Motilal Oswal Financial Services Ltd.

Transcription

1 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Jan-16 Mar-16 Mar-16 Apr-16 May-16 Jun-16 MANAGEMENT COMPANY VISIT REPORT NOTE July 8, 2016 Motilal Oswal Financial Services Ltd. Attempting to deliver a more robust RoE NOT RATED Nifty: 8,336; Sensex: 27,167 CMP Rs385 Target Price - Recommendation NOT RATED Key Stock Data Sector Finance Bloomberg / Reuters MOFS IN/MOFS.BO Shares o/s (mn) 142 Market cap. (Rs mn) 54,663 Market cap. (US$ mn) m daily average vol. 10,073 Price Performance 52-week high/low Rs398/254-1m -3m -12m Absolute (%) Rel to Sensex (%) Shareholding Pattern (%) Promoters 72.0 FIIs/NRIs/OCBs/GDR 13.1 MFs/Banks/FIs 2.3 Non Promoter Corporate 0.7 Public & Others 11.9 Relative to Sensex We met the management of Motilal Oswal Financial Services (MOFS IN) to get a perspective on the company s growth and earnings strategy. MOFS has over past few years been investing to expand fund-based non-broking businesses. These businesses have meaningfully evolved over past few years in terms of size and returns. Going forward, MOFS intends to continue investing in it s traditional equity broking business to strengthen competitive positioning as well as take advantage of a likely upswing in economy while focusing on expanding it s funds based portfolio. We present key takeaways from our meeting. Key Takeaways Re-allocation of capital to funds based business MOFS re-allocated ~Rs3bn equity used for equity financing (LAS, derivatives) to it s fund management and home finance business thereby making a shift from equity market lending to a potentially high RoE business. MOFS intends to build a strong funds based business to sustainably improve it s RoE from 12.4% in FY16 to high teens. Equity broking business key contributor of capital to non-broking businesses Given the stable capital commitment required for equity broking business, the equity broking business has been generating surplus and the same, post-dividend, has continued to provide sufficient growth capital to MOFS fund-based business. MOFS has incremental commitment of Rs3bn (FY17E-FY18E) to it s home finance business with a discretionary allocation to it s asset management schemes. Rising AUM building annuity income profile of AMC business A good performance by equity schemes (PE, AMC), investments in origination capability (in wealth management), and focused marketing (tie-ups with leading distributors, commercials)have helped MOFS expand it s equity AUM to Rs133bn (excl. third party MF distribution), a CAGR of 84.7% FY14-FY16. This has begun generating steady annuity fee alongwith a performance fee in wealth management and PE business (AUM Rs82bn in FY16). Aspire Home Finance a strong leverage play on affordable housing Aspire's focus on affordable housing gives it headroom to leverage capital aggressively (due to low risk weights). Aspire has built a Rs20bn pure affordable housing loan portfolio in under two years of operations and is positioned to grow aggressively going forward. Outlook MOFS diversification is likely to sustain strong traction over next few years and should be supported by a favourable equity market outlook, maturing retail investors providing AUM stability in the capital markets business while the home finance business offers a promise of evolving into a leading affordable housing player. Source: Capitaline MOFS Sensex

2 Key highlights from the management meeting Re-allocation of capital to funds based business MOFS management has been focusing more aggressively on delivering healthier RoEs to stakeholders. It s strategy has thus involved winding down equity deployed in low yield business and re-allocating the same to non-broking businesses that can deliver better returns. As a consequence, the company lowered by ~Rs3bn equity leveraged for segments like LAS (loan against securities) and cash futures / arbitrage and re-allocated /invested the same in fund management and home finance business. Simultaneously, MOFS has also focused on strengthening it s retail broking franchise to take advantage of a likely upswing in equity market volumes. MOFS envisages the consolidated RoE to improve from ~12.4% (reported) in FY16 as the size of fund based businesses expands. Aspire, the affordable housing subsidiary, has already reported a 16% RoE in FY16. Fig.: RoE showing signs of pick-up Fig.: Dividend payout steady despite capital Fig.:commitments 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 11.7% 12.4% 9.4% 9.2% 3.3% RoE % 50.0% 35.0% 35.0% 35.0% 40.0% 26.0% 30.0% % % 0.0% LHS - DPS (Rs.) RHS - Dividend Payout (%) Source: Company Equity broking business key contributor of capital to non-broking businesses Asset light retail franchise model requires low capital intensity MOFS conducts equity broking business through it s subsidiary Motilal Oswal Securities Ltd (MOSL). MOSL s retail broking expansion is franchisee driven with the company franchisees investing in front office infrastructure and MOSL providing the crucial back office support required for handling high volume of transactions.this is done through MOSL s centralized operations in suburban Mumbai. MOSL offers full-service equity broking in the retail segment and it s strong support function to franchisees is complemented by dedicated and trained relationship managers who provide inputs generated by the company s research desk. The overall retail broking and distribution reach of MOFS increased to over 2,000 locations in FY16 compared to 1,743 locations in FY15. The company continues to maintain a strong presence in the institutional broking space. Sustaining market share in overall equity broking volumes MOSL s retail broking and distribution client base has increased at 4.6% CAGR FY12-FY16 despite tough equity market conditions. While the overall market ADTO (average daily turnover) was down 10%YoY in FY16, MOSL achieved a 17%YoY increase in it s ADTO thereby adding 50bps in market share. MOSL s market share stood at 2% in FY16. 2

3 (Rs bn) Management Visit Note Motilal Oswal Financial Services Ltd. Figure: Retail client base has consistently improved over a period of tepid retail participation overall Broking business profits key source of growth capital for non-broking businesses Equity broking business generated Rs605mn PAT in FY16, ~35.8% of the consolidated PAT Rs1,691mn. There is likely to be additional carry income from the exit of a PE fundin FY17E. The broking and fund based (investments) business is thus expected to generate steady profits providing crucial growth capital required for the newly minted housing finance business. With the strengthening of retail equity broking presence over last two years, MOFS management believes it s expansion has been timely and the company is well positioned to capitalize on an upswing in equity volumes. MOFS is committed to infuse another Rs3bn in the HFC subsidiary Aspire Home Finance over FY17E-FY18E. Surplus profits flow into MOFS AMC allocations as sponsor commitments. MOFS has invested Rs5.9bn in MOFS AMC schemes and has unrealized gains of Rs1.2bn on it s investments. MOFS sponsor commitments to it s AMC schemes is the company s way of professing faith in it s equity market and investing expertise and the management believes it builds credibility in the eyes of potential clients. Rising AUM building annuity income profile of AMC business The fund management business of MOFS comprises four key categories: 1) mutual fund AMC (Rs51bn), 2) wealth management (Rs54bn), 3) private equity (Rs28bn), 4) and third party MF distribution (Rs26bn). The total funds under management stood at Rs158bn in FY16, an increase of ~52%YoY. Figure: MOFS has a pure equity AUM 0.70 Retail broking and distribution clients (mn) % 80.0% 60.0% 40.0% 20.0% 0.0% 21.6% 24.4% 22.0% 21.0% 16.4% 17.6% 29.7% 31.7% 21.0% 38.0% 34.0% 35.2% 37.8% 31.7% 28.0% 32.1% 22.9% 10.8% 12.2% 12.0% MF PMS PE TP MF Dist. MF PMS PE TP MF Dist. MOFS earns a fund management fee as well as carry income on it s fund management business, except in 3

4 the mutual fund business, where there is no carry income. It follows a 2/20 model in PE and PMS, that is, 2% fund management fee and 20% share in fund performance. The 20% share generates the carry income for the company. In FY16, MOFS generated fee income of Rs2,235mn from asset management business, a growth of 77%YoY. Aspire Home Finance a strong leverage play on affordable housing Aspire Home Finance got the HFC license in May 2014 and in under two years of operations, the company has built an affordable housing portfolio of Rs20.9bn. Aspire is a step-down subsidiary of MOFS, with MOSL being it s holding company. The company has presence across 51 locations in the states of Maharashtra, Gujarat, and Madhya Pradesh. These are Aspire s own locations displaying the company signage and do not cross sell any of MOFS products. With ~21,000 accounts, Aspire s average ticket size stood at a little under Rs1mn with most individual accounts revolving around the mean ticket size and LTVs of 60-65% at origination. Aspire is positioned as a pure play affordable housing player and aspires to grow only in the individual housing segment. It focuses on salaried as well as the self-employed category of borrowers and would directly compete with Repco Home Finance if present in the same geography. Aspire has instituted an employee stock option scheme wherein every employee is entitled to stock options, thereby making the employees more conscious and active participants in the company s growth process. Aspire s growth is no doubt extremely fast paced, if compared with peer Repco, which is in similar lending category. Repco took ~10 years to reach Rs20bn loan book compared to Aspire s <2 years. It can be argued that Repco achieved the next Rs20bn in a similar time frame but the moot point here is initial growth has to be slow given the time required for testing and maturing of processes. MOFS management however believes the processes have definitely undergone rigorous testing in the first year of operations. There is also a strong comfort in the fact that the rejection rate of proposals at H.O. level, where final due diligence and loan sanction happens, has come down strongly. This is seen as a reflection of strengthening origination skills of branch level employees. Aspire achieved disbursals of Rs18.9bn in FY16 and intends to repeat the same in FY17E. In FY16, Aspire had a PBT of Rs613mn (up 1,486%YoY) and PAT of Rs400mn (up 1,731%YoY). Valuations MOFS trades at 32.8x FY16 consolidated (diluted) EPS Rs The company valuations are at a significant premium compared to it s peers. Table: Comparative valuations Company CMP (Rs) M-cap (Rs mn) EPS (consol.) (Rs) (FY16) EDEL , IIFL , MOFS , P/E (x) 4

5 Financial Summary Profit & Loss Account (Rs mn) Ratio Analysis (%) Net operating income* 4,598 4,611 7,380 8,811 Operating expenses 3,243 3,502 5,462 6,813 Operating profit (excl. other inc.) 1,355 1,109 1,919 1,999 Growth (%) 0.4 (18.1) Other Income Operating profit 1,438 1,151 1,956 2,246 growth (%) 3.0 (19.9) Exceptional items 181 (556) 0 0 PBT 1, ,956 2,246 Growth (%) 6.0 (63.2) Tax expense Tax rate (%) Net profit before minority interest 1, ,433 1,633 Share of profit in Associate Minority interest (9) (21) (19) (26) Adjusted net profit 1, ,436 1,691 Growth (%) 5.0 (63.8) * Net operating income is arrived at after netting off finance cost Operating ratios Cost-income ratio Net profit / net operating income Valuation Shares o/s (mn.) (FV Re.1) Diluted EPS (Rs.) BVPS (Rs.) P/E (x) P/BV (x) DPS (Rs.) Dividend yield (%) Roa (%) Roe (%) Balance Sheet (Rs mn) Share Capital Reserves & Surplus 12,033 11,565 12,808 14,223 Networth 12,179 11,703 12,949 14,365 Minority Interest Borrowings 0 1 7,856 23,745 Other long term liabilities Current liabilities 4,849 5,983 7,563 11,636 Provisions Deferred tax liabilities (net) Total liabilities 17,729 18,432 29,448 50,906 Cash and bank balances 2,144 1,678 2,720 2,867 Fixed assets 3,111 3,072 3,001 2,921 Investments 1,481 2,930 8,140 12,311 Loans and advances 5,156 5,279 9,605 24,610 Other non-current assets ,032 Other current assets 5,837 5,449 5,971 7,165 Total assets 17,729 18,432 29,448 50,906 Source: Company; IDBI Capital Research 5

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