Motilal Oswal Financial Services- Survival of the biggest

Market Cap-8,610

CMP- 580

Key Business Segments

Asset Management

The company has an overall AUM of 30,000 crores as on March 2020 with AUM of 16,000 crores from mutual funds, PMS AUM at 11,600 crores and AIF AUM at 1,900 crores.

The company has a strong SIP contribution with its average SIP ticket size greater than the industry average. SIP’s bring along a lot of operating leverage into the business with no major addition to the fixed cost. It has maintained a steady market share of 1.4% over the years with further huge scope of cross selling to existing 4 lacs active clients.

YearSIP AUM (in CR)Average ticket sizeAverage ticket size of industry
2020163037002750
2019200041003070
2018136044003375

AMC yield trends across the industry

MOSL enjoys highest yield in the industry mainly due to higher margins PMS book. PMS yields are between 100-125 bps. Unlike other AMCs, MOSL has higher proportion of equity vs debt which is lower yield segment in AMC business.

Comparison with top AMC’s

ParticularsHDFC AMCNipponMotilal
  Market cap52,80018,8958,600
Revenue20031132131.6
AUM3,50,0004,22,00029,700
PAT1,26241236
   

MOSL AMC has grown at CAGR of 30% since FY16. The company is poised for higher than industry growth mainly due to cross selling to existing clients, financialization of savings of middle income groups. The MOSL branding ie QGLP, Think Equity Think Motilal, large team of RMs and cross selling would immensely benefit to catch a bigger pie which is small vs other AMCs in the listed space.

The company is also entering the passive space of Index funds and ETF’s which is a very small number as of now but passive investing is at a very nascent stage in India which can scale up massively. Currently majority of the money in ETF’s is invested by the EPFO.

In America almost 30% of the AUM is passive based AUM so comparing that with India passive investing has not even scratched the surface for the Indian retail investors and this provides a huge opportunity for the AMC space as well as for MOSL.

AUM Growth Trends for MOSL

Broking and Distribution

Industry Consolidation to benefit the bigger broking outfits: The Indian broking Industry has seen huge consolidation since last 5 years with the top 10 brokers contributing to more than 37% of market share. Lower margins, advent of financial tech in online trading and growth of discount brokers are creating these trend. Such thin margins and same fixed cost has led to lot of small and medium size brokers shutting their shops. As per SEBI, the number of brokers from 9,000 in March 2014 has come down to 2,400 in December 2019

(pls refer the article below)

https://www.financialexpress.com/market/bses-small-brokers-finding-it-tough-to-survive-against-regulations-emerging-technology/1806091/

Active client base at 4 lacs is growing at 23% CAGR since 2014. Another important shift in broking industry is advent of online trading which is the major reason of industry consolidation. Currently 67% of MOSL clients trade online, this ratio was 15% in 2014.

The company also has a strong distribution network with an AUM of 90 bn which grew at a 50% CAGR from 2016. The current penetration is only 16% of the client base hence giving headroom for growth.

The company has also started Insurance broking business this year and have partnered with HDFC Life, ICICI Prudential Life and Bajaj Life for life insurance products. In times of volatility in markets non market distribution can help sustain revenues and in turn fixed costs.

The lockdown push:

During lockdown, average 57% clients traded online with a peak of 64% which is highest ever clients traded online. Its website got highest ever traffic & leads of more than 20 lakhs & 19k respectively during the lock down.

Key Charts which show a huge shift towards Financialization of Savings

MF industry despite the recent correction post COVID19 is growing at an impressive 20% CAGR since 2014. The industry has corrected from 25.5 lac crore to 21 lac crore in March 2020.

Post COVID19 and lockdown in India, interesting trends have been seen in demat account openings. About 1.2 million new investors opened demat accounts with the Central Depository Services (CDSL) alone in March and April. About 6.18 lakh new demat accounts were opened in CDSL in March and another 6 lakh in April. This record participation even in a down cycle and global health crisis indicates the strong uptrend towards financialization of savings. Total demat account at 4.21 cr, showing an impressive CAGR of 13% since 2014.

https://economictimes.indiatimes.com/markets/stocks/news/lockdown-sees-more-retail-investors-join-the-queue/articleshow/75525291.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Wealth Management Business

India currently has the 4th highest HNI in Asia Pacific region after Japan, China and Australia. The wealth management industry is growing at a rapid pace in India due to regulatory changes. Although 8 percent of the total population in India represent 45 percent of the total wealth, only 20 percent wealthy families take advice from wealth managers.

The business has grown at a rapid pace since 2015 but was a bit muted in 2019 and 2020. AUM as on 2020 was 156bn against 41 bn in 2015.  In October, 2018 SEBI banned upfront commissions for distributors, but MOSL wasn’t impacted with this order because the company always adopted a trail model where the trail revenues cover their fixed costs and hence there is no fear of dropping margins.  Current trail as % of revenues is 70% vs 38% in 2017.

The company has been consistently investing in this business segment by adding new RM’s and training them. The RM count as on March 2020 is 129. According to management, currently 42% of RMs are less than 2 years of vintage. RM productivity will pick up in line with their rising vintage. As existing RM vintage increases, profitability of the business can improve commensurately.

Housing Finance

HFC turnaround visible- After selling a pool of asset book of 540 cr to Phoenix ARC for 260 cr and lower of Cost of Financing, the housing finance business has restored  profitability of 39 crore against a 132-crore loss in 2019. In 2019 additional loans worth 290 crore were written of and there were aggressive write offs during the year. The company has now set up a new management and new disbursement policies in place and are looking to scale up the business slowly and carefully. Their GNPA at the end of the year is 1.8%. Net NPA is at 1.3% and provision coverage ratio stands at 66%. This indicates that the management is now being very careful in disbursing loans.

The disbursements were 5.92 bn in 2020 as against 2.9 bn in 2019. The company has set up a legal team in place to recover the written off amounts of 290 crores last year.

Key Negative- Biggest overhang on the stock is the Home Finance brand, MOSL invested 800 cr in Aspire and the returns has been ZERO. The turnaround in this business and prudent capital management will be important trends to watch in the future.

Private Equity, Investment Banking & Proprietary Investment

Private equity and investment banking provide a very small contribution to the revenue. Private Equity manages an AUM of Rs 66 bn across 3 growth capital PE funds and 4 real estate funds.

IBEF funds

Fund 2 is fully deployed 100% across 11 investments so far. Fund III was launched in FY2018 which raised 2.3 bn. It has already deployed 820 crores across 4 investments and has a robust deal pipeline for investments going forward.

The investment banking business is a very small proportion of the business and does not give steady profits but this segment gives MOSL brand positioning, corporate and industry connects. Deals in 2020 QIP: HDFC – 18.9bn, HDFC bank- 28bn, L&T finance- 10 bn, Piramal- 49.9 bn

IPO’s: AU small finance:19.1 bn, MAS financial servives-4.6 bn.

Proprietory Investment- is promoter’s own money invested into its own funds which is 2,046 crores quoted plus unquoted investments as on March 2020. The promoters having this piece in the listed entity indicates their strong belief in long term investment and investing their personal money into own MF & PMS funds setting example of good corporate governance.

Financials & Key Charts

Growth Trends

Leaner Balance Sheet vs Peers-MOSL has one of the lowest D/E ratio in the NBFC space. In spite of poor returns from Aspire which has 25% of total net worth, the company has a D/E of mere 1.5 times. NBFCs generally have D/E of 5-6 times.

Networth 3,100 cr and a market cap of 8,600 cr indicates a strong balance sheet. MOSL reported a strong Operating PAT(ex mtm) of 398 cr in FY20 vs 256 cr in FY19 a growth of 56%.

Key Moving Parts

  1. MOSL against a debt of 4,627 cr has investments of 3,088 cr (including promoter’s investments) making MOSL practically debt free.
  2. Promoters Skin in the game, have personal investments in many MF & PMS schemes.
  3. Cross selling, branding and strong RM team will aid growth in AMC.
  4. Almost all businesses have huge potential of scalability in their existing sub segment.                    

Negatives

  1. Aspire doesn’t turn around into profitability.
  2. Current COVID 19 crisis impacting businesses over the long term.
  3. AMCs underperformance vs benchmarks.
  4. Prolonged poor economic environment creating redemption pressures.

Why Buy at CMP ie 580

AMC business 30,000 cr, MOSL generates highest yields in the industry. AMC can be valued at 3,000-3,500 cr.

Massive consolidation in the broking industry giving way to the bigger players snatching market share of the small and medium size brokers. Majority of revenues coming from online trading giving huge scope of operating leverage.

Wealth Management has 40% of RMs with less 2 years of vintage, creating huge scope improving profitability.

Lowest Debt to Equity at 1.5x in the NBFC sector.  Promoter’s proprietary investments at 2,000-2,500 cr provides additional comfort to the current market cap.

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