

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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. 

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

    Jinay Gala

    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 40356138

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121