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

Good morning, ladies and gentlemen. I am Lezanne, the moderator for this conference. Welcome to the Q3 FY '21 Earnings Conference Call from Motilal Oswal Financial Services Limited. We have with us today Mr. Raamdeo Agrawal, Chairman; Mr. Motilal Oswal, Managing Director and CEO; Mr. Navin Agarwal, Director; Mr. Ajay Menon, CEO, Retail Broking; Mr. Arvind Hali, CEO, Home Finance; 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, sir.

Thank you, moderator. Good morning, everybody. It is my pleasure to welcome all of you once again to the Motilal Oswal Financial Services earnings call for the third quarter and the 9 months ending 31st of December. We hope that each one of you and your families are safe and in good health. We are happy to report our highest ever quarterly and 9-month profits. Our reported profit for the third quarter grew by 102% year-on-year at INR 3.3 billion and for 9 months grew by 82% at INR 7.9 billion. Adjusting for gains on investments, that account for nearly 2/3 of our net worth, our operating profit grew by 11% in the third quarter and by 16% for the 9-month period, with INR 3.5 billion this year. Our consolidated net worth touched all-time high and stood at INR 39.3 billion. Net debt is at INR 37 billion. Excluding Home Finance debt, the net debt is INR 11.3 billion. The total of debt equities ex the Home Finance, that has declined to 0.5x where net cash accompanied net of the substantial equity investment that we hold on our book. Return on equity for the 9-month period stood at 34%. During this 9-month period, we have completed the buyback of equity shares amounting to INR 1.5 billion, including taxes, resulting in a small increase in promoter holding to 70.67%, still well below the permissible limit of 75%. The Board has also declared the highest ever interim dividend of INR 5 per share from a face value of INR 1 per share. Turning to some of the business-specific highlights. In the broking business, despite constant chatter of the rise of discount brokerages, our broking business supported [ pretty ] stable revenues, continued to gain market share by another 20 basis points to 2.8%. We witnessed strong traction in our chosen and more profitable area of cash markets, so highest ever quarterly client addition. We continue to make significant investments in expanding talent pool and distribution network and also continue to benefit from the rapid consolidation of the broking business. On the asset management business side, our lifetime high market has lifted the AUM of the AMC business to its highest ever. Our mutual fund gross sales and SIPs gained traction. We introduced digital platform for onboarding PMS clients. And on the private equity and real estate side of the business, we've launched IREF 4, which is our real estate -- fifth [indiscernible], sorry, launched with a target size of INR 8 billion. Turning to the Home Finance business. The highlights of the quarter were a sharp reduction, continued reduction in the cost of funds and a tight leash on OpEx, which drove our pre-provisioning operating profit to a record high of INR 440 million in the third quarter. Collection efficiency improved to 94%, and we're expanding the sales force meaningfully in the fourth quarter and in FY '22 to ramp up disbursements in the coming quarter. And now we dive into individual businesses, starting with the capital markets business. This business comprises of retail, broking, institutional equities and investment banking business. The revenues were at INR 4.3 billion for the quarter, up by 39% and grew by 33% for the 9-month period to INR 12 billion. This business contributed to 44% of consolidated revenues and 18% of consolidated rev during the 9-month period. In the retail broking and distribution side of the business, our market share improved 20 basis points. We witnessed strong traction in new client additions driven by franchisee and retail channels totaling 290,000 clients acquired in [ 3Q ] itself. That's up nearly 3.5x compared to the same time last year. Our active clients registered a 46% year-on-year growth to nearly 0.5 million as of December '20. Distribution AUM was INR 120 billion, up by 15% quarter-on-quarter, with 13% of our 1.8 million broking clients tapped for a cross-sell. We expect continued increase in AUM and fee income as number of clients to whom we have cross-sold a number of products for client cross-sold increases. In the institutional broking business, the team had a really big win in Asia Money Poll 2020, where this business was ranked the #1 best local brokerage house, the best research team, the best sales team, best sales trading team and the best corporate access team. Strong improvement in domestic client rankings during the 9-month period with top 3 rank retained in most client is the highlight of this business. This has resulted in strong traction in revenues for the business. The investment banking business continued to engage in a wide cross-section of mandated transactions across capital markets and advisory business. During the third quarter, we participated in one large [ OSS ] in the BFSI space, although revenues for this business remains muted and reported a net loss for the quarter. Turning to the asset and wealth management businesses. The asset management business, AUM, touched a lifetime high of INR 439 billion by 14% quarter-on-quarter. Profit for the quarter stood at INR 382 million, up by 32% quarter-on-quarter. The 9-month performance of the business is impacted by this lower average AUM post the unprecedented market correction in March and also the cut in TER in the mutual fund business. Mutual fund yields, however, has improved on a quarter-on-quarter basis. Our equity mutual fund AUM were INR 262 billion and it is [ 1.8% ] of the industry mutual fund equity AUM of 14 trillion. Our share of corporate asset comprising of PMS and AIF is highest and AMCs were about 14%. We have witnessed strong traction in SIP additions and realizations. Our private equity business has a committed investment AUM of INR 65 billion across fee growth, PE funds and 4 real estate funds. Our first [ IREF I ] growth fund delivered an XIRR of 26%. The average IRR on exited investments in our real estate funds stand at 21 plus percent. And we've now launched the fifth series of our real estate fund with a target size of INR 8 billion. Our wealth management business AUM stood at INR 227 billion, up by 13% quarter-on-quarter. Wealth business revenues grew by 31% in the third quarter and 20% for the 9-month [ respectively ], led by strong net sales, which were up nearly 7x year-on-year at INR 18 billion. Gross and net sales were at a multi-quarter high. Our relationship manager count on this business stood at [ 124 ], and our trail revenues predominantly covered our fixed costs. Turning to the Home Finance business. This business reported a profit after tax of INR 47 million. Our reported profit looks suppressed due to a high tax rate of 61%. We've explained this on the previous call. This is on account of reinstatement of tax asset postmigration to new regime. Cash tax for the quarter and the year-end will be nil. NII grew by 20% year-on-year. NIM expanded 120 basis points to 6.4% in the third quarter. Yield on advances remained flat at [ 4.2% ]. Cost of funds fell 163 basis points year-on-year to 8.95%. And importantly, the marginal cost of raising the INR 11 billion for the 9-month period was just 7.4%. And we expect the average cost of funds to trend lower in the coming quarters. Our loan book stood at [ INR 35.4 billion ] as of December. Disbursements were muted at INR 1.3 billion for the 9-month period with new leadership in place for the business. This business, in our view, is geared for strong growth in disbursements as we substantially expand our sales force in the coming quarters. The gross NPA for the business was at 2.9%. Net NPA at 2.3%. In 9 months, the total credit cost was at INR 606 million due to accelerated COVID-related provisioning. Operating expenditure was down to INR 215 million for the third quarter, down by 25% from highs. Cost-to-income ratio now stands at 33% compared to 44% in the same quarter last year. Strong support from parent continued with capital infusion of INR 8.5 billion until date. Net gearing for this business stands at a modest 2.9x, and the Tier 1 capital adequacy is robust at 48%. We have limited borrowing repayments for the next 1 year from undrawn borrowing lines, cash and balance sheet stands at INR 2.1 billion. All of this places us in a very comfortable equity position. Turning to our fund-based activities. This includes commitment to our asset management and other products. Total quoted equity investments, including [ MTM ] gains, stood at INR 18.9 billion as of December and including alternate assets stood at INR 26 billion. To sum up, capital market business, which is our oldest and cash cow business has achieved new highs on all parameters and continues to benefit [indiscernible] from [indiscernible] consolidation and our knowledge-driven digital offerings. Institutional booking business ranked #1 local brokerage house in the Asia Money poll. Our [ client ] invest business in our own equity investment products has registered highest ever profit. And as a result, our net worth has as a new high as well. Our asset management business is likely to gain from improving product performance and its niche offerings. Home Finance business turned very strong fee provisioning profit under the new leadership. We expect sales to ramp up in the coming quarters. We remain excited about the headroom to grow and the ability to generate free cash by each of our businesses. We're now open for Q&A. Thank you.

[Operator Instructions] The first question is from the line of [ Kashal Shah ] from Capital Advisors.

This is [indiscernible]. So my question is on the broking side. So with the new norms being introduced by SEBI and by September, we'll be seeing 100% [ margin ] requirements. So just wanted to get a sense of how that will be impacting your revenues, your volumes going forward? Any commentary on that would be helpful.

This is [indiscernible]. As far as the implementation which has gone by, I've seen the first implementation, which has come up [ of 10% ]. That has, actually, on the ground has not impacted much because of overall the cash market share has gone up. But going forward, if you look at the implementation in March and then June and finally, in September, it goes to 100%. I think the methodology which should be followed that we will implement in phases. The clients are getting into the [indiscernible] of how to manage the whole situation. So we see that there can be some impact, but it should not be much because of the period implementation in 4 quarters, and people are very clearly getting aligned to the new model mechanism and the comfort of having the shares being trademarked, people are much more comfortable doing the trademark now to get the margin exemptions. So we see that there will not be much impact in the overall pie of the revenues. Surely, on the [indiscernible] side, there can be some impact, but we see that, that can be compensated on the cash market share of the business.

Yes. So is it possible for you to share your revenue split between the cash market and the derivative side -- or on the revenues? So maybe some color on the yields or something like that.

So we can share the mix of revenues. But overall, if you see, we have an increase in the cash market share, whereas assembled marginally on a sequential basis, there is a bit of lower market share. However, overall market share on a year-on-year basis has gone up. And in terms of the mix, the mix is broadly in terms of the volume, we are 95% [ assembled ], 5% cash. Market is at about -- in terms of revenue, we are 50-50, 50% cash, market 50%, is [ 50% ], right?

You said 50-50, right?

On the revenue side.

The next question is from the line of [ Nishit Shah ] from Equitas Investment.

Congratulations on great numbers. Sir, I only need to understand on Broking side, why are the margins low?

Yes. So on the broking side, actually, the margins, if you see, are marginally up year-on-year by about 100 basis. However, this is also after factoring the additional cost that we have taken on account of investing in the manpower. So over the last 9 months, actually, we added about 100 people in the business. And that -- and we have added further 60 branches in the course of this financial year. So if you see we have actually -- we have an extra 5% overall cost because of this expansion that we are doing. And where the opportunity is clearly visible in terms of extra market share and the consolidation opportunity available in the market. So that is the reason where you'll see operating leverage despite this cost addition, that we're still up [ by 100 ] basis points.

And sir, this employee and branch addition exercises then for the broking divisions are, going forward, we'll see more of additions?

So largely, additions are done. However, on the digital side, we'll be adding more people.

Okay. And sir, I wanted to understand for the new client acquisitions, do we have significant upfront costs?

So we don't have -- because when the clients are added digitally, there is no significant upfront cost. In fact, the ARPU is very high for us. That is the cost of...

There is surely some amount of regeneration cost, but that is -- we are managing that in a much more consolidated way. We see that we can build up this accretion digitally because our ARPU is much better. So we see that there can be a huge expansion on the digital side going forward.

Okay. And sir, has there been any pressure in cash yields for us because the market has been competitive of late?

There is no pressure on the cash yields. In fact, cash yields have marginally gone up year-on-year.

Okay. Sir, now coming to this expires. So we have added 50% sales force in Q3, right?

Yes.

Can you share the absolute number of employees do we have -- so we have in expires? And what is our target employees, I mean, addition do we target in next 1, 2 years?

So absolute count of employees stands at 1,200 people in the housing finance business. And what we are targeting over next 6 to 8 months is a further increase in the headcount on the sales side of demand, which is on salespeople. So what we're targeting is could be increase of about 400 people [ on this ]. So it would be about 1,600 people over the next 2 to 3 quarters.

Okay. And sir, any targets on disbursement side for expires, long term, not short term?

So yes. This is Arvind Hali from the housing finance team. So basically, in the last couple of months, we have increased our field staff predominantly on the feet on street side by about 50%. And as Shali has just mentioned, it will go up to about 1,600, 1,700 people in the housing finance team. The idea is that the next financial year, we should look at a target of about INR 100 crores of disbursal in the last quarter of the financial year on a monthly basis. Okay. So the traction is there. We have been logging in around [ 800-odd hires ] now in the last couple of months, which is a good sign. Sanction is also improving. And so we feel that as the efforts keeps increasing because, ultimately, it's a game of width of distribution and the depth of distribution. So distribution did get impacted during the COVID period. But now it's coming back, and we believe that in the next financial year, we should be able to reach the INR 100 crores of disbursal on a monthly basis in the last quarter.

Okay. And sir, in expires, so is the provisioning -- major part of the provisioning done? Or do we still expect provisioning in the next 1, 2 quarters?

In terms of the provisioning, so you see, we have been increasing the provision continuously in the course of this financial year due to the COVID impact. In the last 3 quarters also, we have increased the provisions. Our closing provision stands about 50 basis higher than last financial year. So that goes -- already going up. And what we see in the course of next 2 quarters also, we will see the provisioning increasing further on account of the impact of the COVID on the book. And we have been continuously increasing this number.

Okay. Sir, now coming to this AMC side, can you give us figure of gross inflows and outflow for both mutual fund and PMS?

Yes. Yes, sure. So the numbers are -- for the mutual funds [ for the quarter ], the gross sales is INR 18.7 billion and the net sales is minus INR 3.9 billion, right? For PMS, the gross sales is INR 1 billion, and the net sales is minus INR 11 billion. For alternate assets, the net sales is a positive INR 1.2 billion, gross sales and net sales both. If you add all of these up for the AMC as a whole, the gross sales is INR 20.9 billion for the quarter, and the net sales is negative INR 13.9 billion.

We leave the next question from the line of Shubhranshu Mishra from Systematix.

A couple of questions. The first one is around the leadership team. Over the past couple of years -- in the last 2 years, we've seen a lot of churn in the [ leadership team ]. One at the home financing, we've seen roughly around 2 or 3 CEOs in AMC. We had -- in the wealth management, we again had churn. So how do we read into this, sir? That's the first part of question. Second other question, sir, we've always prided ourselves as active fund managers. So why are we entering market funds? What is the thought process behind that? And yes, those would be my 2 questions, sir.

Yes. So this is Motilal Oswal. See, coming back to the leadership, we have a large organization with about now 6,000 people. 7 or 8 verticals, if you look at investment management, plus 5 support functions. So I think out of [ 100 ] people, I think there is -- and I think always some kind of a thing, changes which will happen. But let me tell you, there is no serious visible kind of, I think, attrition what we have seen at senior management level. The leaders are far better than what we have seen the outgoing people. That's what the effort is at our side, to make sure that leadership team becomes very, very strong, vibrant and most importantly, the performing one. We are not concerned with those kind of, I think, changes, which some are delicate and some kind of, I think, people have -- some have seemed aggrieved because of their own aspirations of cultural issues. Coming back to the passive fund, Navin will explain.

Yes. Yes. So if you go back to time, the passive funds are not launched recently, more than a decade-old initiative. The NASDAQ Fund is flagship fund in India on the passive side. There -- our active management is mostly India equities or entirely India equities. And bulk of our passive business is international equity, so they do not compete with each other. The domestic funds that we have launched mostly form a part of the financial planning suite that you will see us eventually launching. And so in the coming quarters, you will hear us on that front as well. So we feel that we are basically catering to all the needs, our active management focus remains domestic equities. Our passive business is being driven by more and more international offerings and the domestic passive funds that we've launched really are components of more holistic financial planning suite that you will see us follow through with.

Again, my question was not more about the tenor of the passive fund. It was more about how we communicate with investors and all the stakeholders. We always put across that we are active fund manager. So in that, how does passive fund management fit in? And even if I look at the passive fund management, the tenures of those teams are close to 40 bps, if you look at any of the confirmation, they would be one crop of that. So how do we look at it? So that is my question.

So as far as the distribution locally is concerned, the discussion or the entire discourse around active funds, asset funds really have a strong pull. It's because of the kind of niche that we cater to. So really, the engagement with our counterparts, whether it is investors, whether it is distribution is largely around our active fund. The passive marketing is substantially digitally led and also led by world platforms, because in Indian savings are barely diversified across global equities. And so our products have allowed for that. So I don't see any confusion in the minds of -- if your question is that is there any confusion in the minds of our investors or our distributors in terms of what Motilal Oswal Asset Management stands for. I don't think there is any confusion. We're basically active managers. These passive products, as I mentioned to you, as far as the domestic funds are concerned, are not marketed to the same channel and will eventually feed into, I repeat, the financial planning suite, which is more relevant for our retail clients, mass retail clients, right? International funds have a strong pull because that's a niche that we really chose a long time ago. I think Raamdeo would like to add a little bit.

This is Raamdeo Agrawal. The active versus passive discussion has just about started in India. And the world over, there is a massive transformation of allocation. Though in aggregate, the size of the funds managed has almost become almost equal in GDP. So the total market cap of the world is about INR 100 trillion and INR 100 trillion is GDP. Now in next 15 years, the global GDP, there is INR 200 trillion. And all the banks in the environment will also go to maybe more than INR 200 trillion. So the opportunity size on both ends are unlimited, and both can stand on their own merits. Like here, we are saying that India is still a relatively inefficient market. So we have an active strategy, which is right at the forefront. And on the passive side, we are trying to push more and more global equity allocations. Like today, the U.S. is very popular. Tomorrow, it could be China. Day after, it could be Taiwan. So how do you access this market? Because we cannot produce active management from here. So our job is to give -- I mean, our motto at Motilal Oswal is to help you make money worldwide in equity markets. And the way we can do worldwide is basically give active managers, best for the equity managers in India. And best of the ETF conversation worldwide, that's the thought process. Let's see how it pans out.

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

Sir, on the asset management side, the net outflow numbers for the PMS business was a little disconcerting. Can you explain what investor behavior is over there? Second, given that the upfront commissions are now not allowed for payments, how do we see distribution changing for the asset management company and also wealth management? Because in wealth management, we were distributing other asset management products as well. So how does business change or how the strategy changes there?

Madhukar, so basically, the total asset business is led by big-ticket investors, the ticket size of PMS investors is INR 50 lakhs. Size in AIF is INR 1 crore. And those investors follow asset allocation with more religiously than most retail investors and have been even booking profits over the course of the last 6 months' time and -- 3 to 6 months and as markets continue to rise. You've seen pension redemption pick up. So even PMS outflows should be seen in the context that really there are 2 types of providers, the legacy providers and the relatively newer providers. Legacy providers have had their exit load period get over, some very strong absolute returns, so substantial gains and asset allocation for getting booking of profits. So no exit load, significant absolute returns, following asset allocation led to redemption, but they are also equally quick to come back to market. So you'll see them being earlier than mutual fund of mass retail investors to come back to equity. So that's point number one. Secondly, PMS as a product has established its relevance among the high net worth individual community, the portfolios that like diversified, more concentrated and have delivered strong performance over a long period of time. And they are differentiated, and so the relevance of those products remain. However, there are other forms of alternate assets, including [indiscernible], the distribution that is out too. And there's a strong traction in that already visible. In our own case, while the reported numbers from sales in AIF is INR 1.2 billion, the commitment would be in excess of INR 5 billion for the quarter. And you will see the drawdown coming through in the coming quarters. So that's the second part. Sorry, what was your next part of the question, Madhukar?

Sir, I want to understand how is distribution changing for the PMS and similarly for wealth management. So because we were also distributing other third-party products under wealth management, and now there is no upfront commission. So does that change your strategy? How does it change your strategy?

If you've been following our con calls, Madhukar, it will be the focus has always been trail and aggressive distribution has always aligned that sales team to trail form of incentives. A large part of the AUM resides in mutual funds, which had already moved to trail long ago. A part, the other part resides in alternate assets, where now PMS is also trail-based. So really building an upfronting model will have a cliff impact on the business eventually and is not sustainable. So I think the only sustainable way to run the distribution business, the wealth business or running asset management sales is really the trail-bearing model, in our view. And we are progressively moving towards that.

But how does it impact our AMC? Because earlier, we would have a lot of external partners who are distributing our PMS. Do you think there's any reluctance from their part? How do you see that industry evolving? Because in the last few years, last 5, 6 years, a lot of assets were gathered because of the high upfronting of commission, right? So with this big shift, are we seeing any changes in the industry?

So let me just clarify. Some of the largest distributors of our PMS products distributed them because of the performance of the products or the differentiation of the products and not upfronting. In fact, even when there was an upfronting regime, the credit to the sales team was driven by trail income. I mean the firm may have earned the upfront, but the IMs were not incentivized upfront so that human behavior does not alter, right? So that is one thing that is...

That is for us internally, but for the other organizations who are selling a lot of the...

I'm not talking internally. I'm talking about third-party partners, non-Motilal Oswal distribution. I'm talking multinational banks. I mean they're not specifically naming them, but they've already moved to trail-bearing credit even well before regulatory changes. So that's the first one. Second is that there are also other alternate assets like AIFs, where upfronting is committed. And so as I mentioned to you, there's increasing reliance on those products. So that is, to some extent, make up for those distributors who are focused on upfronting.

Sir, one last question on the broking business. What percentage of the cash volumes is intraday volumes in our case?

Okay. It was 70%.

70%?

Yes.

[Operator Instructions] The next question is from the line of [ Raja Kumar ], an individual investor.

Yes.

Sorry, [ Raja Kumar ], sir, we are not able to hear you clearly. Can you use the handset mode while speaking?

Yes. Hello. Can you hear me?

Much better.

Yes. I have a few questions. So the first one is on the Home Finance business. I just want to know what is the strategic reason for getting into this business because it doesn't fit into your -- I mean, even if you see your logo, you call yourselves as liquidity experts. So just want to know why we have moved to a funding activity when effort is more on the knowledge side of the business. And just to belabor on the pain point, I just wonder how do you think -- it really seems that you are late bit in structure. So just wonder what is the strategic thinking from the management side. Do you want to kind of clean it up and then hire it off? Or like you -- how does it fit into the overall gamut of services of the group?

Yes. So Mr. [ Raja Kumar ], I think this question we answered over the last 6 years since we launched this business. But for your benefit, I'm going to repeat the answer.

No, the reason for -- I'm sorry for asking the same question but please...

Sorry to interrupt, Mr. Kumar. Sir, we are not able to hear you clearly.

Yes. The reason why I'm asking this question is you are written on net worth. I mean there's not -- equity on this side of business is very low and that's kind of driving your overall performance and also on the performance of the stock. So I would like to have more color and given the challenges that we currently have, what is the outlook that the management has come into?

This is again Raamdeo here. See, building businesses, they take time. So one aspect is that it typically take 5, 6 years before the businesses can be said that they are already onto the successful track, whether it is broking in '87 to '91, it took 4 years even in simple broking. Then even asset management, we got the license in 2008, but we broke in on 2015. So it takes time. This is a lending business, which is clearly new to us. And I mean any businessman starts the business can see that we can do a cakewalk. But of course, the first 2, 3 years a cakewalk, and I mean let us realize that we have to pay our own patiently. So most likely, in last 3 years, we have learned our lesson. And slowly, we are kind of stabilizing, and it will see light of the day. We have enough determination. We have clear focus. We have good deal. Our segments are desired. The economics are very clear. You can see the economic preprovision profit on this quarter, you see. The only issue is the credit cost. In lending, credit cost has to be seen very carefully. So it will take some time. I mean it was hugely headwinded in the last 3 years. I hope at least it is not -- if there is no tailwinded, it should not be headwinded. And that is what is really our expectation is. And so we will make a success of this. How big a success, how fast, that only time will tell. Now relevant to this in the overall pie of Motilal Oswal is that we have huge free cash flow. Now at the way you are saying that we should not build business in lending, we should also -- I mean there could be objection that why we are building just the portfolio of the company, portfolio on mutual funds. So the issue is that we can deploy a lot of capital. That was the thought process, that the free cash flow can be deployed meaningfully at 15% to 20% return on equity in Housing Finance. That was the whole thought process. Of course, main thought process got disposal. We are here with messing almost INR 1,000 crores what we call invested in this business. And now we are hopefully emerging out of this. And only time will tell how we synergize all these businesses and how do we make success of this particular line of business. And the stocks are already there in the market to absorb. It will be offloaded as a separate company. You have to offload this type of company. So I think the current feeling that this company, this line of business is in a contradiction with the core of the company, that will, over the next 3, 4 years, it will look very clear that Housing Finance company stands on its own and other capital market businesses, they also stand on their own. Only thing is, in the short term, as a multi shareholder, I appreciate you are concerned about the stock price and a lot of concerns around that. But we, as a business manager, we cannot be taking short-term view on the stock prices, but we have to build the businesses and the company. That has been the thought process. Okay?

Yes, this is a wonderful explanation. Sir, my next question is I understand that the company has generally a lot of free cash flows. So why? I mean a suggestion, the 2 questions and comment. So I think we should be kind of focusing more on the real estate business, and particularly from the retail side because that's kind of a sticky business because -- and the payments will have given the -- even though, sir, the ticket price will be higher, there will be a lot of volatility. And given the lower penetration of mutual fund products in India, I think we have, I think, 2 decades of growth when it comes to addition from industrial and also better valuation from the longer-term perspective. So I would request the management to look at investing more contract, investing more funds into that kind of an activity where we have given to the earlier for sale or something, we should probably look at -- in deploying more funds for -- a little more rapidly, we just want growth. We'll get there in the core.

Yes. Clearly, we'll keep the essentials in mind. But I can still tell you there is no conflict in pursuing growth potential in a free cash flow business. It doesn't require balance sheet. It requires only P&Ls, which we are pursuing. You might have seen in broking, same in asset management, we are moving very methodically and aggressively in the passive side. So there is a huge aggression in every business. And this is just a reinvestment into a new business. I mean if you make a success, it becomes a billion-dollar business overnight. If you are a failure and that business is not worth the money you put, that's how the reinvestment cycle works. And it's a growing company. Growth mindset is there. So we have our task cut out, and we are aware of this thing. But thanks for the suggestion. We'll keep in mind. Thank you.

We'll move on to the next question. That is from the line of Prashanth Sridhar from SBI Mutual Funds.

Yes. Am I audible?

Yes, sir. Please go ahead.

Sir, sorry if I have missed it before. Have you covered any -- what kind of restructuring has taken place in the Housing Finance and expectations?

Yes. In terms of the restructuring that has taken place is about 75 basis points on the book is restructured until the end of quarter 3. And still, we have time until 31st March, and we are in the process of looking at the overall collections and rollbacks. And this is that in quarter 4, we would be implementing the restructuring on the line we need to cover. The restructuring is in line with the policy as approved by the regulator.

Sure. Sure. Just a few data set questions. The GNPA, NNPA reported, does that include or exclude the Supreme Court judgment?

Yes. In fact, we have not taken covenants and the Supreme Court judgment at all in this because when you calculate your stage 3 assets while reporting under Ind AS, you can't take that cognizant. So we have not taken any benefit of the Supreme Court judgment in the reported numbers. Had we taken the benefit, the GNPA would have been 1%.

Sure. Sure. That's helpful. And lastly, would you have the split among 0-plus and the 30-plus for the adequacies portfolio?

Yes. So 0-plus stands at 17% and 20%...

11%.

11%.

The next question is from the line of Manish Poddar from Nippon India AIF.

So just had one question. If you go probably across the business verticals, what sort of investments do you require, let's say, for the next leg of growth? If you could highlight that, that would be helpful.

Yes. So bulk of the -- see, the only place where we can actually use the balance sheet is the SME, mortgage company, where, again, because of the current stagnancy are actually declining. Last one year has been a net-net decline. We are not able to deploy any more capital. But other places like broking, asset management, wealth management, they're all businesses where we have to use a current year P&L to expand. And that's what is really happening and it is not visible to the people how much we are reinvesting in our own business. So I don't think we have any huge capital. Unless we acquire something, I don't think the free cash flow will be used anywhere else.

And what would be a fair understanding that, let's say, in terms of network and largely people investments, we are there across the business segments? Or do you think that you will need, let's say, certainly capabilities to be built in the next 2 or 3 years?

I think this is -- I mean, we are a -- if you look at the market shares in all our businesses, the scope to expand the network and people could be manyfold, right? And the broking business was seeming large and sizable and all that. If you look at the manpower addition in this business over the last 5, 6 quarters, it has been massive, right? And so I think to really put a tap to or let's say, the asset management business had 25 branches 5 quarters ago, they are at 36 right now. And maybe 250 over a period of time easily. So I think the magnitude is in multiples rather than percentages. So -- and that will unfold over a period of time. But -- and as already alluded, all of these investments will be made to the income statement, and we will not shy away from any of these investments, notwithstanding what part of the cycle we are in. So you'll see us continuing to do that.

In fact, one of the ways we are growing is that by investing and bringing client commitments along with our own commitments. So when we invest, say, 10% of our fund in private equities, we put up, say, INR 500 crores. We expect INR 5,000 crores to come from a client side. So though it looks like an investment of INR 500 crores, but it is a commitment to that particular product. And that becomes a kind of reinvestment for the firm and expand the total kitty of what money we are managing in private equity. So there is a -- because the nature of equity business is such that the reinvestments happen either through P&L or through commitment as an investor, and that's what we are doing to see across the board.

The next question is from the line of Saurabh Dhole from Trivantage Capital.

Sir, I have a couple of questions.

Sorry to interrupt, Mr. Dhole. Sir, can you speak a bit louder? We're not able to hear you.

Hello. Is that clearer now?

Much better.

Yes, yes.

Yes, yes. So I have a couple of questions. Firstly, on RM productivity. Like if I look at the charts that you've shown on the presentation, about per RM basis, it's at about 40 families. And on an AUM basis, it's -- had been improved over the last couple of quarters. But if you were to look at RM productivity, what metric do you generally track? And at what level would you think of adding RMs?

For the wealth business, I understand, right?

Yes, yes, yes, wealth business, correct.

So I mean the business is very, very tiny. As you're aware, our AUM is INR 230 billion. 2/3 of our RMs are yet to turn profitable. So our viewpoint is that we will reinvest a bulk of the cash flows in this business back into team expansion. We were predominantly a West India wealth management firm. We've strengthened the North Indian franchise meaningfully over the last few years. This year, FY '21, the focus has been on standing South India. You will see us further strengthening both -- all of these regions in the next 2 years' time. We don't have a guidance number to give you in terms of how this will expand. Really, the business has turned much more profitable this year despite predominant part of the revenues coming in from sale. We continue to make sizable investments. You'll see the numbers go up quite sizably over the course of the next 12 months further, and that may have some adverse impact on the short-term profitability. But from a longer-term perspective, we believe that this is something that makes immense sense to us.

Okay. Okay. And sir, on the margin funding and the LAP book, could you just reiterate what interest rates we are offering and what are the tenors here?

Yes. So margin funding is yield is about 13% on the book.

This is margin funding plus LAP, right?

Yes, that's right. Margin funding over LAP.

And as in separately, they would also be very similar? Or there's a distinct difference between margin funding and LAP?

So actually, typically for us, it is more of margin funding only that we do. We don't do any sort of promoter funding, which is in the nature of LAPs. What is there is for the broking customers that we do margin funding, which I said is the average yield is about 13% on the book.

And the tenor would be?

See, there's no specified tenure. But generally, what we have seen, the pattern in fact that the HNI clients typically take this funding for at least a year where the funding remains outstanding. So it is like a 1-year churning kind of a funding that we do.

Okay. And we don't have any ESOP funding, right?

No, not much.

Okay, okay. And sir, lastly, on the Home Finance business. I know you -- as in all lenders are under the Supreme Court judgement, but is there any sense that you can give us as to how the property prices in the geographies that you operate in are shaping up? As in, have you seen some sharp erosion from them?

So in the last couple of years, we have seen some correction in the property prices to the extent of 10% to 20%, depending on the location. Surat, we have seen some correction in prices. Otherwise, it's not really been a very sharp correction beyond that. So about 10% to 20% is what we see.

Okay. And sir, connected to that, now all lenders today cannot take any action against the delinquent borrowers. But hypothetically, once the forbearance or the dispensation that the Supreme Court has given, if that goes away and all lenders go into the market selling the property, don't you think there will be a very sharp supply surge and consequent price correction?

Yes. So I mean we already have been using legal tools since the last couple of years, and we already have properties under position and definitely in certain pockets, as I mentioned, let's say, for example, Surat, there -- or maybe 1 or 2 other locations, there may be excess supply in the market. But I guess that's the part of the business cycle. So one will have to bear that loss and move on.

Okay. And sir, under the judgment, are you not allowed to even repossess or the restrictions is limited only to...

No, no. So there are certain pockets like, for example, in Maharashtra, there was some challenge. But otherwise, other than a few months during the COVID period, there were certain restrictions. But otherwise, we are quite able to repossess properties and enforce surrogacy. As and when we get the DM orders, we are very much able to take possession of the properties. Things have moved back into normalcy now since last couple of months.

No, no, no. What I meant was that under the GNPA, which is enjoying the dispensation. So today, are you restricted from repossessing? Or are you restricted only from selling? As in you can repossess, but you can't sell.

We can sell also. We have been selling properties also.

Okay. So and this is also for the GNPA which is under the dispensation?

We had nothing under that.

We had nothing under that.

Ladies and gentlemen, we'll be taking the last question. That is from the line of Dixit Doshi from Whitestone Financial Advisories.

A couple of questions. Firstly, in terms of our Housing Finance business, do we give loans to borrowers who do not have an income tax return filed?

Yes. I mean are -- basically, our target market customer is low-income borrowers, LIB segment, as we call it, people with income levels of about INR 3 lakhs to INR 6 lakhs is where we are largely concentrated. And 60% of our portfolio is salaried and about 40% is self-employed. So salaried portfolio is largely the ones where there is some or the other form of income document and some of them also cash-salaried customers, where we take certain other surrogate means of assessing the salary credits, which they receive in cash. On the self-employed side, which is about 40% of our portfolio, half of that is documented income customer, where they have -- they provide us with the income statements, bank statements and ITR but there are -- half of that is also assessment based, where we have our credit teams who go and meet the customer at their place of employment and place of business. And they basically assess the business in terms of the financial strength and in terms of the repayment capabilities. And accordingly, we assess the amount of loan that the customer is eligible. We also do bureau checks and we also have certain other checks in terms of the assessing the technical value of the property and the legal ownership of the property in terms of legal documents and encumbrance and other things. So a comprehensive check is done even for the cases where the income documents are not available.

Sir, looking at the current scenario, where there is a huge competition from public sector banks in terms of housing loan, our rates are almost upwards of 14%. So how do you see next couple of years in terms of loan book growth? Because the prepayment would be much larger because even if somebody is not having, let's say, income tax return filed and you are giving them loan after, let's say, a couple of years' history, they can switch to the -- banks. So how do you see in this scenario, the loan book growth in Housing Finance?

So we -- see, there is a huge market available there where the regular banking does not reach and we have customers who are into self-construction, even the salaried customer in the semi-urban and rural areas where you have -- you need to give quick turnaround time. Turnaround time is one of the key drivers here. And over a period of time, as the credit rating of the organization improves and the cost of funds which we have seen has also improved, so some part of that is also going to be passed on to the customer. But eventually, the main delta comes from the fact that we are able to quickly assess the customers' requirement, and we are able to turn around the applications fast and are able to provide them with the desirable loan within a desirable time period. So obviously, when you provide that kind of a service, so there is a certain amount of premium that you can charge and we are also fairly focused on self-employed banking customers. And when you look at the banking and public sector banks and you look at the housing finance companies, who are more focused on the salaried customers. So to that extent, there is also a fair degree of potential available on that side.

Okay. And one last question in terms of broking business. So obviously, there is huge competition from discounted loan rates and on the other end, we are expanding the branches and people. So how do you see this?

So as far as our strategy is concerned, so if you see, we have been also acquiring huge number of clients in the overall market space. And we have added about close to 4 lakh customers over the last 9 months and close to 2 lakh customers in quarter 3 of this financial year. So overall, we have been able to acquire clients and take the opportunity of consolidation available in the market for us. And what we are targeting versus discount focus is definitely an advice-based brokerage and profitable market share. So that is just the segment which we are operating into. So that is how we are wielding results out of that market consolidation opportunity available.

But just -- so just one last point. So maybe not in next couple of years or something, but let's say, over 5-, 6-year horizon, do you feel that the -- that there is a value migration kind of thing from normal broking to a discounted brokerage?

So we see that this discount brokerage is helping in increasing the industry size. And surely, the -- it's new customers, new millennials, which are coming into the market. So the overall pie is becoming bigger, which is good for the industry on a whole. And we see that the value which we provide from the advice-based booking will continue to grow in this bigger scheme of things. So surely, there will be more number of customers with discount brokers. But when we look at our pie of the whole value chain, I think we'll be able to get our quality of customers and advise them through our differentiated model. Plus we have a big distribution network, along with our broking. So that alignment will be well aligned to take it forward.

Thank you. Ladies and gentlemen, that's the last question. I now hand the conference over to Mr. Shalibhadra Shah for his closing comments.

Yes. On behalf of Motilal Oswal Financial Services, I would like to thank every participant for attending the Q3 FY '21 con call. In case of any further queries, please do get in touch with me or our Investor Relations desk. Thank you, and have a good day.

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