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

Good morning, ladies and gentlemen. I'm Stephen, the moderator for this conference. Welcome to the Q1 FY '21 Earnings Conference Call for Motilal Oswal Financial Services Limited. We have with us today, Mr. Motilal Oswal, MD and CEO; Mr. Raamdeo Agrawal, Chairman; Mr. Navin Agarwal, Director; Mr. Shalibhadra Shah, Chief Financial Officer; and Mr. Rakesh Shinde, Investor Relations. [Operator Instructions] Please note that this conference is being recorded. I would now like to invite Mr. Navin Agarwal to make his opening remarks. Thank you, and over to you, Mr. Agarwal.

Good morning, everybody. It is my pleasure once again to welcome all of you to the Motilal Oswal Financial Services Earnings Call for the first quarter ended 30th June 2020. At the outset, I hope each one of you and your families are safe and in good health during this pandemic. I'll start by giving you some broad highlights. Our consolidated profit after tax for the quarter grew by 29% year-on-year to INR 1.67 billion. Our operating profit, excluding the mark-to-market on fund based investments grew by 4% year-on-year at INR 1.04 billion (sic) [ INR 1.03 billion ]. Our reported profit was higher due to mark-to-market gains of INR 1.3 billion on fund-based investments. However, the reported profits also absorbed the impact of onetime provisioning towards exceptional item comprising of full provision on account of negative price settlement of crude oil derivatives position of the customers in the commodity broking business. Our consolidated net worth as of 30th June stood at INR 32.8 billion. Our net debt is at INR 37.4 billion. Excluding Home Finance, the net debt is INR 9.3 billion, which is down by 4% year-on-year. And our overall debt equity has declined to 1.4, including the Home Finance business and 0.5x excluding the Home Finance business. We're effectively a net cash company net of our equity investments. Return on equity for the first quarter stood at 33%. In terms of the business highlights, the broking business reported the highest ever quarterly profit. There was a gain in market share sequentially. We had very strong pace of client addition and there were continued investments in talent and distribution network. Our AMC AUM is now back to near highs. The quarterly trend of positive net flows in the AMC continues. During the quarter, we digitally launched India's first NFO of S&P 500 Index funds. And our branch network expansion within the AMC business, including sales team expansion and IFA network expansion, continued during the current quarter. In the Home Finance business, we saw a sharp reduction in the cost of funds driving margin expansion. There was continued traction in collection efficiency and falling morat numbers month-on-month. We made a special COVID-related provisioning of INR 21 crores till now. Our provision coverage ratio has now increased to 87%. And we continue to see superior quality of the new book underwritten. We provided moratorium to 26% of our customer base as of 30th of June. I'll now deep dive into individual businesses. Starting with the capital market business. Our capital market business comprises of retail broking, institutional broking and investment banking business. The revenue for this capital market segment was at INR 3.4 billion, up by 24% on a year-on-year basis, and contributed to 44% of consolidated revenue. Profit, excluding exceptional items, were at INR 573 million, up by 58% year-on-year and contributed to about 59% of the consolidated operating profit. In the Retail Broking & Distribution business, our market share improved by 40 basis points quarter-on-quarter to 3%. We witnessed strong traction in new plant addition driven by franchisee as well as the branch channel, with 86,000 plus clients acquired in the quarter, which is nearly 3x of the clients acquired in the same quarter last year. Our distribution AUM stood at INR 102 billion, with 15% of our 1.5 million broking client base tapped for a cross-sell, and we expect continued increase in AUM and fee income as number of clients to whom we've cross-sold and number of products per client cross-sold rises. In Institutional Broking, there was continued traction in client addition and revenue growth. We launched our first addition of virtual conference amid this lockdown period. Investment Banking business continues to be impacted by the headwinds faced in the ECM segment and poor deal closures. Turning to our asset and wealth businesses. Our asset management business AUM across mutual funds, PMS and AIF stood at INR 352 billion, which is up by 18% quarter-on-quarter. Profits for the quarter stood at INR 24 crore -- INR 240 million as AMC's profit was impacted on account of lower average AUM post the unprecedented market condition -- market correction in March. Our equity mutual fund AUM is at INR 196 billion, which is 1.9% of the industry equity AUM. Our share of alternates is 46%. Several of our schemes rank in the top decile in performance terms over the last 1 year as well as since inception. Our private equity business has committed AUM of INR 65 billion across 3 growth private equity funds and 4 real estate funds. We closed IREF IV with an AUM of INR 11.5 billion in February 2020, and the fund has already deployed INR 5.3 billion across 9 investments. Wealth management AUM stood at INR 178 billion, up by 14% quarter-on-quarter. RM count was at 131, and our trail revenues predominantly cover our fixed costs. Investments in strong RM addition continues to suppress the overall profitability of this business. The overall Asset & Wealth Management revenues stood at INR 1.5 billion for the quarter, contributed to 19% of the consolidated revenues. Profits were at INR 292 million and contributed to 30% of the consolidated operating profits for the quarter. Turning now to the Home Finance business. The Home Finance business reported profits of INR 111 million in the first quarter. Reported profit looks suppressed due to higher tax rate of 54% on account of reinstatement of tax asset post migration to the new tax regime. The cash tax for the Home Finance business for the quarter is 0 and for the full year will continue to be 0 versus very high reported tax rate of over 50%. Yield on advances improved by 40 basis points year-on-year to 14.3% in the first quarter while cost of funds were down by 50 basis points year-on-year to 9.8%, resulting in expansion in our spreads for the Home Finance business to 4.5% and net interest margins to 5.8% during the first quarter. We raised INR 4 billion in the first quarter at incremental cost of funds of 8.6%. This compared with our average cost of funds of 9.8%, and we expect the average cost of funds to trend lower over the next 3 quarters on top of the 50 basis point saving that you've seen in the first quarter. Our loan book for this business stood at INR 36.8 billion at the end of the first quarter. Disbursements were very muted at INR 238 million. The new book sourced from April 2018 validates the new credit policy with 10 cases in 90-plus out of the over 6,000 loan cases that we have booked. Our gross NPA stood at 1.75%. Net NPA stood at 1.28%. Provision coverage was at 87% and our 1 plus days past due stands at a single-digit 9%. We further enhanced provisioning in 1Q by INR 130 million, considering a potential COVID-19 impact. As a result, provision coverage is up to 87%. Our total COVID-related provisions stand at INR 210 million on a INR 36.8 billion book as of June end. Our OpEx is down by 210 -- down to INR 210 million for the first quarter, which is 27% below the highs. And as a result, our cost-to-income ratio is now down to 36%. We've provided morat facility to 26% of the customer base as of June 2020. Our total capital infusion in MO Home Finance till date is at INR 8.5 billion. The net gearing for Home Finance business stands at 3.2x and the Tier 1 capital adequacy stands at 42.6%. We have limited borrowing repayments for the next 1 year. Undrawn borrowing lines of INR 7.4 billion. Cash on the Home Finance balance sheet of INR 3 billion, which places us in a very comfortable liquidity situation. Turning to our fund-based activities, which include commitment to our asset management products. Our total quoted equity investments, including unrealized gains, stand at INR 12.7 billion as of the end of first quarter. Our total equity investments, including alternate funds, stands at INR 18.6 billion. To sum up, the capital market business, which is our oldest business, and our cash cow, has achieved new highs on various parameters, including market share, profits and continues to benefit from industry consolidation and also led by our knowledge-driven digital offerings. Our asset management business is likely to gain from strong product performance and its niche positioning. The Home Finance business legacy issues are behind with incremental focus on profitable growth. We remain excited about the headroom to grow and the ability to generate free cash flows by each of our existing business. We're now open to Q&A. Thank you.

[Operator Instructions] The first question is from the line of Prakash Kapadia from Anived Portfolio Managers.

On the broking side, what is leading to the surge in retail participation? We've seen record DMAT accounts being opened in the system. We've seen retail participation almost touching 70% in terms of contribution to cash volumes. So what is driving this? Is this sustainable? Because at a time, mutual funds are seeing muted inflows. So is this sustainable? And you mentioned in the PPT you are looking at expanding on South and North market. So what is the game plan there? What is our market share? What is the room for growth, if you could give some sense on the broking business?

Prakash, this is Motilal Oswal. The retail volumes definitely had kind of sharply moved up this quarter. I think the retail volume, one is the function of the volatility in the market. So we're seeing kind of, I think, huge volatility in the market, and most of the volumes actually are contributed by the day traders. Delivery volumes kind of, I think, also is a function of the action of the small and mid cap [Audio Gap] serious fall and generally we saw, I think, a good amount of recovery. Now it's very difficult to say whether I think these volume exposure will keep on happening. But I think this digital and the technology kind of access to the market, especially in lockdown period has kind of, I think, pushed huge number of investors who were inactive into active mode. And a lot of new first time investors are actually coming into the market because, I think, the debt and real estate and all the alternate asset class is not doing well. Globally, I think, the technology-led kind of market volumes on retail side has gone up drastically. So we are in line with the global trend. In short term, I don't know, but longer term, I see the structural change in the way broking business is happening. Now to really, I think, explore further benefit, we are actually also expanding into new footprint where we have lesser branches, but we also are, I think, expanding into new branches. Some of the kind of, I think, brokerages which actually has become weak [Audio Gap] new employees and new customers actually are coming in to us, especially to the players that have very good kind of I think advisory capabilities apart from the technology. So we have a digital platform [Technical Difficulty]. So we remain confident, yes.

We lost your voice. I couldn't...

Yes. So tell me what is that you lost? I don't know where we lost?

I think you were talking about the broking business and all of a sudden your voice was not legible. Second part of the...

The last 30 seconds, you can just repeat.

Yes. So we have got a huge number of -- actually, the customers -- our whole model is digital model where every customer is mapped on adviser, okay? And because of very strong advisory capability, as well as the best of the technology, we call ourselves the only [Technical Difficulty] the best in terms of capability from the digital perspective. So even in the smaller client who comes with INR 10,000, INR 20,000 of margin also we map a relationship manager and adviser. So because of very strong relationship and advisory capability and best of the technology, I think we see we have a very unique model on broking side.

And if you could comment on the North and South foray where we are looking to expand market share. So what is the kind of headroom for growth, what is possible?

No, I think market share -- you've seen the market share also moving up. And we not only look at the market share but we actually look at the revenue base market share. So today, thanks to, I think, many players who are just letting -- pushing in new clients acquisition at kind of, I think, whether the client is giving revenue or not. So we are very revenue focused and not -- of course, we had a very strong presence, but I think the size of opportunity we see is really also very large kind of because West, I think we have very large penetration in terms of the outlets. I think South also, we are very strong, but North, I think, because of the kind of size of the country, I think we're also now expanding aggressively through our own branches in North.

And secondly, on the AMC business, so if I look at some of the listed companies with scale, all of us know, there is a huge pent-up operating profitability. So at what scale does AMC business start getting to a 35, 40 bps kind of EBITDA margin and where are we in that? So at what scale does that happen? And the last thing was how much money have you spent on buyback till now?

Yes. So Shalibhadra, you want to speak more about buyback and then maybe Raamdeo or Navin can pick question on AMC.

Yes. So, I think, Prakash, on the AMC side, if you see our costs have largely been freezed basically to about INR 23 crores, INR 24 crores a quarter kind of a cost. And if you see our PAT yield also last year had been about 40 basis PAT yield. Now what has happened in this quarter, of course, average AUMs have been lower but more or less the costs are flattish. So that is one reason where you see. And as we've already said here that we are back to our sort of highest kind of AUMs. We are very close to that. So once we are around that, definitely, we'll see the improvements happening in the overall PAT margin and EBITDA margin. And coming to the question on the buyback. Basically, we have spent about INR 10 crore till date on that. But however, as of now, the market price has already shot up. So our maximum buyback price is INR 650. And that is the reason why we are unable to buy it back now. But in case if we get an opportunity, we still have 3 months window to buy it back by 30th September to close book.

Yes. And just to answer your question on the AMC business, Prakash, our EBITDA margins for the quarter is at 32%. Now what you have ended up seeing is that the June average AUM was down very sharply, although the markets made their lows on 23rd of March and then recovered during the June quarter, but the average AUM is substantially lower while in our case, unlike a lot of the other listed companies where they sharply cut back on expenses, particularly brand building expenses, our cutback in expenditure is not proportionate. So the sharp fall in the AUM quarter-on-quarter led by the market disruption with sticky cost structure has led to this fall in the EBITDA margin. It may not be appropriate to look at this in this perspective to the AUM because as you may have noticed the share of passive in the total AUM has gone up on a year-on-year basis meaningfully to almost 7%, 8%. And there, obviously, the bps yield right from top line to bottom line is lower. So if you look at the EBITDA margin then itself, you should see with recovery in the market, and we've also alluded that our AUMs are back to nearly the highs, you will see a bounce back in the EBITDA margin depending on where the markets sustain.

The next question is from the line of Madhukar Ladha from HDFC Securities.

First, can you talk a little bit about the regulatory changes which are being implemented in broking? And what sort of an impact can this have on our business? And from your perspective, what is the regulator trying to achieve over here?

Yes. Madhukar, So I think, what you are asking in terms of the margins and regulatory changes around that, what I understand, right?

Yes, yes, yes.

Yes. Sure. So basically, I think on the margin side, so I think what we have seen is a couple of changes. So I think what they have come up with is on the changes on the upfront margin basically where in terms of the intraday position the client has to bring in the upfront margin. So that is coming in a phased manner starting December till June 2021. And basically, today, what is happening is that there is an upfront margin on the intraday which is, in fact, funded by a broker. But that is something which the regulator wants the client to bring in as the overall proportion. So that is something we would see some impact on it on the intraday only on the expiry days as of now. But that also, we see that there has been a representation made around that in terms of because these positions don't land up in any end of the day creating any margins at all. They are auto squared off because these are intraday positions. So there is no actual margin which is deployed at all. So the regulatory representations have been made. But nevertheless, even if that has to impact, it can come on the expiry date. And for that also, I think what is being talked in the industry is that, once again, the margin funding would come into play to fund that. So I think that is what is, as far as the overall upfront margin on the intraday is concerned. And on the upfront margin on the cash, I think just a couple of days back, already I think it has been relaxed because earlier it was VAR margin or 20% whichever -- it was VAR margin, but now they have cut it down to 20%. So I think that is a positive move as far as the cash trades are concerned as an overall impact.

Just on the first derivatives part of it, what percentage of our F&O turnover would be this intraday trading? Any sense of their...

So actually...

That would be at risk, right?

See, basically, I don't have that exact number. But generally, what we see is the largest -- so basically, as an overall proportion to my top line, if I have to see, it could be about 6%, 7% of my top line.

Okay, okay. And you said that the margin funding book can be used for this to fund the intraday margin requirements of -- so they would then also then need to give you some collateral. How would that work?

So basically -- so once again, here, effectively, intradays are not generally having collateral because you have -- what is there is your overall collaterals on the end of the day position. But on an intraday basis, it is a funding arrangement between the broking or the NBFC with the banks or institutions. And basis that those lines are given because once again the money flows back after the -- on the expiry closing hours. So effectively, it is something which would be similar sort of a line. Though it is at early stage to call out this, but there are talks in terms of creating a model around it.

Okay. And on the cash margin side, I believe it's just being deferred till 1st September and then it will get reinstated. Is that -- is my understanding correct on that?

Yes, that's right. So basically, they would raise it from 1st September which is at 20% margin on the cash side.

So -- but after 1st September, it will be VAR margin or after September, it will be 20%?

No. So after 1st September, it will be 20% maximum cap margin or VAR margin, whichever is lower.

Whichever is lower, okay.

So till now...

So that is the change?

Yes, that is the change because from January 1, it was only reporting of the margin and no penalty. After September 1, there will be penalty if there is any failure to collect that 20% margin or VAR margin, whichever is lower.

But sir, all those other restrictions on BTST that -- I was reading somewhere that securities need to come into your account, only then you could sell them. And those sort of rules will that -- is that still applicable or...

Yes. Those are all applicable. So now...

Those will all be still applicable, right? So -- and it's only a deferment by a month. So even that could have an impact -- that should have an impact on the cash volume side, I suppose?

No. We have been -- see, if you see cash margins are now already collected by broker because it is applicable since Jan 1. So already reporting is happening on that on a daily basis in terms of the overall cash margin what is selected. So that is already there. And now what has come is that they have implemented the penalty provisions, if that is not there. So I think we have already catched up to the collection. And now what is relaxed is that even if the VAR margin was 25%, then you still have to collect 20% only. So that is the relaxation which has been provided 2 days back.

Okay. Maybe I'll have a more detailed discussion with you off-line.

Sure, sure.

On the distribution side, what has been the net sales in this quarter? I think that number was not there.

So, I think, that is INR 150 crores.

So net new sales is about INR 1.6 billion?

Yes, yes.

And also on the AMC side, and more on the Wealth side, actually, so SEBI had proposed new rules on direct PMS and clients have to make a choice either to vote via the distribution route or through the advisory route. Because of all this -- because of the COVID situation, things had been postponed. Where does this stand right now? How much of all these -- all the other new regulations have been implemented or deferred? Can you give us an update on that?

Navin can answer to that. Navin?

Yes. Basically, see, our model, Madhukar, is mostly on the lines of being a broker dealer rather than an RIA. So some of the other firms, larger firms are actually trying to migrate towards the advisory model. But we are sticking to our earlier old model. And the other thing is that banks have certain challenges to make the choices. But as I said, banks and larger wealth management -- some of the larger wealth management firms have to do this balancing act. At our end, there is really no impact of this, and we continue to focus on being a broker dealer.

So even on the wealth management side, you will not take up the RIA model and you'll continue to be on a distribution model? Is that...

So our current model, Madhukar, you're aware is entirely distribution, right?

Yes, yes.

So as far as migrating any of this is not happening, is not planned, is what I'm telling you. And for incremental business, all the options are open. But please bear in mind that our wealth business is not a family office positioning business, right? We have much more granular, large number of clients with lower AUM. So I mean this -- so as of today, till we have a strong family office offering, this is unlikely to be relevant to us.

Understood, sir, understood. And on the PMS side, the direct PMS, have those rules being implemented? They were brought out in Jan, right? So -- and then, I believe, they were deferred.

Yes, they have been deferred. So there is still some headroom available of a couple of months as of now till 30th of September, assuming that there is no change in that time line again. But as of now, the old rules continue till 30th of September assuming that they don't review it again.

Got it. Just 1 last question. I think, on the housing finance, there was some reinstatement of tax asset. What is this exactly? Can you just explain that?

Yes. So basically, what has happened is that in housing finance, we have now moved to the new tax regime from 35% to 25% in this current financial year. So by virtue of that, we had an opening deferred tax asset which had to be written down. So while last year, we continued in the old regime, so that write-down was [Technical Difficulty].

The next question is from the line of Prateek Poddar from Nippon India Mutual Fund.

Sir, couple of questions. One is, if I see the distribution AUM and wealth management AUM, both on a quarterly perspective, Q-on-Q perspective have gone up, but the income has gone down Q-o-Q. So can you just give some thoughts about it? What's happening over there?

So that's -- if you see that, it is largely in line with the reduction in the average assets because the bulk of correction had happened in the March month when markets had corrected. And in our Wealth and Distribution AUMs, we have about 60% of these assets are equity assets. So by virtue of that, our average AUM on a trail basis continues to be lower, and that is one of the reasons which is there, although we have a very strong net sales in our wealth business, which is at a multi-quarter high. But despite that, I think the average AUMs have been lower. And slightly, the shift is more towards the debt assets in Q1. So that is also one of the reasons where there is a marginal impact on .

Okay. So it's basically the AUM correction as well as shift of assets. But your new sales have gone up, sir. If I may ask quarter-on-quarter basis, your new sales in both the Distribution as well as Wealth Management have gone up.

Yes, in Wealth Management, it is at a multi-quarter high. It is about INR 8 billion net sales. And in Distribution, it is INR 1.5 billion.

And what is leading to this INR 8 billion, sir? Is it new client acquisitions? I think you disclosed it.

Yes, it's a combination of new client additions. As we said, increasing the fixed income franchise to cross-sell to the existing equity clients that we have. So that -- it is a combination of new client addition as well as higher cross-sell of fixed income to the existing client base.

And sir, second question is, you said that in the month of July you are back to pre-COVID level in terms of AUM. Clearly, Nifty is not over there. So is it fair to say that you guys have gained market share or is it early?

No, that is not correct. Our market share is stable. We have not seen a gain. But one of the contributors to this is our successful launch of the S&P 500 product which is [Technical Difficulty].

Yes, it's a passive fund.

So basically -- so your pre-COVID level is because of this passive fund launch?

Aside of the strong uptick in the NAV, which is almost back to the pre-COVID level. So it's a combination of both of these factors.

Understood, understood. Sir, 1 just small clarification on the VAR margin to 20%, whichever is lower, which you were talking about. That effectively means that the intraday leverage now is only 5x, right, versus earlier in intraday cash segment being provided in multiples of 5, now it is restricted to 5x, right? That's a fair understanding?

No. So this is for the end of the day margin, this 20%. Intraday continues to be, once again, based on your overall risk policy.

So then, sir, from a cash ADTO perspective, and I'm just trying to understand this a bit more, the latest trends which we see, there is -- so there will be no impact on intraday cash volumes despite these margins coming in. My understanding was that now for taking intraday position you have to provide, say, your leverage is restricted to 5x versus earlier being 10, 15x. And...

So -- yes. So I think those intraday, there is a separate circular, which I discussed just back in -- when answering that. So I think that is already getting implemented from December 1 till June 21 in a phased manner. Whereas on the end-of-the-day margin, for the cash segment, it is at 20% or VAR, whichever is low. That is the implication.

That end of the day when you say is for delivery, right, or BTST? In a way, BTST, if I may put it?

That's right. That's right. Yes.

Okay. And sir, in your view, how much would the industry ADTO shrink? Because, see, ultimately, even in derivatives, expiry trading, as you said, was highest in terms of ADTO. And in a year's time, I think that will become 0 -- I mean, the leverage will be reduced to a massive extent. So in your view, the shrinkage in ADTO, how much can that be for both the segments, if at all, if you can throw some light?

I think, as of now, it's difficult to say that. But I think -- let's see how it gets implemented, and we can get on it once more.

Okay. And to your point of saying that broker can actually give a margin funding. My understanding was that the entire rule was such that the broker cannot give margin funding, right? It was in a way to curb these excessive leverage which happens on expiry day. Ultimately, the brokers balance sheet was funding that. Now I think the individual bank [Technical Difficulty] said that. So to that extent, will this be...

I said that margin funding is through the NBFC arm, not through the broking arm.

Okay. [Foreign Language] Okay. So you are using that route to bypass that?

Yes. So basically, margin funding is even prevalent today. While we do F&O margin funding, that is happening through the NBFC because basically, the margin funding through the broking regulation is for the cash segment whereas NBFC continues to do for the F&O side of the trades.

And sir, in your view, do discount brokers give this kind of NBFC arm tie-up for getting expiry day leverage?

I think difficult to comment as of now. So we're just evaluating this whole thing, as I said. And basis that, we would take a call. First, representation has already happened to the SEBI in this respect. So we'll wait and watch how things come up there, and then we would take a call in terms of what is happening.

Okay. Maybe I'll take this off-line and get into a bit of more details.

Sure.

The next question is from the line of Saptarshee Chatterjee from Centrum PMS.

Sir, my first question is on the AMC side. If I see revenue yield for mutual funds for last few quarters, it is constantly kind of declining. I understand that this quarter the base is lower, the starting base and then market moved up. But if you can give some guidance, what should be the stable state yield for the mutual fund and overall AMC?

So the regulatory changes -- multiple regulatory changes have also impacted TRs and the yields over the course of the last 2 years' time, 1.5 years' time. And to some extent, there's an element of mix change. But on a like-to-like basis for active equities and for passive equities, we see yields to be incrementally stable.

Okay. And secondly, out of the growth in both mutual fund and PMS, how much -- if you can give some color how much had come from the MTM gains and how much from net new money? You have said the net new money is positive, but we are seeing equity inflows actually lower across the industry. So how much has come from this net new money? And how -- what is the outlook on your net new flow for this year?

Our net new money is INR 3.2 billion during the quarter. Rest is all on account of the mark-to-market impact.

Yes. And as far as the forward-looking statement on what is the expectation of flows in the current year, that would be very tough, as you are aware that the gross sale numbers have come down quite substantially in the recent past. And in fact, after a very, very long time, we've seen net outflows from the industry. So at this point in time, how really the whole COVID pandemic plays out, how do the markets play out and whether -- all I can tell you is that in the past, when we've seen outflows in -- inflows in equities, the strong inflow trend has continued for a very long period of time. And so if there is a trend of outflow that you've seen just recently, to assume that, that may get over in a hurry in 1 month or 2 months' time would also be incorrect. So it is not a forecast that the outflows will continue nor is it a forecast that things will just come back strongly. I think we have to wait and watch. This is not a year where anybody could have clarity of what will be my net sales in the current year.

Yes. Actually, my question is more to understand from the view that the market is moving up, but we are seeing more kind of outflows or subdued inflows. So what are the client behaviors or client feedbacks you are getting, why they are having these outflows? Any insights on that?

Yes, there is a lot of chatter that you will hear on media with distributors that the rally is disconnected from the fundamentals, and hence, it's a good time to take profits or book profits, and that's what in turn retail investors are following. So basically, this is profit booking because of lack of conviction whether this big rally that we've seen is sustainable causing outflows and importantly, also causing gross sales to continue to come down. So a bigger contributor is the fall in the gross sales and also additional contribution is rise in the redemptions. It actually drives the number down to a negative.

Understood. Very helpful. And thirdly, on this -- to the earlier questions only, this margin, which is currently to be capped in the 20% or VAR, which is lower, what is the kind of margin currently being provided?

You're talking of the absolute amount of margin?

No, no, in percentage terms in both cash and intraday derivative.

Basically in cash, as the VAR margin collection has already been started off, so whatever was the VAR margin has been collected basically because, as I said, that from 1st Jan there was already reporting of that, and we continue to collect the VAR margins at the applicable rate.

Okay. And intraday?

Intraday, so basically -- so as I said, intraday margins are generally as of now funded by the brokers basis that, basis the overall delivery stocks in the client's bucket, basis that they are funded. And that is how the norm has been.

Next question is from the line of Roshan Chutkey from ICICI Prudential Asset Management.

Sir, just wanted to understand this intraday margin regulation from December onwards. Sir, effectively, the problem is providing financing to these customers, right, effective, that's what it boils down to, right? Sir, is it not the right understanding?

Yes, that's right. That's right.

And therefore, NBFCs or banks, what they have to revert to for getting the funding. And do you expect volumes to shrink therefore -- I mean large brokers like yourself -- and there can be consolidation in the industry and large brokers like yourself might stand to gain, I mean, in a very long short thinking...

So as I answered in my past questions, we've already answered that there have been representations which have been made in that respect because there is no end-of-the-day margin. And even this is applicable in a phased manner. So certainly, there will be some initial impact which will come, but the -- but as the market -- it is good from a longer-term perspective, it will strengthen the overall framework. And one would look at how the funding happens to the NBFCs.

And the other question I want to ask you is for the intraday business, you cannot provide funding through the broking business? Is it regulatorily disallowed?

No, presently brokers can provide the intraday funding because client is not funding that effectively. So that is already permitted. But now what they've brought is client has to fund a portion of that amount.

The next question is from the line of Hiten Jain from Invesco.

Hello? Am I audible?

Yes, sir, you are.

Okay. So I had a question on Home Finance. So asset quality, Slide #30. For June 20, we have written that 26% of our total customers are under moratorium and the chart below that for the collection efficiency trend we are saying that 85% is our collection efficiency for June month, and that also includes moratorium. So can -- is there difference between volume and value? Or anything more than that?

No, it is not...

It's the difference between the 1 EMI and multiple EMIs. So it's basically the morat number tells you what proportion of the customers have paid the EMI for the month of June. And the next number shows you that if there is a customer who has paid 2 EMIs, right, then that will take the collection efficiency for that customer to more than 100% for the month, right? But it...

I'm sorry, I didn't understand this.

So if you have INR 10,000 EMI due for the month, right, and you have paid INR 20,000 because you had 2 EMIs due. So the collection efficiency formula is cash that I've received in the current month divided by the cash that is due for the current month, right? So if I have INR 35 crores to be collected from the customers and if they paid me 85% of INR 35 crores, right, then 85% becomes my collection efficiency. But only 74% of those customers may have paid me. Some may have paid me more than 1 EMI.

Okay, okay. So you're saying -- okay. So by loan value, is it fair to assume that 20 -- more than 20% is under moratorium while this collection efficiency also take into account any EMI which has been from previous month also. So that also increases the numerator?

You take the morat percentage on value and volume to be similar for the time being, but collection efficiency includes additional EMI paid beyond the current month due because the customer may not have -- may have availed of morat for, let's say, the month of March, April, May, June, then my collection executive goes there and he realizes the grave impact of moratorium in terms of the increase in the loan tenure, right? So he chooses to pay June and May EMI this month which [Audio Gap] the collection efficiency.

Correct. This is [Audio Gap]. And the second question that I had was that the leverage in Home Finance has gone down. So is this only because of the drop in AUM? Or there has been some capital infusion as well?

So by -- in FY '20, there was no capital infusion. We had the capital infusion in FY '19 of INR 200 crores. And post that, actually, if you see, our leverage has already gone down in FY '20 itself. And further, during the course of quarter -- during this quarter, the net leverage levels remain same in Q4 FY '20 versus Q1 of this year. So the cash levels have increased drastically.

Okay, okay, okay. So the question is like the strategy around Home Finance, so how are we looking at this business? Do we intend to grow that business faster than the company? Or I mean, are there any plans in terms of infusing further capital in that business? Or how are we looking at that business in the current scenario?

See, right now, there's no plan to infuse any capital further because kind of I think our leverage is very, very low, okay? We are kind of, I think, having on the cost, I think, improve our disbursements, okay? And then I think slowly and gradually, we are increasing the disbursement, I think, after this shutdown. So month-on-month, it will be the, I think, second month where we will increase our disbursement. But I think with very tighter risk management, the most of the disbursement is happening only on documented salary which is a less risky and predictable kind of stuff. So in a calibrated way, we are increasing the disbursements. We're also having kind of people wherever the branches are there and where we think, I think, we can create good business. So the whole effort is just, I think, to move back to the calibrated growth path in terms of overall disbursements and collection efficiency, I think month-on-month efficiency is very, very high.

So [Audio Gap] to lend only to salaried incrementally?

Yes. Our target is to about 75% to documented salary and rest is only kind of, I think, segments which are kind of not impacted by COVID.

If I can just add the same distribution network which is doing disbursements of INR 20 crores right now, 40 months back in March '17 had done a disbursement of INR 300 crores. But we've always tightened our credit policy substantially, but it will give you a perspective as the same number of branches actually had disbursed in a single month INR 300 crore.

The next question is from the line of Prateek Poddar from Nippon India Mutual Fund.

Sir, can you explain your market share gains in the Broking segment, what has led to this?

Yes. So actually, we have a market share increase on both cash and F&O side of our business. And that is where, overall, it has improved. Even our proposed -- so mix has also improved towards cash further during the quarter. So both of these have led to the overall increase.

No, but -- yes, but what is leading to this market share gains is the question? I mean, is it -- whom are you gaining from or...

So basically, it is due to the delivery segment and as we have already stated that we have been continuously expanding this business, whether through digital, whether through acquiring small broking houses and the overall opportunity of consolidation available in the market. And we've seen that benefit because we've actually had about 500 employees in this business recently and have expanded further branch count as well. And that is leading to the overall enhancement of the network and increase market share gains as well for us.

And do you see this trend...

Sorry, if I can add the structural trend of -- if you look at the last 3 years, last 1 year, the top 10 brokers are anyways continuously gaining market share. So within the top 10, again, there are 5-odd out of those top 10 which are also gaining market share within the top 10. So we are part of those set of brokers who are gaining market share. In fact, that is what has been driving us to -- even before this huge surge in the retail volumes that you've seen in the course of the last 6 months, the whole planning to substantially augment the sales team as well as the physical branch network, we have -- and we're going slow right now, but we had set out to double our branch network in the current year -- more than double our branch network in the current year. So we are actually going a little slower on that plan given the COVID situation. But geographically, our presence has still a lot of headroom to grow. As we've put in our presentation, our penetration, if you divide the country into North, East, West South, the market share that you see of 3% would be much higher in West, much lower in North, lower in South as well. And so the headroom for us to take our market share up in West itself is there, firstly. Let's say, if you look at all the states in the West, our market share in Gujarat would be much lower than Maharashtra. There's a lot of headroom to open up branches in various locations where we're not even present today. And this applies even more for North India and South India. So I think geographically, the reach, structurally, the trend towards top 10 within that towards the bigger 5, continuous improvement in the research offering, in the advisory offering, in the technological capability, there are lot of levers there we see this trend of becoming bigger would be continuing, where, I think, there's another trend that I think 92% of all instrumental business in the last decade has been done by the top 10 brokers, but the market share of top 10 brokers is not 92%.

Correct. Yes. Okay, okay. That's good to hear. And do you see this trend continuing of market share gains in the next couple of quarters also, given that you have added 500 employees?

There is no prediction we make of a month-on-month or a quarter-on-quarter trend. But if you see -- I mean, these investments are being made to grow the salience in the market. I mean, if my physical geographical salience is going to be upped and the product is powerful, the offering is great, the branding is strong, we see no reason where if I open a newer branch in Punjab or in Gujarat or in Tamil Nadu, I will have -- I will not reach that market share in the next 3 years' time. It may take time, but it will definitely add to my market share in a geography where I was 0, which will mean that my overall market share should go up, but payout quarter-on-quarter is very tough to predict.

Understood, understood. No, I was just looking for a trend.

Just -- sorry, Prateek, just to add what Navin said. We always look at the revenue market share rather than the kind of, I think, turnover market share because it's turnover mix kind of, I think, and discounting part really I think, what -- we really I think avoid that. So whole effort is how do we acquire new customers? How do we kind of, I think, add to the distribution? And really, I think make sure that based on our advisory capabilities, our yield is also very high. So the whole focus is on revenue, not only on market share or not even new customers added. So new customers you can add by kind of discounting as well as without any kind of volume being contributed.

Absolutely, right, sir. Sir, and one more point [Audio Gap] said that distribution penetration, that seems to have flattened out in the last 3, 4 years. I mean, in FY '17, it was 14%. And in quarter 1 of '21, it's around 15%, went up to 16%. So is there a challenge being faced by us? Or what is it? Because I was -- I mean, you also have highlighted in the past that there is significant headroom to grow over here. So what is stopping us, sir? Why is this penetration rates not increasing?

Sorry, which -- I didn't get your question. Which distribution?

Sir, the distribution book within your retail broking. The distribution business penetration.

Okay. So how far the distribution, yes, yes, yes.

Motilalji, I'll just answer that. Basically, in the last 9 months, this AUM does not include the insurance cross-sell. So we started the process of insurance cross-sell in the second half of FY '20. And on a month-on-month basis, we've seen very, very strong traction in the insurance cross-sell. Now that comes as a part of the distribution income but does not come as a part of the AUM, right? So there are different points in time where the focus is different. Right now, anyways, the industry is facing -- as far as the equity flows are concerned, you're anyway seeing headwinds, right? So it's best to keep your network engaged. And strategically, we wanted to make this addition anyways. So while it is continuing to add to the top line, right, it is not adding to the AUM because that is not an AUM product for us.

And to even add, I think...

[Technical Difficulty] is also increasing because earlier we used to calculate the same ratio close to around 11 lakh, 12 lakh clients. But in last 4, 5 months, we have seen almost like 3 lakh, 4 lakh clients getting added. So that is also factoring.

Yes, yes. The base has gone by. And if I may ask, sir, I mean, obviously, there's been a leadership change at the AMC level, any change in the thought process strategy or the strategy remains the same?

No, there's no change in the strategy at all, absolutely.

The next question is from the line of Amaan Elahi from Haitong Securities.

So I had 1 question on this negative oil price settlement provision that we have made. So there's a disclosure in the annual report, and we have, I think, provided entirely for it in Q1. So any update in terms of where that case is in terms of arbitration? And what kind of recovery can we expect? And any outlook on time line?

See, we are very hopeful of the recovery because client has paying capabilities. That is number one. See the matter is about kind of, I think, legal. So now there are 2 legal battles which we are fighting. One is we have filed against MCX that, I think, the way we feel they have done is really, I think, summarily, I think, is not acceptable legally. And second thing is we also have filed against the client in the court where we have got the positive order about kind of securing the assets. Not directly, but the court has asked them not to sell any kind of, I think, assets, not to dispose off any assets till the arbitration happens. And we've got also date for the arbitration. So we are hopeful that in next couple of months the arbitration award should come and then I think we can go back to the court about the asset part against the client. And then let's see what happens in the case against MCX. I'm quite hopeful that either we get the money from the MCX or we'll get the money from the client.

Okay. And sir, this question is to Mr. Shalibhadra. So you highlighted that you are considering various options in terms of the new regulatory changes. So just wanted to check, is there a scenario where you're considering cutting down some of your broking yields because now the clients would have to put in higher margins, so that has some cost. So would you consider reducing your yield to accommodate the higher-margin requirement from clients?

It's too early to come to any conclusion about the pricing because pricing also is decided by the market. And finally, what is called the regulator stake, I think, there is lot of review is happening at those levels. But I think we have seen whenever any change happens, even if they're regulatory, the market gets adjusted. So either the client they arrange the money because most of our clients have got DP assets with us or kind of I think somewhere, I think the NBFC books can fund that kind of margins.

Okay. And sir, finally, given the current environment, a lot of businesses, which have long-term good prospects, could have some opportunity from a private equity perspective. So in that context, are we looking to raise some new funds on the Business Excellence Fund specifically?

We have a very large fund raise that we had done, INR 24 billion, right, which is, I think, deployed to the tune of 60%. So we have got dry gunpowder of almost INR 1,000 crores. We made some deployment during the current quarter. So we have not completed the transaction. So we've not made the announcement. But we are very, I mean, excited about the prospects of making those investments over the course of the next 6 to 9 months. So fresh capital raising is not on the cards till we cross 80% deployment of this fund. So another 25% deployment or about $100 billion of deployment is hopefully likely to happen in the next 12 months' time, which is a point in time that IBEF IV will be conceived.

The next question is from the line of Manish Bhandari from Vallum Capital.

I have 2 questions on the broking business. What kind of client deposit you would have in terms of cash and cash equivalents? And what kind of interest-bearing or interest income the broking business will have out of it?

See, basically, we have client deposits, which are kept with us in the form of liquid funds, fixed deposits or client cash, in these 3 forms. And basically, they are equivalently placed either in the exchanges or in the client bank account. And that is kept as a margin ForEx positions in the exchange. So that is one part of the thing. And in terms of the overall interest charges, if there is a margin shortfall or if there is a client debit that remains outstanding due to the either T+5 funding or margin funding, we charge interest on that.

So what kind of interest income we would have had on that?

So basically, as we have, I think, given our book sizes, so we have a margin funding book size of INR 5.4 billion. And further, we have T+5 book size of about INR 6 billion, which is close to about INR 1,100 crores of the debits on which there is an interest income that we charge.

So there was some concern in the media that the brokers can't earn interest on the client money, which is in the form of the float. Is there any legal position? And does that change the earnings of the company? How should I understand that? I'm just struggling with that.

So as far as the regulatory framework is concerned, the money has to be segregated and kept in the client bank. Or if the positions are there, then they have to be kept in the exchanges. So this position remains intact. As far as the overall money that goes into the bank, there is no yield of money on that. As far as the money that gets deployed in the exchanges, the client is given in form of a liquid fund and the yield comes on that. So that is as far as the overall regulatory position that remains based on the overall guideline.

So in a nutshell, Manish, basically, there is no float income, but the capital required due to increasing margin requirement is funded by the client. And that funding is something which also reduces the overall risk of how the business is being run, which is also the regulatory objective. And whatever interest income you see that we make is effectively a fund-based activity for us. There's borrowing. As we've articulated in the past, we don't lend out of our equity funds. So there's borrowing and against that, there is lending. So there's a spread that you earn on that.

Sure. My another question will be there was some news item we said that there can be an indirect trade through the exchange for the clients. So is there any merit in that? And has it been done anywhere? And what will be your position here?

Don't see any precedent of that. Don't have a view whether it will happen in India. We don't -- we see there are a lot of challenges to roll out something like this. So we are not really -- we don't have any comment on that. There is no precedent of this anywhere.

Sure. And my last question will be, what percentage of our broking trade will be happening online for us as a percentage of our total volume?

Percentage of trade will be huge. I think, Rakesh, you have that number.

Yes. So it's -- as of June, it is 56% of trades are happening through online channel.

And value? Percentage of value?

The value could be around 40%.

The next question is from the line of [ Abhijit ] from Kotak Securities.

Couple of quick clarifications on the Home Finance business. First one is, could you talk about if you guys use the TLTRO on the refinance facilities that were made available in the first quarter? And what would be the quantum and the cost of funds there? And the second question is, if you could also indicate the collection trends in the month of July? And if you've kind of seen substantial improvement versus June?

Yes, sure. So on the Housing Finance borrowings, so we have participated in the TLTRO as well as the NHB refinance, and we have got both of these financing in Q1. So while we have stated that in Q1, we've already raised INR 4 billion of borrowings at an average cost of below 8.5%. So that's on account of the TLTRO plus the NHB refinance put together. So we have already got money there, which is INR 3 billion out of these 2 windows. And coming to the second question on the July numbers. So I think we have been bettering than the overall June numbers. And we are seeing this number coming down for us materially.

Just to be specific, the July collection is higher by 4% than June.

Okay. And just as an extension, in that context, how do you see the current level of provisioning on the book? And any outlook on the credit cost side for the year?

So if you see the credit cost, actually, we had already started providing for the same since Q4 FY '20 itself, where we had already done 20 bps of provisioning. And further during this quarter, we have done INR 13 crores of extra provisioning. So we have been providing for this, given that on the moratorium book we have assumed a higher probability of default as per the ECL model. So basis that we have been providing that. And Q1 is already a provisioning which we would also tend to further go on providing over next 2 quarters.

Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to Mr. Shalibhadra Shah for closing comments.

Yes. On behalf of Motilal Oswal Financial Services, I would like to thank every participant for attending the Q1 FY '21 con-call. In case of any further queries, please do get in touch with me or our Investor Relations desk. Thank you. Have a great day, and take care. Bye.

Thank you. Ladies and gentlemen, on behalf of Motilal Oswal Financial Services, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.