Motilal Oswal Financial Services Limited (MOTILALOFS) Earnings Call Transcript & Summary

Good morning ladies and gentlemen. I'm Janice, the moderator for this conference. Welcome to the Q3 FY '20 and 9 months FY '20 earning conference call for Motilal Oswal Financial Services Limited. We have with us today, Mr. Raamdeo Agrawal, Chairman; Mr. Motilal Oswal, MD and CEO; Mr. Navin Agarwal, Managing Director; Mr. Aashish Somaiyaa, CEO, Motilal Oswal EMC; Mr. Shalibhadra Shah, Chief Financial Officer; and Mr. Rakesh Shinde, Investor Relations. [Operator Instructions] I would now like to invite Mr. Navin Agarwal to make his opening remarks. Thank you, and over to you, sir.

Good morning, everybody. It is my pleasure to welcome all of you once again to the Motilal Oswal Financial Services 3Q FY '20 Con Call. I'll start by running you through some financial performance of the company for the quarter. During the quarter, the consolidated PAT for the consolidated entity was INR 1.65 billion, which is up almost 4x on a year-on-year basis. Consolidated profit for the 9 months period is INR 4.37 billion, which is up about 3x on a year-on-year basis. Consolidated net worth stood at INR 35.4 billion. Net debt is INR 42.5 billion. And the ex Home Finance ended at INR 13.6 billion. Effectively, excluding the investments and Home Finance business, we had a net cash balance sheet. The return on equity for the 9-month period for the consolidated entity stood at about 21%. In terms of the key highlights for the quarter, the AMC AUM has grown by 7% on a year-on-year basis to INR 401 billion. The private equity and real estate AUM is up 8% year-on-year to INR 66 billion. The wealth management business, AUM is up 15% year-on-year to INR 189 billion. Distribution business AUM is up 16% year-on-year to INR 104 billion. We've seen positive net flows in the mutual fund business for the second consecutive quarter on the back of improved performance across the board for all our products. The Q3 performance overall should be viewed in the context of muted flows, in-flows for both the asset management and the private wealth business for the industry as a whole, a lackluster IPO & QIP scenario and multiple changes in the regulatory framework of brokers. The home finance business reported a INR 16 crores profit after tax for the quarter, and sales ramp up and profitable growth is the next key agenda for this business. We have chopped out a sizable expansion in the distribution network for both the asset management and the Broking & Distribution business, which should drive the next leg of growth for both of these businesses. I'll now talk about individual businesses, starting with the Asset & Wealth businesses. The asset and asset management business across mutual funds, PMS and AIF, had an AUM of INR 401 billion as of December '19, which is up 7% and the AMC ranks #12 in terms of total equity assets. In PMS, we maintained a leadership position. Our revenues for the quarter stood at INR 1.44 billion. Our profit stood at INR 410 million, it's up by 22% year-on-year. Our equity mutual fund AUM stood at 210 billion, 1.9% share of the overall industry equity AUM of INR 10.8 trillion. Our share of quarter net assets comprising of PMS and AIF is the highest among the entities at about 47% of the total AUM and it continued to rise. Our several schemes ranked top quartile in performance over 1-year as well as since the inception, and this has resulted in strong traction in the gross inflows and also some traction in the net inflows during the quarter. Karaikudi business has an AUM of 66 billion across 3 growth capital funds and 4 real estate funds. This business has delivered on profitability and scalability front. The strong performance in positioning is also aided new fundraise as we closed IBEF III, which is an equity fund, during the year with an AUM of INR 23 billion and IREF IV, which is our fourth series of real estate fund. We expect to close the fund at about INR 12 billion AUM in the March quarter. The current AUM is just over INR 11 billion as of December quarter. The wealth management business, AUM grew by 15% year-on-year to INR 189 billion. The net adds for the quarter were at INR 7.4 billion. RM count of this business has reached 134 as of December, and our trail revenues predominantly cover our fixed costs. Investments in strong RM addition has suppressed the reported profitability for the wealth business. Overall, Asset & Wealth revenues are at INR 5.7 billion for the 9-month period, and account for 28% of consolidated revenues. Profits are at INR 1.46 billion and account for [ 30 ] consolidated profits. Turning to the capital markets business. The capital market business comprise of retail broking, institutional broking and investment banking businesses. Revenues for this segment was at about INR 9 billion in the 9-month period, accounted for 44% of the consolidated revenues. Profits were at INR 1.4 billion in the 9-month period, and accounted for 31% of the consolidated PAT. The broking and distribution business profits stood at INR 1.43 billion in the 9-month period. In the retail broking and distribution business, our market share in the high-yield cash segment continues to rise. In fact, the cash market share overall should be at a lifetime high during the current quarter. Our overall market share improved by 30 basis points quarter-on-quarter at 2.6% extra in the 9-month period. Our strategy to bring in linearity through trail-based distribution business is showing results. The distribution business AUM is up 16% Y-o-Y to INR 104 billion. With only 16% of the INR 1.3 million client based tapped, we expect continued increase in the AUM and fee income as a number of clients to whom we cross sold and the number of products per client cross sold rises going forward. In institutional broking, there was substantial improvement in rankings in Asiamoney 2019 poll with the #1 rank in overall sales, #1 rank in sales trading, #1 rank in corporate access and #2 rank in terms of overall best local brokerage. This has been the result of focused, differentiated research, products with over 250 companies across 21 sectors and a coverage by the team. Investment banking business continues to be impacted by the headwinds faced for the ECM segment and toward deal closures, although overall transaction pipeline is encouraging. Turning to the Home Finance business. We reported a profit of INR 16.1 crores for the quarter, INR 21.4 crores for the 9-month period. Margins have improved to 5.2% in the 9-month period as our yield on advances are up on a year-on-year basis and cost of funds are lower by 20 basis points on a quarter-on-quarter basis. Our incremental cost of borrowings are nearly 100 basis points lower than the overall cost of borrowings [indiscernible] about 10.2% as of December 2019. The loan book stood at INR 38 billion as of December. Disbursements in the 9-month period about INR 1.5 billion. A new book source from April '18 validate the new trade policy with 11 cases of 90-plus out of total 4,500 loan cases. Asset quality remains sequentially stable. Our reported GNPAs have gone up on a quarter-on-quarter basis because as of September, we had separated a part of the book to the ARC. If you were to include the rollbacks in the 90-plus on the ARC book, the new overall 90-plus is stable on a quarter-on-quarter basis versus an increase that we reported for the standalone book reversal home finance. More importantly, the 0 to 90 DPD is down meaningfully in this quarter compared to the previous quarter by over 1% of the overall loan book. Our CRISIL has upgraded the rating of the home finance business to AA- stable outlook from earlier A+ stable, which is also helping us in terms of bringing down our cost of funds, which are down 20 basis points this quarter and incremental cost of borrowings are 100 basis points lower than the overall cost of borrowings right now. Strong support from the parent continues. Our total capital inclusion in this business stands at INR 8.5 billion. We have limited borrowing repayments for the next 1-year strong undrawn borrowing lines, and the ALM takes us in a very comfortable liquidity position. Turning to our fund-based businesses like commitment to our asset management products and other products like private equity and real estate. During 9 months, we made additional investments of over INR 1 billion. The total quoted investments, including unrealized gains were at INR 16.6 billion as of December. The cumulative XIRR of these investments is about 18% for us. To sum up, the asset and wealth business is now largest contributor to our profits and robust growth in AUM. The home finance business legacy issues are behind with incremental focus on profitable growth. We remain excited about the headroom to grow in all of our business and their ability to generate free cash flows. We are now open to any questions [ to answer ]. Thank you.

[Operator Instructions] We take the first question from the line of [ G Vivek ] from GS Investment.

Yes, first of all, congratulations on superb growth in net profit. And just wanted to ask about the not so great growth in the top line. Why is it insipid and how does the future look like? Coming to the capital market division, how do we compete with the [ Zerodha ] and flight brokerages being offered? And is the worst over for the home finance business?

This is Raamdeo Agrawal. Actually in booking, we are quite aware that the business model from earlier completely paper based, so it became demated. And from there, now it is shifting to completely online kind of a situation. But even in the developed markets, there is a -- there are 2 types of brokerages, one is complete discount broking and second is a full-service brokerage, where research and advice is being given. And that has been our strength. And so we are not seeing any stress in our client set, in terms of migration to the newer side of brokerages. We are -- but almost 60% of our transactions also are online. So it's not that we are not aware of or there is lack of competency to become that kind of broking house. So I think, we firmly believe that very significant portion of total broking will remain advice driven and result driven, and that's where we want to dominate. And that is what is our strategy, and you will see that our cash brokerage -- cash segment market share is continuously rising. So we are seeing good traction. In fact, we are seeing aggressive growth possibility in the years to come in our model of business. And clearly, the future, in the future, the only online will increase the market share. And at some point values becomes completely discount brokerage. I mean it doesn't take more time for us to, at some point of time, slowly to move into that side also. So that remains about the brokerage. As far as the asset management is concerned, I think we are in a -- right now, my AUM is at all-time high at about INR 41,000 crores, but that is more because the mark-to-market. The actual inflow is literally 0 or [ INR 300 crores, INR 200 crores negative for ] the year. So we are preparing. We are creating bigger -- sorry -- much more robust infrastructure, so that next round of growth we can participate when the inflow starts becoming bigger and the income moves away from SIP only to SIP and bulk kind of inflow because our inflows have been a lot more numbered by larger tickets than SIP. As for the housing finance is concerned, that clearly has turned around. And the earlier concerns of last year, if you see the last year's result, it was dominated by losses in housing finance business because, this is the cleaning of the books. But now the cleanup process is complete, in last quarter again, the -- that percent of amount [indiscernible] into ARC. But in December quarter, if you see, I think it is the cleanest possible result we have ever had. But it is still it is not up to the mark in terms of -- we cannot say that we are very good in housing finance. Still, the gross NPAs and all are in manageable proportions, but not absolutely under control and we are not less approached. But we are profitable. And as we go forward, we think that quarter after quarter, we'll start improving. But I would say, another 4, 5 quarters, before you can say that we have good traction in this business. So all in all, I think it's the operating conditions are very stable. There's stress portions, which were there that is removed. And as a tailwind it starts in the economy or in the markets, I think we are there to seize the growth opportunities.

And sir, last question is about any plans of encashing our society investments and investment banking -- because we are sitting on good profits over there?

I didn't get you. What you said?

A Society investment bid by us, something similar to Au Finance Bank where we had a bonanza. Something similar is expected in the future?

Out of the investments you're saying?

Yes, your private, we have also made some investments in companies, which is expected to come out with IPOs in the near future. Something of the value of Au Finance Bank?

Yes. So investing, see -- out of your INR 3,500 crores net worth, INR 2,200 crores invested. The biggest strength of the company is to invest in equity in one form or the other, whether it's equity, legal staff, mutual funds. So you know, what all opportunities come in the future and where we allocate that. But 100% of the free cash flow will go into equity, that is for sure. Now in what form it finds a way, that, only time will tell.

We take the next question from the line of Madhukar Ladha from HTC Securities.

Sir, can you quantify what is the net sales in the AMC in this quarter?

Yes. The net sales number is INR 80 crores in this quarter.

INR 80 crores. Sir, and if I look at your mutual fund and PMS, AUMs, your mutual fund AUM has grown about 6% quarter-over-quarter and the PMS has grown only 3.5%. So have you seen some redemptions in the PMS?

Yes. The net sales in the PMS has been marginally negative, and the mutual fund business has been positive. But these are quarter-on-quarter numbers. In the preceding quarter, we had our net sales positive in PMS and a net sales negative in the mutual fund business. But the overall net sales, both for the second quarter and the third quarter, as for the AMC as a whole have been positive.

Right. So -- and we have the new regulations now, which increased the ticket size to INR 50 lakhs. How do you see this impacting fresh flows in the PMS business?

Yes. I think it's a matter of -- it's a very minor matter of adjustment. The reason being that we've been through this in the past. I think even 2012, the INR 5 lakhs was made INR 25 lakhs. Now the INR 25 lakhs is made INR 50 lakhs. On the other hand, we already manage reasonable book of [ ARX ], which is at INR 1 crores. So my sense is that, it's not a big -- it's a temporary -- there might be 1 or 2 months of adjustment period, but I don't think it's a big disturbance at all. The other thing to keep in mind is that, it might -- a lot of times, when a new manager comes in, then people want to just experiment and start small. I -- my perception is that this might be a little bit of a hindrance for somebody who is just starting on day 1 and trying to source clients. But people who have a huge client base and a huge distribution network or partnerships in place, I think they will be able to adjust faster. Long story short, I don't see a disruption because of that.

Right. My other question is on the wealth management business. I noticed that our AUM has gone up, but our top line has declined in that business. So why is that happening? I didn't sort of get that.

If you look at the share of the trail income in the overall business, that's gone up, which is the reflection of the AUM. But if you look at the net sales, they have been quite muted and lower on a quarter-on-quarter basis also and on a year-on-year basis. So the upfront income, which a net sales generate, has come down, and that's the reason why the overall revenues have come down. The share of upfront on a year-on-year basis would be significantly lower and the share of trail would have been significantly higher. And the impact of upfront is reflected in the overall revenues.

Are we still booking upfront fees that we get right in the first year itself or on the day we get it? Or are we amortizing it over a period -- of over a year.

So actually -- so what happens is basically, at the stand-alone level, they will be accounted as an upfront, whereas if it is a consolidated level, and that's an intergroup fee received, that would be amortized because the AMC would also have amortized it.

Okay. So that's why, so then in the inter segment, it will get canceled off?

That's right.

And -- but then, in that case, the wealth management should show a higher revenue, but it's not showing because the net new sales are little lower and the proportion of tail has gone up?

Yes. That's right.

Okay, understood. And on -- actually, on the housing finance business, the shoot up in the gross NPAs is a little troubling. And when do we see this coming under control? I mean what is our strategy over there? Why is this still happening after actually removing a big portion out of the books?

So as I explained in the opening remarks, if you were to consider the ARC book, plus the book that we have in the home finance, then the 90-plus increase is 0 in this quarter because the rollbacks from 90-plus in the ARC book are no longer accounted in this book, right? That's a separate entity. However, if you look at the 0 to 90 during the current quarter, that's down by more than 1% of the loan book. So that's more than 2x of the 90-plus increase. So overall, 1 plus has actually declined by over INR 20 crores. The 90-plus is increased by just over INR 20 crores. And the 0 to 90 is down by more than INR [ 40 ] crores.

What is it?

And as far as the 90-plus increase in the stand-alone home finance business is concerned, we think that the incremental roll forward in 90-plus should be negligible in the coming quarters.

I think another thing is that very unusual situation. I mean, every single NBFC HSC is supposed to be denominator keeps growing at 20% or something. That is not happening. Right now we are [ degrowing ] by 10%, 12%, sorry.

Yes.

So that distorts the ratio further. But your point is well taken, and I told you in my remarks also that we still -- so I think Q4, let's see, I mean, operating guys will keep giving you guidance. So we hope that Q4 will be a better number.

Got it. Sir, our fund base income and the treasury has shot up substantially in this quarter. What are the key investments that have performed in this quarter?

Yes. So actually, if you see a treasury, that is predominantly invested in our own equity mutual funds and PMS, which have actually performed during the quarter. So the alpha is because of that. And if you see the OCI increase also, which is our investment in the Au's Small Bank Finance which we have done, which has also performed during the quarter. So these are the main investments, which I have on.

Okay. See, the PMS and the Au Small Finance, that should not come in the PAT, right? Because they are equity shares. So you're saying it's part of OCI, that's where...

That's right. That is a part of OCI. That's right.

What is that component? What is the -- so the entire OCI is because of this? Or...

Yes. The entire OCI is because of the equity shares, which is PMS and Au Small Bank Finance.

Okay, okay. And 2 more questions on the tax rate. I noticed that your housing finance tax rate is shot up in this quarter and your overall ex housing tax rate is down to about 13%. Yes, so just wanted to understand that.

So actually, housing finance we continue at the tax rate of 35% option. Because they are considering the impact of the earlier brought forward loss. We are adjusting that. So still that is beneficial for us. But on all the new -- all the other businesses, we have moved to the 25% tax regime. Plus, the alpha is also on account of the fund-based profits, which are now not taxed under the MAT. So if you see because of these 3 impacts, our average tax rate has gone down. On a normalized basis also, what would happen is that our average tax rate would be continuing in around about 20%, 21% only because of the fund based profits of which don't have now a MAT impact.

We take the next question from the line of Prateek Poddar from Nippon India Mutual Fund.

Sir, any thoughts on the trend book, it keeps on declining every quarter. Sir, I was just wondering what is happening over there? That's question #1. Second is, could you give you the net sales number for the wealth management business and the distribution business on a quarter-on-quarter basis? That's question #2. And lastly, the third question is a bit strategic in terms of all the businesses today are subscale, how do you make them scalable? And what is more needed in terms of investments or are investments done for this to become more scalable is the third question.

Sorry, we didn't get your first question.

You're not audible. You'll probably have to come closer to the phone.

Okay. Am I audible now? I'm sorry, am I audible?

Yes.

Yes. It's better.

Yes. So my first question was, sir, if I look at the SIP books, SIP book was closer to INR 170 crores a month -- a year ago, it's down to INR 130 crores. So I just wanted some clarity onto that as to what is happening. That is one. Second is, could you give me the net sales number for the wealth management piece and the distribution piece on the quarter-on-quarter basis? That's question #2. And third is all the 3 businesses today, which is wealth management, distribution and the AMC, are subscale. So moving vertically up what is more needed? Or what are your thoughts in terms of timelines? Or any broad vision in terms of where do you see this businesses in the next 2, 3 years here?

There will be 2 components to the SIP decline that you mentioned. One will be related to the fact that there will be a certain pace at which the SIP which have been registered, those -- they will run out of their actual course for which they were registered. So let's say, somebody registered for 3 years, 4 years, so there is a natural, what you can say, closure to the SIP, which has been registered and fresh installments, let's say, somebody registered for 36 months and 36 months are over. So the question is that, are you registering fresh SIPs at a -- what pace are you registering fresh SIPs at? So the first part of your question is answered in the sense that, the pace at which new SIPs are registered is slower than the pace at which new SIPs were registered in 2017. But of course, a lot of them would be -- would have run their course. Second is that -- second point, which I want to tell you, we are transparently reporting what is the accurate number of successful SIPs gone through. I don't mean to ring alarm bells out here, but whatever is reported in the industry is a gross number. If a gross number of INR 8,200 crores is reported, doesn't mean that there is INR 8,200 crores worth of successful SIP, which has actually gone through in that month. So there will be 2 parts to it. One is some SIPs run their course. And second is, at any point in time, I have to keep reporting to you what is a successful collection. If I just say that there are 3,000 SIPs and they had 2,000 bookings installment, and I just keep reporting to you mechanically what is the gross number, that may not always be the true picture. So overall, some -- so this is a fact of life and this is the actual number which comes through, which we're reporting here.

We take the next question...

I think the other questions are left to be answered.

Okay. Then please, go ahead, sorry.

Net sales on the wealth management side was INR 1.5 billion in Q2, which is INR 1.3 billion in Q3. And the net sales on the distribution side of the business was INR 2 billion in Q2, which is INR 3.5 billion in Q3.

Yes. And the third part of your question was about certain businesses, which you thought were subscale which ones were you referring to?

No. I was just saying, you have to move upwards, right? I mean, you upgrade investments, all the businesses are subscale today. You are in investment mode. Is that investment over? Or do you need more investments in terms of scaling these businesses? You have to move vertically upwards, right? That is what your objective would be, right?

Yes. So as we discussed earlier, basically, we are not in an investment mode in most of our businesses. However because the free cash flows from all of these businesses are actually quite strong. But having said that, we have completed 5 years in most of our mutual fund schemes and we're doubling the distribution network in terms of city count as far as the asset management business is concerned from about 25 to about 50. And as far as the broking and distribution business is concerned, we have about 22 branches right now. And we're looking at trebling that number to about 65 over the course of the next 6 months' time. So there are substantial investments that we make all the time because we believe that the headroom to grow in each of these business is large. As I also alluded to in the opening remarks, the wealth management business has seen a very strong RM growth to about 135 numbers. And these RMs are not really profitable in the first 3 years of their existence in the firm. And so as they become more vintage, they'll turn profitable as well, right? Fourthly, as far as the home finance business is concerned, that is over 110 branches. And as you saw the last quarter, disbursement was just around INR 60 crores. So the run rate for a viable branch is a much higher disbursement per month. So as we achieve that, over the course of the next 12 to 18 months, that business should also see the benefits of operating leverage. So significant investments have been made in multiple businesses. More investments, as I articulated, are being made over the next 6 months. And we think that because of whatever is happening to the overall marketplace, the opportunity to gain scale and change ranks is quite good for anybody who's a strong brand with a strong balance sheet.

Sure. And sir, just on the wealth management part, could you -- I mean, on a quarter-on-quarter basis, I see some dip in terms of net sales in the wealth management part. Why is that so and...

At the overall asset management business, also they've seen alarming dip, right, in the quarter-on-quarter net sales, December quarter over September quarter. And so basically, even as the gross sales traction has been pretty strong in the asset management business, in the distribution business and in the wealth business, the redemptions also continue to be growing particularly, in the wealth business. And because of which, the net sales are lower in the third quarter compared to the second quarter. It's in line with how the industry trends are also.

Next question is from the line of Sumit Bhalotia from MK Ventures.

Congratulations for a good set of numbers. Part of my questions have been answered. Just coming to the housing finance business, I understand that there's a technical reason for the GNPAs going up. But last quarter, we had mentioned that we had cleaned up the entire book and our focus shifts from collections to growth. And if I look at the employee cost in this quarter, there's a quarter-on-quarter dip. So just wanted to understand that whether our focus is back on growth and how this cost structures will move going forward?

[indiscernible] substantial degrowth in the employee cost, okay? In fact, the number of salespeople we have increased hiring. So maybe some kind of, I think, branches, 3 or 4 branches may have come down. Maybe few operations guys were extra have kind of, I think, has been rationalized. But -- and of course, we have centralized credit for that salary -- documented salary cases also. So I think that's what really has happened this quarter.

Okay. So coming to the deployment of free cash flow, I understand there is a regular need for each of the businesses for investment, as you detailed out for the brokering and AMC business. But overall, the cash requirement or capital requirement that we had in the housing finance division is over now. So going forward, how do we intend to deploy that surplus cash? Will we be putting it into treasury as we have been doing earlier? Or is there any plan of some, let's say, something like on a sort of buyback or on those lines?

Yes. So we have our dividend policy, where almost 25% to 30% will be paid out clearly. Last year, we paid out actually 50% because we not only want to pay out this thing and we want to have a steadily growing dividend amount. So dividend will definitely be one of the core of this thing. Second is that since we know we have confidence in equity and we know how to invest in equities, so we will keep building up our treasury in our -- all the products, whether it's private equity or public equity. Yes, everywhere, we'll keep investing. And then we'll keep looking at a strategic opportunity in terms of maybe some kind of acquisition can come on the way. Or -- so if you have the large balance sheet, liquid balance sheet, there's been a lot of opportunities going forward and we keep examining. So because organic growth is funded through the P&L itself of the year. That actually doesn't consume any of the free cash flow. Actual free cash will be consumed when we actually buy something significant. So I mean, our balance sheet size is still not that big. It's just about INR 3,500 crores. So maybe, we have to put up another building or something. So those kind of strategic investments will be made. Otherwise it will go to treasury.

Okay. Sir, one technical question on the borrowing front, the consolidated borrowings that we report is around INR 4,600 crores. Ex of that housing finance borrowing, that still stands around INR 1,500 crores. So which divisions are these borrowings deployed?

Yes. This is deployed in our broking business. So it is a part of our working capital and margin requirements in the broking business.

And what is the cost of debt that we have in broking?

Yes. Cost of debt is 8 quarter, average cost of funds that we did.

Okay. Okay. Sir, finally, just last question is, there's so much of negative news flow going around change -- regulatory changes in the broking segment overall because of this Karvy breakout. What kind of impact -- I mean, how can this impact us given that our margin funding business is huge and there's lot of -- majority of the income that we have in the broking also comes from the interest income that [ we are ] on the float. So will we get affected and in what form?

So I don't think so we have been impacted negatively because of this. In fact, we see serious consolidation efforts -- in case we -- is now accelerating because the people with brand, people with capital, people with very strong governance, I would say will get disproportionate market share. In fact, taxing of new client acquisition also, you've seen the numbers growing. And as Navin said, that we are expanding into new branches and also, a lot of focus on cross-selling. So I think we remain confident about what -- the way we are doing our business.

We take the next question from the line of Bhavik Mehta from Antique Stockbroking.

Sir, it's very heartening to see the ADT of ours has been growing so substantially. And I assume that has to do more with the mid-cap and the small-cap value that we're having and the consolidation of small brokers that's going through. But however, sir, the revenue on quarter-on-quarter basis of us has been at INR 300 crores only, somewhat over there. So what is the reason for the -- reason for the yields to drop over there? Could you just give us some light on that?

Actually, that's on account of the lower revenues in the funding book, basically. That is one of the reasons. So broking revenues have actually grown, whereas the funding book average book size has been lower. That is one of the reason on a quarter-on-quarter basis. The second thing is that the business mix also keep on changing. In this kind of volatile market the delivery volumes also keep on kind of I think shifting from delivery to options because that the markets are volatile and small caps really, I think, are not doing so well. So I think the volume shift happen from delivery transactions to options.

[indiscernible] you are franchising to branches. We should do more of franchising for revenue which is less.

We take the next question from the line of Nischint Chawathe from Kotak Securities.

Sure. Just on -- this is on Aspire. Just trying to understand what would be the stage 2 or basically, target equity?

So we haven't gone down to all those details as yet. But I think our Investor Relations can quickly share that with you.

Fair point. I'm just trying to understand, just as your GNPLs have kind of increased, and I think you might have mentioned that day 1 is kind of gone down. Just trying to understand where day 30 is?

Yes. So Stage 2 is at INR 240 crores.

And how has that moved quarter-on-quarter?

So quarter-on-quarter, actually, that's come down by about INR 25 crores.

Sure. On incremental kind of growth in this business, now if you could give us some guidance in terms of what are you really doing over here? Is there any -- what is the difference? And how do you see the growth trajectory moving out here? I think many of your peers out there are kind of slowing down in this business. So just trying to get some views from your side?

We are slowly building the sales engine. If we look at quarterly numbers, it's almost INR 60 crores disbursement, I think truthfully, our target is to keep on moving up cautiously, looking at the competitive scenario. We have no problem about the capital as you know that. But I think the quality comes first and then the growth.

But have you seen any stress in the sector? Because some of your peers have kind of gradually moderated their growth rates. So just trying to understand, have you seen any kind of challenges for good business?

We have not seen any kind of stress with term, I think, only problem what we have seen is that the [indiscernible] happening across because we've been lending at 13% to 14% loans, there are some banks specially, public sector banks who maybe -- who are actually aggressive on acquiring book -- a high-quality book because most of the low-quality book has shifted now to ARP. So we see some concern there. But customer engagement, we're starting to have the programs where all the customers are being engaged. We are actually trying to make sure that our customers are [indiscernible] so that BT comes down. But sales, as I said, we don't see any concern on the ramping of the sales. It's our own internal kind of cautious approach which we are right now following. Most of the place had state level has been hired national sales manager is also in place. We don't have focus on quality, especially through our mobile apps that each and every meeting is tracked, every lobbying is tracked. So I think building a very strong foundation for a much higher level of expected growth in the future.

And for now you are looking, maybe next 1 or 2 quarters, you would be looking at a similar run rate and then this kind of takes off from here? Is that -- I mean, based on whatever the current plan is?

So we've already grown on a modest base quarter-on-quarter for the second quarter and the third. We are hoping that, that ramp-up should continue in the coming quarters also.

We take the next question from the line of Kajal Gandhi from ICICIdirect.

Our first question is on the broking side. You have not shared the cash market share at this time?

So historically, that is kind of [indiscernible ] but professionally really I think so far, we have really not kind of I think shared because there is a cash, within cash intra-day, within cash delivery, it's just on cash, retail cash, PCG broking cash. So I think that amounts to lot of complications in terms of data.

Okay. Sir, broadly, you have quarter-on-quarter gain good increase in GDP or the [indiscernible] from the market share of 2.6%. So what is the reason? Anything specific there? And what will be your share of sub-broker channel in overall volume?

So in terms of branch as sub-brokers, if you look 2, 3 years back, it was a completely sub-broking stamping model. Now the branch in terms of revenue, I would say net revenue branch is much higher than the franchisee channel, although we are growing on both sides. So it's quite balanced impact sense today, between the franchisees and the branches, although, the number of banks are 22, but we are renting to about [ 50 ] branches. And my confidence is much more that the branch direct channel is going to grow faster, not only in terms of booking revenue, but also in terms of cross-selling opportunity.

Sir, what is the impact that you see because of this intra-day cash margin being introduced. Is there anything specific that you see because of this?

Yes. I think working capital will slightly increase. And in the short term, the volumes may come down, but markets always keep on kind of, I would say, reflecting for some time pausing and then reacting, take it to the next level. With any kind of practices and regulators obviously, I think, has helped for the medium to long-term growth for the business.

But is there a scope of getting fees because it's not taken up by both brokers and investor community?

Sorry. I think we have been consulting with the regulators. And I think somewhere, we have got some kind of reprieve in the short-term for the margins, intra-day margins.

It's under discussion stage with the regulator. Because effectively, it is implemented from April 1. Today only reporting has started, but the effective implementation is from April 1 of this year.

We take the next question from the line of Prakash Kapadia from Anived PMS.

Congrats on a good set of numbers. If I look at the broking and distribution side, where seems to be large part of our client base in the opening remarks, you did mention about room for expansion. So any specific geographies we are looking at or west will remain pretty high in the broking and distribution side given the equity culture, it's more here?

Maharashtra, Gujarat becoming the dominant players in the market, also they have the highest markets in terms of states, but we have now across the country from Maharashtra to Assam everywhere or to north or the east part of the country. So we are presenting now about 550 cities. Wherever we see the opportunity, I think we keep on adding more and more kind of distribution.

Okay. So the specific geographies, if you can give some color, would love, is there room for higher growth sale east because of...

Southern part, we were slightly weaker. I think east, we have the highest market share. West, we have also highest market share. I think, maybe on the southern part and slightly another side from UP, Bihar, on the other side, where now we are trying today to increase our distribution. So basically, you see the active client breakdown, north and south are roughly 15% each, and there's a lot of headroom to grow in both of them. In west, that contributes 60% of the active client base. So while there is headroom there as well, I would say the growth rates will be much higher for all our businesses in terms of clients, in terms of AUM, whether it's broking, whether it's wealth, whether it's asset management, both in the northern and the southern part of the country.

So on the AMC also, this kind of an approach will continue where west would dominate as of now, but there is room to grow in other of these geographies also?

There our presence in B30 0, and so if you see the doubling of the distribution footprint, we will be entering in a lot of the B30 cities also. So that is one. And secondly, more presence in the larger metros, the top 4, top 5 from 1 location to 2 or 3, so both of those will guide our overall growth there also.

Right. On ETFs and index funds, we have seen a lot of product launches. If I look at say our mid-cap ETF, a 9-year-old product, AUM is INR 30 crores. So that's not been very large in terms of size. So what is the rationale of your recent ETF and index launches? And is there some kind of AUM we are targeting because all of them seem to have garnered INR 30 crores, INR 40 crores each in each scheme. So if you could give us some sense?

See, I think that -- this is Aashish here. If you see the growth of the ETFs otherwise in the market, it is all basically government related. It is either CPSE, Bharat-22 or it is this EPFO money, which is going into one particular Nifty ETF and another sensex ETF. So bulk of that money, according to me, 90% of it is related to government business and related to institutions. Fundamentally, how many ETFs have retail cost participation is something which is debatable because, generally, all these ETFs which are launched, people skim the discount and then the number of investors and the [ corpus ] starts dwindling. So I'm -- I have seen that ETF is not something which has fundamentally taken off at all. And there are 2 reasons for this: one is that we have a very, very big mutual fund base, and we have a very, very big stock broking base. And ETF falls in between because the operating platform is of stock broking, but the -- but it's basically like a mutual fund where people are used to filling forms and cutting checks. So ETF has somewhat fallen between the cracks, other than the government business and the institution business. Now when we are talking retail, this is the reason why if you see recently whatever we have launched, we have launched open-ended index funds, which are tracking the index, but they are basically open-ended mutual funds where you are transacting with the AMC. So then the operating platform has become easy, all these Paytm money and our website, our app or for that matter Kuvera or whichever grower or whichever platforms are there, these index funds are subscribed on those platforms. Totally, our passive corpus is now approximately INR 800-odd crores. But what is interesting is that this INR 800-odd crores is -- bulk of it is in the last 3 to 4 months that it has come through. And at the same time, it is more than 20,000 investors, which has come through in these last few months. So if you -- if we want to actually scale the business on the passive side, then it needs a diversity of products, and it needs retail friendliness. Otherwise, it will be only institutional. So a lot of lip service to the passive business, but it's not retail friendly. And that's the reason why we are trying to make it retail friendly through these index launches. The other thing, why are we doing, I think, in previous conference calls, we have discussed this. We are basically expecting that the market will go the U.S. way, where either there are active specialty or alternate strategies on one extreme. And on the other extreme, there will be passive. Anything which is passive plus, index plus, which is very closely mimicking the benchmark with minor underweight, overweight, I think that is something which typically gets cannibalized as the market develops. So we are basically batting for a polarization. That on one side, you would have passives and on the other side, you would have active specialty or you would have alternates. That's what we are battling for. That's why we have created this business.

That is very helpful, Aashish. And last one, Aashish, from my side. If I look at the Motilal Oswal Nifty Index Fund, the expense ratio is much higher than other schemes. I would imagine that the new index fund, it should have been lower. So it's having 0.65 as compared to 0.39.

So the open-ended nifty index fund, which we created in November, the direct plan PR is now 10 basis points. All the others, which are small cap, mid-cap, bank, Nifty 500, those direct plans are at 35 basis points. Nifty index, there was a revision which was done as soon as the NFO got over, it was mid-10 basis points.

Okay. Okay. Maybe the fact sheet is not updated.

Excuse me, sir. Sorry to interrupt, but requesting you to please speak a bit louder, Mr. Kapadia. We are unable to hear you.

Sure. I thought the earlier fact sheet maybe I have seen, that is why we believe...

Yes, yes. I got you, but we made the revision.

We take the next question from the line of [ Nishit Shah from Acquara Investment ].

First, I wanted to ask on our housing finance business. So if we look at our year-end, so it is at 3.6x. So at what levels are we comfortable?

So I think at least the next -- I'm going up to 5x or so is not something that should be a concern, maybe even a little higher than that. As of now we are quite comfortable in terms of -- the disbursement plan for the next year will still not be taking us to that level.

Sir, can you quantify the disbursement plan for the next year?

As we said, if you see the quarter-on-quarter numbers, 2Q was higher than 1Q, and 3Q was higher than 2Q. We expect that momentum to continue. However, we have not put down target that we have to disburse anyways.

So next year, we won't be seeing any equity infusion in the housing finance business also, right?

I don't think it's required for the next couple of years, actually.

Okay. And sir, what are our plans for this business going forward? Any resting of strategic investors?

As of now there are no such plans.

Okay. Sir, and there was this upfront commissioning ban in PMS business, so how will this impact us? And currently, how do we pay our distributor in PMS?

As for the circular, which came on January 20, what has the banned is charging the customer a set up fee when he registers for the investment. So that is what has got banned. I don't know if there are any further circulars or any further information coming to us. But technically speaking, upfront commission hasn't been banned, upfront collection of setup fee has been banned. I think that is one thing, that's the nuance to be kept in mind. Coming to your question, bulk of the distribution, the largest of private bankers in the country who are our important partners, they all have moved to trail because they don't want uncertainties in their own business plan. So anyway, if you ask me, out of every INR 100 of PMS which comes in, it used to be 60%, 70%, which had some component of upfront commission being paid. I think it is falling down to about 30%, where there is some upfronting -- 30%, 40% where there is some upfronting. But slowly, slowly, all our B2B partners are preferring to move to trail. So nobody wants that uncertainty. That's the point.

Okay. And how much would we be paying to them?

We, on an average, pay only the first year's earning and not even the full first year's earning. So it would end up in the range of -- the average in the first year would end up in the range of 150 basis points.

150 bps. Okay. And sir, we launched this large and mid-cap schemes. So how much did we get in the NFO? And what is the current AUM?

We received about INR 305 crores and the current would be just under INR 400 crores.

And sir, in Q2, our employee cost was around INR 143 crores, which was 14% higher Y-o-Y. And in Q3, our ancillary cost is again INR 132 crores. So was there some one-off in Q2?

Basically, it was on account of some ESOP cost reversal in this quarter because of which it is showing flattish.

Okay. So the trend going forward be INR 140 crores, INR 145 crores going forward?

Yes. So as we continue to add employees on each of our businesses, it would marginally keep on growing, especially in the broking business.

Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Shalibhadra Shah for closing comments. Over to you, sir.

Yes. On behalf of Motilal Oswal Financial Services, I would like to thank every investor for attending the Q3 FY '20 Con-Call. In case of any further questions, please you get in touch with me or our Investor Relations desk. Thank you, and have a good day.

Thank you. On behalf of Motilal Oswal Financial Services, that concludes this conference. Thank you for joining us. You may now disconnect your lines.