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

Good day, ladies and gentlemen. I'm Armand, the moderator for this conference. Welcome to the Motilal Oswal Financial Services Limited Q4 FY '22 Earnings Conference Call. We have with us today Mr. Raamdeo Agrawal, Chairman; Mr. Motilal Oswal, Managing Director and CEO; Mr. Navin Agarwal, Director and AMC CEO; Mr. Ajay Menon, CEO, Broking; Mr. Shalibhadra Shah, Chief Financial Officer; and Mr. Rakesh Shinde, Investor Relations. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Navin Agarwal to make his opening remarks. Thank you, and over to you, sir.

Good morning, everybody. It is my pleasure to welcome all of you once again to the Motilal Oswal Financial Services earnings call for the fourth quarter and the year ended March 2022. We hope that all of you and your families are safe and in good health. For the fourth quarter, we reported an operating profit after tax growth of 41% to INR 2.6 billion. This was the highest ever quarterly profit supported by us. For the year ending March 2022, we've reported a PAT of INR 13.1 billion. Ex gains on investments, our profits grew to INR 9.05 billion, which is up by 69%, once again, highest ever numbers. The core business was robust with capital market business profits up 68%. Asset and Wealth business, profit of 31% year-on-year led by 116% Y-o-Y growth in the profitability of the wealth business and a 46% growth in the profitability of the private equity business. Housing finance business too has turned around this year and reported highest ever profits of INR 929 million, more than twice year-on-year. Our consolidated net worth at INR 56.7 billion, and net debt is INR 41.4 billion. Excluding home finance debt, we are a net cash company net of our equity investment. Our return on equity for the year ending March '22 stands at 30%. The Board has declared a final dividend of INR 3 per share and has also decided to consider a buyback program in a separate Board meeting that will be held on May 17. Turning to some of the key highlights for the fourth quarter and the full year. Our capital markets business reported highest-ever broking revenues and profits and has delivered consistent growth in profits over the last several quarters. We've seen a sizable growth in active clients and client addition led by traction in digital acquisition channel. There's a 99% year-on-year growth in the average daily turnover with mix favor -- in favor of high-yielding cash delivery business. Our cash market share touched multiyear highs. We had robust net sales in our distribution business also. We've also started adding talent on the digital side to revamp our digital journey. Turning to our asset management business. We witnessed lifetime high markets, which in turn have lifted the AUM to its highest ever. We've seen traction in both the SIP and the overall AMC flows, while AIF continue to receive encouraging response. Our private equity business has seen the [ Series 4 ] IBEF second closed at about INR 40 billion within 7 months of launch. We are targeting to have a final close of this fund at INR 45 billion. Similarly, our real estate fund has raised INR 12 billion in its fifth series IREF V. Our home finance business witnessed reasonably strong pickup in disbursement, traction in log-in and sanction pipeline and a meaningful expansion sales force to ramp up disbursements in the coming quarters. Sharp reduction in cost of funds also drove margin expansion for the home finance business. Series of ratings upgrades that we have received will see further benefits on our liability franchise in the coming year. I'll now deep dive into individual businesses, starting with the capital markets businesses, which comprised of our retail booking, institutional equities and investment banking businesses. Revenues for this segment were at INR 6.9 billion, up by 35% year-on-year in the fourth quarter and at INR 25.3 billion, up by 48% year-on-year in the full year. The capital market businesses have contributed 55% to consolidated revenues. Profits grew by 79% year-on-year to INR 1.4 billion in the fourth quarter and up by 70% year-on-year to INR 4.9 billion for the full year led by healthy volume growth, which is up by more than 100% year-on-year as well as improvement in our cash market share. We witnessed strong traction in new client additions driven by online and other channels totaling 880,000 clients acquired in the full year, up by 43% year-on-year. NSE active clients have registered a growth of nearly 60% year-on-year at 900,000 clients as of March '22. Our strategy to bring linearity to the trail-based distribution business is showing some results. Our distribution AUM grew by over 30% to INR 168 billion as of March '22. With only 16% of the 2.8 million client base that for cross-sell, we expect continued increase in the AUM and fee income as number of clients to whom we cross-sold and the number of products that we've cross-sold rises. We've also registered a strong insurance premium collection in this year, which is up by 40% plus to INR 57 crores. In institutional broking team, we had big wins in the Asia money poll. We were ranked as the #1 best local brokerage house. We're also ranked the top sales, top execution, and top corporate access house. We've seen improvement in our domestic client rankings with top 3 rankings retained in most of the clients. In our investment banking business, we participated in 13 deals, and there has been a turnaround in this business in the year ending March '22. We continue to have a strong pipeline of IPO mandates and hoping to see further traction in this business in this year. Turning to the asset and wealth management businesses. Our asset management business AUM across mutual funds, PMS and AIF stood at INR 490 billion, up by 13% year-on-year. Profit grew by 21% to INR 1.8 billion, excluding the onetime tax reversal impact that you saw in the last year. Our equity mutual fund AUM stood at INR 306 billion. We've seen improvement in performance of several products. Our gross sales and net sales have started improving. We witnessed favorable response towards alternate offerings under AIF strategy and expected flows and continued flows in the AIF strategies which are in the pipeline. Our share of alternate assets comprising of PMS and AIF at nearly 40% of the AUM is among the higher ones in the AMC business. We've added about 480,000 SIPs in the year ending March '22 and by more than 50%. And our new SIP count market share stood at just under 2%. Our private equity fee earning AUM is at INR 100 billion across 3 growth capital PE funds and 4 real estate funds. In the fourth quarter, our revenues were at INR 469 million, up by 90% year-on-year. Profit at INR 200 million, up by [ 184% ] year-on-year. The first growth fund, IBEF 1 has delivered an XIRR of 26%. Our average IRR on exited investments in real estate funds is also over 20%. And in our private equity business, we've seen our biggest ever fund launch with a target size 2, close at INR 45 billion in the coming quarters. Turning to our wealth management business. Our AUM grew to INR 344 billion, up by 36% year-on-year. Revenues grew by 28% year-on-year to INR 477 million for the quarter and by over 50% year-on-year to INR 1.9 billion for the full year. This was led by strong net sales at INR 54 billion during the year, yield at about 63 basis points. RM count stood at 144, and our trail revenues predominantly covered as fixed costs. Strong operating leverage is visible led by improvement in RM productivity, although we continue to invest in this business by adding the number of RM. Overall, the asset and wealth business revenue stood at INR 2.6 billion for the quarter and INR 9.5 billion for the full year, up by 25% year-on-year. This business contributed 23% of our revenues and 28% of our consolidated profits. Turning to the home finance business. We reported our highest ever profit at INR [ 456 ] million for the fourth quarter and INR [ 929 ] million for the full year. Our NII grew by 11% year-on-year. NIM expanded to 7.3% for the full year. Yield on advances stood at 13.9%, while cost of funds were down by over 100 basis points to 8.2%, resulting in expansion in our spread to 5.7%, up by 66 basis points. We raised an incremental INR 14 billion for this financial year at an average cost of 7% versus our overall cost of fund of 8.2%. And this number is likely to trend lower in the coming quarters aided by the latest rating upgrades on the company. Our disbursement grew by nearly 2.5x to INR 6.4 billion, and the business is geared for stronger disbursement in the coming year. Gross NPAs were down by 60 basis points to 1.6% in March '22 led by improved collection efficiency, which stood at 104% in the month of March. Trading upgrades by CRISIL as well as India ratings to AA stable, we think, will benefit in terms of lowering our cost of funds further. Our net gearing for the business stands at 2.3x. And our Tier 1 capital adequacy remains robust at about 50%. Finally, turning to our fund-based activities, including commitment to our asset management product. We've registered gains of INR 400 million during the quarter and INR 4.1 billion during the full year, taking the total quoted investments, including unrealized gains to about INR 26.8 billion. The cumulative XIRR on these investments is about 17% since inception. And our total equity investments, including alternate funds, stand at INR 40.5 billion as of the end of the year. To sum up, this was the second consecutive year of highest ever profit or performance in terms of revenues, profits and AUM. Our retail broking, which is our cash [ flow ] achieved new highs on various parameters benefiting from industry consolidation. Our institutional booking business is ranked #1 best local brokerage house for second consecutive year in the Asia money polls. Our strategy to invest our business profits in our own equity investment products led to highest ever profits, and as a result, our net worth stands at all-time high. Moreover, our strategy to diversify our business model towards linear source of earnings continue to deliver results. Our asset management business is likely to gain on process-driven investing and its niche offering. The wealth management business has delivered stellar performance this year and is on its way to achieve scale. Our private equity business has delivered on both successful exit of its investment and fundraise of its largest ever fund. And finally, our home finance business has experienced a strong turnaround, registering the highest ever profitability and now geared for sustainable growth. We believe each of our 7 businesses offer headroom for growth. We're now open for any questions and answers. Thank you.

[Operator Instructions] The first question is from the line of Madhukar Ladha from Elara Capital.

Congratulations on a good year. I have a few questions. First, on the asset management, I don't know maybe I've missed it, but what has been the net sales in the last quarter?

Yes, net sales in the last quarter is INR 1,000 crores.

Okay. So then predominantly, it seems to be negative mark-to-market impact of that?

Yes, that's right. So there'll be -- because there's a lower market overall in quarter 4 versus quarter 3, that is the reason the average AUM is lower.

Right, right. So -- and predominantly, we're seeing that in the PMS funds. So do we have the net sales by category, MF, PMS, AIF?

Yes. So on the MF side, the net sales is INR 5 billion, and similar INR 5 billion is on the alternate side.

Okay. So -- no, but then what happened in the PMS?

Ultimate includes the PMS part when it is a [indiscernible].

Okay. Okay. Then on the private equity side, so we've seen some good fundraise. I wanted to understand the broad construct of this business in terms of how long do the assets stay with us? What is the management fees? How much then are we supposed to pay sort of trail commissions from here onwards? And how do exits and profit share work in the new funds that we face? And so we have about INR 5,200 crores in the new AUM and about INR 4,800 crores in the old AUM. Is that right?

Yes, I think that's right. So the broad private equity constructed 2% management fee from the date of the first close on the entire fundraise, right, which will be INR 4,500 crore, which we'll start accruing from this coming quarter and a 20% carry at the end of the life of the fund. The life of the fund is 10 years and extendable by 2 years. So you can say the duration will be anywhere between 10 and 12 years' time period. As far as the growth capital fund, we've already done our second close at INR 4,000 crores. We are hoping to close this fund at INR 4,500 crores. As far as the series 5 real estate fund is concerned, there the fees would be over 1% and over 10% yield and carry, respectively. Duration of these funds are typically lower at more like 4 years to 5 years' time period, although the payouts in the real estate funds are more frequent compared to slightly back-ended payouts in the private equity business.

Okay. And why is that?

Because what we are seeking in real estate is really income. And so you have repayments happening at predetermined intervals while as far as the private equity business is concerned, we're investing in some of these companies at a slightly earlier stage. And you want to give them a minimum 4, 5 years before there is any [indiscernible] event. Typically, our holding period would be bare minimum 5 to 6 years, potentially longer.

Understood. And the old AUM that we have, are we still generating management fees on that? Or is that sort of past that 10-, 12-year horizon, and you're still only looking at exits?

Management fee is on right till the last date of return of capital. But the only difference between this and the asset management business is that here the management fees accrues at cost while in the asset management business, management fees on the alternate assets accrue at market prices.

But on the return on the capital, you will not be able to take any fees on that, right?

Yes, return capital, not mark-to-market, but return capital marked to cost.

Yes. Yes. Understood. Understood. So when we give the AUM number, that's the cost number. And hence, the 48, INR 48-odd billion will be the cost basis on which we will accrue fees. Is that right? Is that understanding right?

Absolutely.

Understood. And what is the sort of time horizon left for those funds, the old one?

IBEF 1 has already returned. IBEF 2 will have another 3 years of time horizon. IBEF 3 Idea will have a reasonably long time horizon, at least over 5 years' time. And as I said, IBEF 4 will have a 12-year time horizon.

Got it. And final question on the wealth management side. Now this quarter, net sales have come off. I'm guessing it's because of the difficult market environment, but maybe you can shed some light on that. And I wanted to get an understanding of what -- how much of this business is external -- sale of external AUM versus like a sale of just the group's products? And what has happened over here because quarter-over-quarter, we're seeing some dip in revenues and consequently lower profitability?

Basically, on a quarter-on-quarter basis, you will see net sales slightly volatile also depending on the product launches, right? So when we had a big private equity and real estate raise in the earlier quarters, you saw the net sales numbers being higher in those quarters. And you may not have equally big product launches in every single quarter, right?

Right.

As far as the captive products are concerned, they account for about 1/3 of the overall incremental net sales. And this number is coming down over a period of time as the business becomes more and more open architecture.

And on an AUM basis?

AUM would be 60% external and 40% captive because historically, when the business was born, it used to be 100% captive. And over a period of time, that number has kept on coming down all the way down to 40%, and we expect this will be trend over in the coming years. And turning to the quarter-on-quarter numbers again, linked to the gross sales for that quarter, sometimes you have upfronting in some of the alternate products. And that could create volatility in your quarter-on-quarter revenues. And that is why maybe a better way to look at this would be how this business is spanning out over a year because as I said, sometimes you could have words of large capital reasons in a particular quarter, which may not repeat in the following quarter. And then upfronting income that you earn on that raised during that quarter may not necessarily repeat in the next quarter. But on a full year basis, if you see, the yields are quite stable. And the net sales have been much higher. And the revenues and profits, obviously, have seen a massive increase, both because of AUM increase as well as the operating leverage and the profitability.

Got it. Actually, just one final question back on the private equity side. You mentioned 2% fees for the private equity business and 1% plus on the real estate business. What is the trail fees that we have to pay? And what sort of upfront fees have been paid on those fund basis?

Sorry, can you repeat that, Madhukar?

What sort of upfront and trail fees have we paid on the new fund? So what sort of upfront fees have we paid on the new fundraise right now? And what sort of trail fees will be -- will we be expected to pay going forward? So that's going to come off my private equity P&L, right?

Yes, actually, a lot of the fees that have been paid on the private equity raise is actually mostly trail bearing. I mean, you have some part of it which is upfront also, which would be about 3%, but a good part of the AUM would have 3 years of trail.

So actually, when you raise any new fund, typically, you pay the fees over a 3-year tenure, but they are amortized over the life of the fund. So that is the way the P&L will be reflected.

Okay. So the private equity P&L would have sort of a regular trail commission payout because that's amortized. You paid upfront for 3 years but gets amortized over the life of the assets. Plus there would be an additional trail commission, right?

No. There is no further trail commission. What is paid is upfront over the next -- over the first 3 years, which is amortized over the life of the fund. There is no other trail commission that other than that.

Understood. Understood. And then what would that be just to -- 3%, did you say that?

Yes, around that.

But not on the entire capital raise. It will be a part -- there's institutional money raised and our own drop investment. So you can say that this would be applicable for about 60%, 70% of the fundraise.

The next question is from the line of Prasheel Shah from CapGrow Capital.

My question is regarding the AMC business. So if we see the AUM over the past 3 to 4 years, the business has not really grown. So PMS and mutual fund would be about INR 450 crores now, which was about INR 350 crores in FY '19. So the mark-to-market is more or less greater than that. So just wanted to know where do we see ourselves, where do we see the AMC business going in the next 2 to 3 years?

So as you have seen in the past, over a 6-, 7-year period, you've seen the INR 1,000 crores AUM go up to INR 45,000 crores, right? I mean, in India, the AUM linkages are strongly to performance. And 1 or 2 years of strong performance can take the AUMs significantly higher like we've seen for some of the other performing AMCs in the last year if you look at their AUM numbers. Then you have a combination of mark-to-market as well as net sales, and then it will start building up. We are hoping that given the turnaround of our fund performance is our second largest mutual fund, Midcap 30 fund is India's #1 performing fund. It is about a INR 3,000 crore AUM, and we are seeing some traction there. Our large and mid-cap product, which is about 2.5 years old, was among the best performing fund till 3 months ago. Our flagship multi-cap PMS and [ PPoP ] was among the best-performing funds as of 31st of December. We've seen some slowdown in that performance in the last 2, 3 months. Our mid-cap PMS FMS is one of the best-performing PMS. So we've got quite a bunch of products which are now top performing products. And we believe it is a matter of time that we should recommend our journey of meaningful growth in AUM of this business once again. So I think as we said in the past, our operating model and our operating priorities are very clear performance first, yield next and AUM follow suit. So I think what you've seen is the preservation of the yields to this time period. And as and when performance comes back, we believe you should see that translating into AUM also.

Okay. So just to rephrase my question with you, the net flow has been in the last maybe a couple of years, maybe 3 years in both PMS and in mutual fund?

So if you look at our overall net sales number, this number was about INR 4,000 crores for the last year. Correct. This number was negative INR 13 billion or INR 1,300 crores for the previous year. So there's actually a turnaround of INR 5,300 crores, right? So basically, as I said, as more and more performances have turned around, you will see this number gradually building up. And you can obviously see spurts if you have extraordinary performance like you've seen, as I said, in the performing AMC in the last 2, 3 years.

Okay. And one next question is on the home finance business. So our ROAs are doing fine. But [indiscernible], obviously, because of the leverage is about 10%. So what would be the triggers for this 10% to go up to, let's say, 14% or 15%? Would it be like a wait and watch more than increase in leverage? Or how do you see this spanning?

So actually, the ROA is at 10%. However, given the betterment of our disbursement and growth journey, that would put us in a higher level because the leverage is actually at the onset is [ 2.5x ]. So as our year-on-year, if you see, we have grown from INR 270 crores of disbursements to INR 600 crores of disbursement, which is expected to further augur in FY '23 as well. And as that growth journey shapes up, leverage would better the overall ROA plus this is largely an ex assignment ROA. So if assignment is on the -- the ROA numbers would start shooting up. Overall, NIMs and cost of funds have also -- NIMs have expanded, and cost of funds have also lowered. We've got a recent rating upgrade from CRISIL, which should also help us to further lower our cost of funds and better the ROA. So we see this over the next couple of years moving to this sort of ROA number from where we stand today.

Okay. So basically, we would be because of are we seeing the markets span out in the next year where you have guided for better growth in the home loan business. So we will see this 2.3 number going -- would you say this is like the bottom that we are opening at 2.3 in the leverage?

Yes.

Our next question is from the line of Rikesh Parikh from Barclays Securities.

And the initial question is about the capital market operation. I just want to understand what is the kind of NPA book we carry? Or do we have NPA [ kind ] of loan book?

Yes. The total book is at INR 2,000 crores as of the March end number.

Okay. Second question is related to -- now we have a new guidelines around IPO financing. So what will be -- what kind of overall numbers we can see or impact on our income on those part?

Yes, [indiscernible] so as these guidance have come into effect from April 1 and the maximum funding that we can do per borrower per IPO is INR 1 crore. So what will happen is this will lead to more retailization of our customers and more number of applications of INR 1 crores ticket size. So as quarter 4 was actually muted in terms of these numbers. But I think there is some bit of momentum now given the LIC IPO and other IPOs in the pipeline. So with the larger number of retail client base that we have, we should see, overall, this number gradually catching up, right? But yes, on a year-on-year basis, it will start slower, but overall, it will catch up to a better run rate given the traction with the retail clients.

So just for reference, what was the number for the FY '22, if you can share?

The -- you want the profit number of that or which number?

The income number for IPO client.

That number was INR 70 crores for FY '22.

That was helpful. Second, coming to AMC business as such. So if I look at the AUM growth that has been relatively muted and even off let the SIP flows, market share has come down below 2%, it's 1.8% if I look at it. So how we are looking at it and the focus we can look at it around?

Yes. So as I answered earlier, we've seen a substantial improvement in our net sales to around INR 4,000 crores this year compared to an outflow of INR 1,000 crores last year. And we are hoping to build on this trend in the coming year ending March '23. As far as the SIP book is concerned, as you may be aware, our international funds related SIPs have got called now after the embargo on international funds. We have seen that money, which was coming on a monthly basis, lost for us while the overall industry SIP number went up because of which you saw this market share number changing. We're hopeful that the regulator will take cognizance of our strong [ ForEx ] reserves and the follow-up by the entry in terms of potentially reviewing this limit. And we're hoping that, that part should come back. But even otherwise, we have a high focus on building up the SIP book even for the SIP funds or even for the active fund. And we are hopeful that this year, we should see meaningful traction in this number, obviously subject partly to also the embargo in international investment being lifted.

Our incremental focus would be on passive fund or an active fund because last year, I think, sir, because of the new launches of passive fund and the money flow on that side?

Actually, these products are very complementary. As you see, they don't overlap with each other. So we don't have international active funds, and our passive funds are predominantly international. So really, they are complementing each other. And currently, as I said, the international investment limits at [indiscernible] being sustained is coming in the way of growing businesses. And as far as active business is concerned, I highlighted that our second largest mutual fund by AUM is already the best-performing fund in the country. We are hoping that similar traction in other funds will see substantial improvement in net sales as well as the AUM of this business in the next cycle.

And my next question is on the home finance segment. I think we have gone through the learning curves over there. And probably, we have seen the things. So what we can expect in terms of growth numbers over there and the targeted ROA, ROE and NPA levels we will be looking at or targeting?

So as far as the disbursements are concerned, you've already seen a disbursement pick up to more than INR 600 crores. We have over 100 branches. A good rule of thumb to start with is that each plant should disburse INR 1 crores a month. So that will take you to about INR 1,200 crores of disbursement potential, right, which is 2x of the actual disbursement number for the last year. As far as the gearing is concerned, we are at about 2.4x. I think we'd be very comfortable with at least 3.5x kind of a gearing also. So that will give you a sense of what kind of AUM the current network itself can support, right? And that will bring with it some cost-to-income leverage and operating leverage for the business. Our cost of funds we highlighted to you is already running at more than 100 basis points lower in terms of incremental capital raise for the year compared to our overall cost of funds. So we have a leverage on cost of funds. We have a leverage on disbursement growth and overall operating leverage. So we believe that scaling any business for us will require a minimum 15%, 16% ROE target. All our other businesses earn a lot more. And the overall firm return on equity is 30% as of now, right? So we're looking forward to much higher disbursement levels over the next 2 years' time. I highlighted to you that the potential based on the current distribution network itself is [ INR 1,200 crores ]. And that combined with lower cost to income and cost of funds should help us to achieve those ROE numbers that we're talking about.

The next question is from the line of Sanjay Awatramani from Envision Capital.

I just wanted to know that our capital market business is on the higher side of the revenues. So I mean, how are we moving ahead with this on the tech front or digitization stuff? Can you highlight some things on that?

Yes. So we are surely building on the digital side of the business in a big way. As you know that we have built a digital model to run our business. So on the digital side, there's a lot of investments happening on the app. We will be coming out with an upgrade in the quarters from here on from the next quarter onwards. So in terms of our super app plus we are looking at something specific for the research related stuff because we want to build on the research and advisory base. At the same time, on the overall technology overall, we are looking at a lot of investment in terms of the security and the overall [indiscernible] to take care of the load, which we'll be building on to with a number of client acquisitions. So overall, we are well aligned to build on the digital journey in terms of client UI/UX as well as from a security angle and even from the back-end growth perspective.

Okay, sir. This was helpful. And any guidance you can provide us for FY '23, I mean, for multiple divisions or a ballpark figure for overall revenues?

Yes. So overall guidance-wise, so we don't give out such guidances. But definitely, as you have seen that last 2 years, we have shown [ strict color ] on this side of the business and in terms of the number of clients, the assets under advised, the overall distribution AUM growth, the funding book and the overall active clients and the overall operating leverage playing out. Definitely all this augur well for future periods for us to deliver growth.

Our next question is from the line of Sahej Mittal from HDFC Securities.

Congratulations on a great set. First, my first question was around.

Can you speak up a bit?

Am I audible now?

Yes.

Yes. So sir, if you could give out some growth outlook for your strategy for the capital markets business for the next 2 years, maybe now given that if we would see some stable markets, market stabilization and not so much volatility in the next 1 or 2 years? Or I mean, what's your strategy over there? And the second thing was around -- so lots of -- I mean, majority of the customer acquisitions are happening in the Tier 3 cities. So what does the cost of acquisition look like for us? And if you could share some ARPUs from those customers?

Yes. So from an overall business angle, as you know, we have been investing on to this business in the last 4, 5 years in terms of employees, in terms of branches and in terms of overall franchisee network. So we are well aligned to build this growth going forward in each of these segments. When you look at the franchisee base, we are already expanding it year-on-year in a big way across the country. Similarly, we want to look at the branch models. At the same time, on the digital channel, we are acquiring in a big way like you see all the discount book we're acquiring, but we are very clearly focused on the quality of accounts than the number of accounts. So that is on the overall account base. At the same time, on the distribution base, also we are building the business in a big way so that we have a good mix of the distribution business along with the bookings when it comes to the overall -- our own manufactured products. And also, we sell other products, including insurance and other third-party distributors. So overall, there's a good focus on expanding the overall reach as well as the overall mix in the overall business. Coming to the overall cost of acquisition, we are -- as of now, the overall cost of acquisition is around INR 2,000 per account. That is what we are looking at. And the overall revenue ARPU is around INR 7,000 for us when we look at our overall model.

Sir, typically, my question was around the digital acquisitions, which we are doing in the Tier 3 cities. So if you could give us some color on the cost of acquisition for those customers and ARPUs, if these customers are really contributing any ARPUs related to the cost of acquisition, which we are incurring.

So the cost of acquisition is -- looking at the digital side of the business when I talked about [indiscernible] might be a bit lower. But overall, the mix is very well aligned. So it will be in the same range when you look at quarter revision. On the revenue side, because we have got advisers for all our digital acquired clients also, so we are having a much better ARPU when you look at the revenue side of the whole thing. So we build on the advisory base and the overall thing because on the overall ARPU, if I look at across [indiscernible] and all that, it is almost INR 17,000 ARPU. So when I talked about 7,000, it is on the digital side of the business.

Got you. And the second bit was a data keeping question. So was there a one-off in the interest income from last book in 3Q because there is a sharp drop from 3Q to 4Q from INR 100 crores to INR 47-odd crores. So if you could.

Yes, that's right. So this -- as I discussed that quarter 3 actually had a larger level of IPO financing income, and quarter 4 was a bit lower [ dilution ] in terms of the IPO financing activity. That is the reason. So if you see NII was actually lower by almost INR 34 crores on a sequential quarter 3 to quarter 4 basis.

[Operator Instructions] We have the next question from the line of Rishikesh Oza from RoboCapital.

Sir, my first question is regarding our home finance business. Sir, could you indicate what credit cost are we looking for in FY '23?

Yes. So credit cost-wise, if you see last 2 years, we had a bit of higher credit costs on account of the COVID environment. And -- but we're seeing a very good improvement in the overall asset quality because if you see the headline numbers of 1 plus, 30 plus, 90 plus, they have significantly come down even on a year-on-year basis. So this augurs well for our next year's overall outlook of credit cost. We intend to keep it within 1% range for next financial year and a targeted number for it.

Okay. And my second question regarding the AMC business. So as the AUM grows, as you previously highlighted about meaningful growth in AUM that you're targeting, where do you see the PAT margins going ahead? Like when can we see something like a 35% and 40% kind of profitability margin?

Business obviously enjoys very high operating leverage where the costs do not go up proportionately. In fact, if you see our overall size of distribution network and sales team is up by nearly 50% in the last 2 years, while the AUM has been flattish. So we've invested even during this time period. And you must have seen in the last cycle when the AUMs grew meaningfully, the operating leverage played out. So really, we don't see costs really rising proportionately as and when you start seeing the AUM growth [indiscernible]. So without talking about a specific number, if you just refer back to the numbers when we had strong AUM growth, you had seen a dramatic improvement in margins on this business. And the other aspect that also happens along with performance is carry. As you know, we have a lot of alternate assets, and part of those assets are carry based. So that is the additional upside that one sees as and when the AUM and performance comes back.

Our next question is from the line of Shalini Vasanta from DSP Mutual Fund.

This is Vivek Ramakrishnan. All my questions are on the mortgage finance business. So I'll just ask them sequentially. Firstly, there was an increase in GNPA marginally from 1.6% in Q4, it was 1.3%. So is it just a one-off or accounting-related issues? And could you also let us know the number of clients who have paid at least 1 to 2 installments and are still regarded as GNPA? Because your collection efficiency is well over 100%.

So GNPA number, if you see sequentially, it has actually come down. It has not gone up because overall GNPA stands at 1.6% as of 31st March '22. And it is even down on a year-on-year basis as highlighted. If we consider the impact of the new RBI norms, then the GNPA number is 2.6%, which is going to be made applicable from 30th September of FY '23. So overall [indiscernible] coming down. So the EMI.

Sorry, I was just looking at the Q3 number of 1.3%. That's the number that I was looking at.

I don't think you have the correct number. Maybe you need to recheck.

Okay. That's okay. So if you're saying that -- this is a number I got from the presentation. But in terms of -- so overall, the number of clients were still regarded GNPA and.

Sorry. You're right. So just to clarify the point from 1.3% to 1.6%, actually, last quarter, post the new RBI announce came, the GNPA number was 3.6%, which has come down to 2.6% on the new circular basis. And as per the financial reporting under Ind AS, this number has been marginally higher from 1.3% to 1.6% because now internally, we have actually changed the complete process to collect now 3 EMIs, and the focus is to collect 3 EMIs rather than collecting one EMI. However, the financial reported number goes by one EMI method because in the Stage 3 assets and then Ind AS, you continue to differentiate. So that is the reason you will see some bit of movement on the GNPA number from Q3 to Q4 on a Stage -- Phase 3 number. However, the overall number basis the RBI norms has come down by 100 basis points on a quarter-on-quarter basis.

So the 2.6 minus 1.6 would be the people who are actually paying a few EMIs, but that's regarding the [indiscernible]?

Yes, that's right. So that is the difference where actually one EMI versus paying multiple EMIs.

Sure. Okay. Great. Sir, I'll just ask the next 3 questions quickly because I know you're running out of time. Given your portfolio is relatively riskier plans compared to, let's say, a salaried account in urban cities. What are the initial bounce rates, and how much do you have to do cash collections thereafter? That's question number one. Question number two is, you had guided that you will increase leverage to 3.5x. Would this be around the peak kind of leverage that you have on the 3.5x, 4x because of the relatively riskier kind of clients? Or do you think there is space to go higher? And last question is, what is the target PPoP that you'll have so that we can try and guess what your estimation of credit cost would be? Of course, if the credit cost come lower, our ROA, ROE will be higher.

Yes. Sorry, what is the first question? Actually, I.

Okay. So the initial bounce rate on presentation [indiscernible].

Our bounce rates now are at 13% on the new book that we have and on the overall book is at 19%.

Okay. Excellent. And on the gearing, what would be the.

As far as the gearing is concerned, overall gearing, so 3.5x, 4x is quite a comfortable number as far as we stand. We have already infused INR 850 crores of equity from the parent company. And with the strong free cash flow at the parentage level, the commitment is always there to increase equity. So leverage overall has not been constrained. We have been flattish on the growth overall over the last 3 years. But I think as we see growth in FY '22 or FY '21, we are very confident of getting a further growth run rate in the coming years and leverage until we had just had 50% capital adequacy today. So there is a huge headroom to further go on the leverage side.

Surely, sir. The last question is on the PPoP as a percentage of assets. Do you have certain targets that you can guide us? Because that will give the cushions that you would have just in case credit costs increased due to some reason or other.

So as we informed that our idea is to keep the trade cost around [ 1% ]. Our NIMs are already at 7.3% in FY '22. So that would give us a very strong PPoP of run rate journey. So this financial year, so quarter 4 if you see we have ended almost at a profit of INR 49 crores, which itself is where we started or one of the financial year.

Sure, sir. It is indeed strong. Sir, can you just give me the cost income target then? That will help us. Because you've been investing in assets in operating branches also. So cost-to-income ratio would be useful.

That's also a function of the AUM growth. So basically, there will be 2 phases of how you should look at the cost-to-income ratio. In the first phase, we will be dialing up on the sales team as we keep dialing up on disbursements like you saw. And in the second phase there, as the productivity of the newly hired RMs also start rising that you will see some benefit. So really, again, you would like the numbers to trend lower from where you are currently. But any specific number of guidance for what the PPoP margin would be for the cost-to-income ratio will trend to is something that we want to refrain from giving at this stage.

Next question is from the line of Deepak Sonawane from Haitong.

Am I audible, sir?

Yes.

Yes, yes. So my question is regarding your broking business. As we can see that we are on a strong acquisition of -- the acquisition spree of new plants. But on activation rate of the client, we are still, I guess, we are still lagging behind the industry trend of around 38%, 39% even in FY '22 as well. So going ahead, how can you -- like what will be the strategy by management to improve this activation rate? And is there any sense sort of nudging or something, some sort of any activity that has been going on for improving the attrition rate on broking side?

First acquisition rate on the incremental client stands at 38%, which is very much comparable to a discount booking house. So to correct that because that's -- it's not like that incremental activation rate has been lagging behind.

Yes. But to add to that, we surely are working on it from particular angles. One is the digital way of getting the clients activated, whether through [ nudge ] or whether through other kind of offers. That process is on. At the same time, we -- as you know, that we are very well aligned towards the distribution business. So we are trying to cross-sell multiple products to the same clients. So to that extent, we have got a very good traction there. So we see that this can only keep improving from here on as we are very clearly looking at quality of clients when we are acquiring at the same time and ensuring that the activation is on the higher side. So there is digital interventions, which are being looked at. And at the same time, we have got our advisers and the distribution products, which will help us in doing the activation.

All right. And sir, my second question is regarding cost of acquisition. As you mentioned that your CSC is around 2,000 per account. So can you just give us a breakup between -- a ballpark figure between the cost of addition through marketing and cost of addition through employee OpEx, I mean?

We typically don't give the breakup. So we look at it from the overall cost angle and from the overall revenue perspective on that.

Ladies and gentlemen, that would be our last question for today. I now hand the conference over to Mr. Shalibhadra Shah for closing comments.

On behalf of Motilal Oswal Financial Services, I would like to thank every participant for attending the Q4 FY '22 con call. In case of any further queries, please you get in touch with me or our Investor Relations instead. Thank you, and have a good day.

Thank you very much. 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. Thank you.