Headwinds May Impact Performance In The Near Term
In the housing finance business, quality of underwriting remains a key concern due to severe competition in this space. Also, the asset quality must be maintained while continuing to chase growth. A robust mechanism for collection is also important to avoid write-offs.
Motilal Oswal Financial Services (MOFSL) is a well-diversified financial services company. The company has a presence in over 600 cities via 2,400 business locations and over 5,000 employees. The company has a presence across several business units, namely, retail and institutional broking, private wealth management , investment banking , private equity, asset management and home finance.
The company has a client base that includes retail customers (including high net worth individuals) , mutual funds, foreign institutional investors, financial institutions and corporate clients. The company is headquartered in Mumbai and has a network spread over 450 cities and towns comprising over 2,400 business locations.
The company’s capital market business (i.e. retail broking & distribution, institutional equity, investment banking) has a stable share in high yielding cash segment, strong operating leverage and robust growth in distribution AUM. The company’s asset management business enjoys a strong growth in assets under management (AUMs) and significant operating leverage. The company’s housing finance business called ‘Aspire’ has managed to strengthen collections and operations and cleaned up its legacy book. The company’s fund-based businesses have a healthy pool of unrealised gains and a cumulative XIRR of 17 per cent on quoted equity investment.
Industry
The asset management industry in India is among the fastest growing in the world. In December 2018, corporate investors' AUMs stood at US$ 127.65billion, while HNWI and retail investors reached US$99.05 billion and US$ 82.03 billion, respectively.
The mutual fund industry has witnessed a rapid growth in the assets under management (AUMs). As of February 2019, the total AUMs of the industry stood at Rs.23.16 trillion. Along with the secondary market, the market for Initial Public Offerings (IPOs) has also witnessed an increased interest. The total amount raised through IPOs stood at Rs.14,032 crore as of February 2019.
The investments made by foreign portfolio investors (FPIs) in capital markets have reached Rs.5,400 crore as of December 2018. The private equity/ venture capital reached US$ 33.1 billion in 2018.
India has benefited from large crossutilisation of channels to expand reach of financial services. The rising incomes in the country are driving the demand for financial services across income brackets. The penetration of credit, insurance and investment has started increasing in rural India. The wealth management segment has witnessed growth in participation by the HNWIs. The Government of India has taken several steps to enhance the reforms in the capital markets, including simplification of the IPO process which allows qualified foreign investors (QFIs) to access the Indian bond markets. The Association of Mutual Funds in India (AMFI) is aiming for nearly 5-fold growth in AUMs to Rs.95 lakh crore and more than three times growth in investor accounts to 130 million by 2025.
The Indian mutual fund industry is more than $300 billion. The US mutual fund industry is around $16 trillion, whereas it was only $200 billion 30 years ago. This indicates that India has a long way to go.
Growth Drivers
Motilal Oswal’s broking and distribution increased and delivered strong numbers aided by strong volumes and growing operating leverage. The distribution business AUMs increased by 20 per cent, driven by strong net sales led by higher sales of equity-focused products. The company has only tapped 11.5 per cent of its client base and 20 per cent of its distribution network and a meaningful increase in distribution can be expected with increase in cross-selling. There was traction in new client addition by franchisee and retail channels, i.e. 35,600-plus clients in Q3FY19. The online penetration is gaining traction in client additions (38 per cent) and turnover (40 per cent). Its distribution income stood at 16 per cent of retail broking gross revenues, with just 11.5 per cent of cross-sell penetration. The SIPs gained traction with 91200 SIPs live as of Q3FY19 with average ticket size of Rs.4,000 per month. In the institutional broking segment, empanelments continued to witness traction, with 678 empanelments. The company is focused on corporate access with execution of successful events like Annual Global Investor Conference and other events in India.
In the investment banking space, the company is actively engaged in a number of transactions, both capital markets and private transactions, which remain well-placed for successful completion, subject to market conditions. The company has robust pipelines and is actively engaged in certain M&A transactions with anticipated positive outcomes in the coming quarters.
The company’s asset management segment has delivered strong revenue growth of 22 per cent and profit growth of 45 per cent in 9MFY19 on account of superior operating leverage. The AUMs across PMS, mutual funds and AIF reached a milestone of Rs.37,400 crore with MF AUMs reached Rs.19,100 crore and PMS AUMs stood at Rs.2,700 crore. SIP inflows in Q3FY19 remained buoyant at Rs.500 crore, up 29 per cent YoY. The SIP AUMs are growing qualitatively and profitably. The company’s average SIP stood at Rs.4,200 per month, which is higher than the industry average of Rs.3,152 per month. The company’s SIP market share and its proportion to the total is rising. The company’s market share in mutual fund equity net sales stood at 2.4 per cent in 9MFY19 in a rising pool of equity flows. This is driven by MOAMC’s niche equity focus, process-oriented approach and performance track record.
The company has become one of the largest AIF managers in India within a span of two years, with AUMs of Rs.2700 crore in 9MFY19. The company’s offshore products are seeing initial interest. The offshore segment is 1.6x the institutionallymanaged equity assets in India.
The company's housing finance loan book stood at Rs.4,400 crore. The mortgage-to-GDP ratio in India remains very low at 10 per cent and has a huge scope for growth. The government's initiatives like ‘Housing for All’ will also aid growth in this segment of the business. The diversification into this business, will help MOFSL reduce cyclicality in the capital market-related earnings. Most of MOFSL's businesses are fee-based and do not require much incremental capital.
The housing finance businessThe company has become one of thelargest AIF managers in India within a span of two years, with provides an avenue to deploy capital for long term value creation.
The financialization of savings, investors moving their wealth from physical assets to financial assets, improving investor awareness, rising middle-class aspirations and growing SIP culture all augur well for the company and the industry. The company’s household contribution to equity remains very low at less than 5 percent.
Challenges
The broking business witnessed shrinkage in market share on account of change in mix in favour of F&O segment. F&O as a proportion of market share now stands at 97 per cent, which was about 95 per cent last year. Broking is inherently a cyclical business and remains at risk if the stock markets crash In the asset management business, some of the company’s schemes like F-30 and F-35 have underperformed over the last two years on a SIP and lump-sum basis. This, however, was after three years of outperformance. The underperformance of funds and products remains a concern for the asset management business as it could lead to slowing of inflows into these funds and also redemptions from existing clients.
In the housing finance business, quality of underwriting remains a key concern due to severe competition in this space. Also, the asset quality must be maintained while continuing to chase growth. A robust mechanism for collection is also important to avoid write-offs.
Another challenge faced by the company which cannot be ignored by the investors at large is the fact that SEBI has identified Motilal Ostwal as not 'fit and proper' to be a commodities broker for their alleged role in the Rs.5,500 crore NSEL ( National Spot Exchange Limited) scam in 2013. Even though there will be minimal impact on the bottomline and the business will not be impacted materially, there will be a sword hanging over the management's head till the issue is resolved completely.
Financials
Motilal Oswal reported consolidated sales of Rs.647.59 crore as against Rs.728.63 crore in December 2017, registering a de-growth of 11.12 per cent. The company’s quarterly net profit stood at Rs.39.9 crore in December 2018, down 73.05 per cent from Rs.148.05 crore in December 2017. The company’s EBITDA stood at Rs.148.26 crore in December 2018, down 58.12 per cent from Rs.354.1 crore in December 2017. The company’s numbers were impacted by its housing finance subsidiary, Aspire Home Finance, which reported losses. This was on account of significantly high provisions and write-offs of Rs.178 crore. The asset quality continued to deteriorate with gross non-performing assets (GNPAs) increasing to 8.68 per cent as against 7 per cent in the last quarter. The capital market business as well as the asset and wealth businesses registered tepid performances, which further hurt the company’s financials.
Within the capital market business, the company’s broking segment is volatile and faces challenges like low cost brokers and decreasing volumes. The company’s retail distribution aided the group’s profitability in Q3FY19, taking the AUMs to Rs.8960 crore, a growth of 20 per cent YoY. A slowdown in capital market activity led to the company’s investment banking segment reporting losses.
The company’s wealth management AUMs increased 7 per cent to Rs.16,400 crore, revenue increased by 2 per cent YoY. The revenue growth was tepid on account of SEBI order to cap total expense ratio as most AMCs enforced a cut in distributor commissions.
Conclusion
In conclusion, the financialization of savings, investors moving their wealth from physical assets to financial assets, improving investor awareness, rising middle-class aspirations and growing SIP culture all augur well for the company and the industry. The company’s household contribution to equity remains very low at less than 5 per cent, which means there remains a long runway for growth. The cyclicality of the company's businesses is a key issue and the company's performance in the near term will be a function of the sentiments in the markets. The company reported poor financial performance in Q3FY19. The secondary markets have remained subdued for the last 2 quarters. The company is likely to face near term headwinds. By virtue of the above factors, we recommend a SELL.