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

Good evening, ladies and gentlemen. I'm Shehzad, the moderator for this conference. Welcome to the Second Quarter FY '23 Earnings Conference Call for 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 and CEO, AMC; Mr. Ajay Menon, CEO, Broking; Mr. Shalibhadra Shah, Chief Financial Officer; Mr. Chetan Parmar, Head 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.

Good evening friends, and wish you all a very, very happy Diwali. It is my pleasure to welcome all of you once again to the Motilal Oswal Financial Services earnings call for the second quarter of the financial year ending March [ 2023 ]. Let me first start by taking you through the key highlights of the performance for the quarter. During the quarter, we reported one of the highest quarterly profit after tax at INR 509 crores, which is up by 11% year-on-year. This is our profit, excluding the private equity profit share. Our operating profit without considering the private equity profit share grew by 16% year-on-year and 22% quarter-on-quarter to INR 221 crores. The core business were robust with Capital Markets business profits being up by 9% year-on-year and 46% quarter-on-quarter to INR 132 crores. Asset and Wealth business reported profit after tax of INR 66.7 crores, up by 2% year-on-year and up by 15% quarter-on-quarter. We saw traction in the Home Finance business and the business reported a profit of INR 33.4 crores, up by 67% year-on-year and by 4% quarter-on-quarter. Our consolidated network stands at INR 5,970 crores. Net debt is at INR 5,520 crores. Excluding Home Finance, our net debt is INR 3,000 crores. Our total debt equity stood at 1.3x. And ex-Home Finance, debt equity stands at 0.9x. I'll now deep dive into the individual businesses, starting with the Capital Market businesses. The Capital Market business comprises of retail broking and distribution, institutional equities and investment banking businesses. Revenues for this segment were at INR 719 crores, up by 18% year-on-year and 18% quarter-on-quarter. Profit grew 9% year-on-year and 46% quarter-on-quarter to INR 132 crores, led by healthy volume growth of 198% year-on-year and 45% quarter-on-quarter. We also saw improvement in our retail F&O market share by 63 basis points quarter-on-quarter. As you know, this part of the market now contributes to a vast majority of the overall market volume, and we have seen steady traction overall within the F&O market as well as specifically within the auctions market. In Retail Broking and Distribution, a total of 351,000 clients were acquired in the first half with traction, specifically in the online channel. The NSE-active clients have registered a 26% year-on-year growth at 9.1 lakhs as of September of 2022. Our average daily turnover market share improved by 50 basis points quarter-on-quarter through robust growth of 45% quarter-on-quarter in the average yearly turnover. The distribution AUM grew by 17% year-on-year to INR 18,600 crores as of the second quarter. Robust distribution net sales of INR 710 crores during the first half and our outlook on this remains quite positive. We see the opportunity for cross-sell to the entire 52 lakh client base of the group. Interest income increased by 20% year-on-year to INR [ 156 ] crores, primarily due to a 39% increase in the margin trading funding book, which has gone up to INR 2,920 crores. Our currency market share improved by 150 basis points quarter-on-quarter to 12%, while our commodity market share stood at 7%. We launched Research 360 app, which is a one-stop shop to get 360 degree knowledge and research to the retail client base of Motilal Oswal. Institutional equities successfully hosted the 18th Annual Global Investor Conference, which saw a participation of over 160 companies. The investment banking business completed 3 deals with a total fund raise of INR 2,330 crores during the quarter. Turning to the Asset and Wealth businesses. In the Asset Management business, our AUM across mutual funds, PMS and AIF grew by 8% quarter-on-quarter to INR 46,700 crores. In the second quarter, our revenue stood at INR 143 crores. Mutual fund AUM grew by 6% quarter-on-quarter to INR 29,140 crores. We've seen improvement in performance of nearly all of our mutual fund schemes with top quartile rankings in 1, 3, 6, 9 months and our mid-cap fund now seeing top rankings across 1, 3 and 5 years as well. We expect this to result in improved gross sales and a reduction in redemption in the coming quarters. We added around 55,000 new SIPs during the second quarter with traction in active funds, which grew by 16% quarter-on-quarter. Our net revenue yield was impacted 78 basis points during the first half of the year. The AMC onboarded Prateek Agrawal during the quarter to lead investments at the AMC business. He brings over 28 years of experience in the business. The private equity business fee earning AUM was at INR 8,520 crores across 3 growth capital private equity funds and 4 real estate funds. In second quarter, revenues, excluding the share of profit on investments, grew by 41% year-on-year, 23% quarter-on-quarter, actually INR 39.1 crores. We also announced the final close of our largest private equity fund, the Series IV India Business Excellence Fund, which had a fund size of INR 4,500 crores, in the month of October. And the full impact of this in terms of the top line and the bottom line of the business will be visible in the third quarter. Our Wealth Management business, AUM grew by 22% year-on-year to INR 38,400 crores. Revenues grew by 7% year-on-year to INR 51.1 crores. Net sales during the first half was at INR 3,360 crores. The RM count, the Relationship Manager count increased from 123 at the same point in time last year to 155 now. Our operating margins are lower as we continue to invest in this business by adding more relationship managers. Overall, the Asset and Wealth Management revenues grew by 5% year-on-year, and 7% quarter-on-quarter to INR 234 crores. Profits were at INR 66.7 crores, up by 2% year-on-year and 15% quarter-on-quarter. Turning to the Home Finance business. We reported a profit of INR 33.4 crores, up by 67% year-on-year. NII grew by 11% year-on-year. NIM expanded by 88 basis points to 7.8% for the first half of the year. Yield on advances stood at 13.8% in the first half. Cost of funds were down by 53 basis points to 7.9%, resulting in a spread expansion of 46 basis points to 6%. Disbursements grew by 74% year-on-year, by 65% quarter-on-quarter to INR 280 crores, and we are gearing up for stronger disbursements in the coming quarters. Our gross NPAs improved to 1.5% with collection efficiency of 100% during the quarter. Net gearing for the Home Finance business stands at 2.3x and Tier 1 capital adequacy remains robust at 49%. We also saw an upgrade by ICRA of our long-term rating to AA stable from AA minus, stable as per the last rating. Finally, turning to the fund-based activities. This business includes forms of commitment to our AMC, PE, RE funds and strategic equity investments. The total investments, including unrealized gains were at INR 4,720 crores. The cumulative XIRR on these investments ever since inception has been about 19%. To sum up, we've achieved one of the highest quarterly profits of INR 509 crores following robust and sustainable performance across all our businesses. Our retail broking business, which is our cash cow, continues to improve its market share and benefited from market expansion as well as industry consolidation. Asset Management business has seen improvement in performance across most of the products and is hoping to start reporting positive flows from the coming quarters. The private equity business has successfully delivered on the fund raise of its largest ever fund, while investments in building Wealth Management business continue during the quarter. Our Home Finance business has witnessed [indiscernible] by improving disbursements and asset quality trends, which is now geared up for sustainable growth. There is immense potential and opportunities in the market for each of our businesses to grow strongly in the coming years. Thank you, and we can now open the floor for Q&A.

[Operator Instructions] The first question is from the line of Sahej Mittal from HDFC Securities.

Sir, a couple of questions from my side. So I mean, on the Wealth Management business, while the investment in hiring the team has resulted in a drop in our margins, but how should we look at the growth outlook for maybe next 12 to 18 months in terms of the top line growth? And how should we look at the margins reverting back to the last year levels? So if you can talk a bit about that.

So there are 2 things here. Firstly, the investments in augmenting the RM base is likely to continue, as we've highlighted in our earlier calls, even in the coming quarters and the next couple of years. However, this half year also saw a fall in the upfront income on a year-on-year basis. We had very strong alternate asset sales in the first half of last year, and they were lower in the first half of this year. So that -- all of the other revenue line items within this business continue to grow on a year-on-year basis. So that was the second driver for the lower margin that you saw. We see that coming back in the second half as well as in the coming years. However, the investment in the RM base is something that we expect to continue going forward.

But then on the productivity of these RMs, right, because we are upfronting these costs, but what about the productivity?

Yes. So typically, year 3 onwards, you start seeing profitability from these RMs. So I think in the ramp-up phase you will see some pressure on margins in this business. But eventually, profitability should come back as the productivity builds up. Also, it should build up as the incremental additions fall as a proportion of the denominator base or the opening base.

Right. If you can index the productivity of the new agents maybe which we hired a year back versus our vintage agents -- sales managers, I mean, so to get us some sense.

I think, that, we can discuss offline. We will not be readily having all those things.

Sure. Sure. And something -- I mean, your Capital Markets business has done quite well. So on the -- but for the industry, there's this one trend which we've [ seen ], right, the active clients have been seeing a decline across most of the players, right? So what is your sense? I mean, why is there [indiscernible] for a player like -- for fintech brokers, we do understand they were actually expanding their customer base at a very fast pace, but that was not really the case for a traditional bank-based broker -- the traditional brokers or a bank-based broker. So why are even these players seeing a sharp drop? [Technical Difficulty]

Ladies and gentlemen, the line for the management has got disconnected. Request you all to please stay online while we reconnect them. Thank you. Ladies and gentlemen, thank you for patiently waiting. The line for the management is reconnected. Mr. Mittal, please repeat your question.

Sorry, am I audible now?

Yes, sir.

Yes. So I mean, sir, there is this one trend which shift like in the broking industry, right, that the clients have been dropping from most of the players. So we expected that -- so our sense was that for most of the fintech brokers who are actually acquiring clients -- then this trend to happen, right? But even for a traditional or a banker-based broker, this was not expected. So if you can give us some sense, how should we look into this?

So you're right, as far as we were concerned, we were looking at really that the accounts were increasing on [ the math ]. But if you know that during the IPOs, there were a number of accounts increase more. So if you look at the quarter, there were no much IPOs per se. And at the same time, the quality focus was there. And typically, retail clients also look at the market conditions. So these were the only factors whether it's the IPO, whether it's the market situation. So based on that. So our parameters are always on quality and getting the margin accounts. So to that extent, there is a marginal dip, but we feel that the consistent growth of our accounts will continue to happen as we grow from there.

And if you could talk a bit about the customer behavior who's coming from the Tier 2, Tier 3 city, [ are we ] trading into futures auctions or maybe cash. Give us some sense maybe.

So we are also seeing the trend towards auctions trading and futures. But as we have got advisors aligned to each client, surely, there's a mix to the cash market also for us. But surely, the trend towards F&O is increasing, and that can be seen in the growth of our market share also on the F&O side.

Right. And generally, what's the order size in the auctions segment?

Order size, you mean to say number of lots?

Number of lots, that's correct.

So typically, our typical lot size is around 3 to 4 lots for the retail client.

Right. And does this change materially, I mean, in a bull market or a bear market?

Not really. I don't think so, because from a retail perspective, surely lesser, but from a high-end PCG clients, it can change, but from the retail, it remains the same.

Right. And generally, the customers who are new to market, right, what's the initial ticket size, initial check which they write into Motilal?

So we look at a margin in the range of INR 25,000 to around INR 50,000 for retail client coming into the system.

Got it. And any plans for a buyback, given the kind of cash we have?

No. We just completed our buyback in Q2 only in the month of July. So no, we don't have any plans for further buybacks.

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

I just want to ask for a little extra time and some extra questions. So please allow me for that. So -- okay. So now my first question is that in March '22, we had a network of INR 56.7 billion, and now we have INR 59.7 billion. So it's an increase of INR 300 crores. And if we see the profit of the half year, it's INR 500 crores. So I'm not sure, is there a mismatch between like INR 200 crores some-odd amount or how it is, if you can clarify that?

Yes. So we actually completed a INR 200 crore buyback. So the difference is on account of that. So if you see in July month, we did a INR 200 crore buyback. That will reduce the net.

Okay. Got it. Got it. Okay. Now on the -- our brokerage segment, I just want to -- the questions I have. One is that our [ gas ] market turnover is up by almost kind of 50%, but the revenue is not up by 50% or -- so that's a -- so much difference between the revenue upside or the turnover upside. So if you can clarify something like whether we have reduced our brokerage plans to some of the customers or [ kind of there ]?

So cash market turnover is actually up 7% on a quarter-on-quarter basis. So there is no such 50% number. Cash market turnover is up 7%.

And the difference can also be because of the mix between delivery turnover and the trading turnover. So the delivery profit will be different to our trading turnover.

Okay. Okay. Okay. Maybe that was one of the reason. Okay. Now the second question is like about the employee addition. If I remember like last quarter, there was around like 1,400 employees who were added and predominantly on the sales side, right? And now this quarter, we take like 1,300 core employees on the advisory and technology side. But if I look at the number of client acquisitions, let's say, if the 1,400 employees were added and number of clients last quarter added was 2.1 lakh And the one year before, also we had an average of 2 lakh per quarter client additions. So I just want to know like the -- how the -- those new employees are working or how we are getting the benefit of the new clients if those are in the sales side?

So actually, first of all, this last one year, we have added net 1,300 people. That's what we said. That's a net number of addition. So -- and in quarter one, what we said is 1,400 gross number of addition. As far as the overall client addition is concerned, so that is in line with the overall market as well. So that's the update.

Okay. And another question on the like interest on the brokerage, like whatever we are running, that funding book. So it seems like going good. So how do you see the future of this particular funding? Because that seems like an elephant in the room, right? Because going forward, the market looks -- so I wanted your perspective on that particular area on the funding in the brokerage side?

So typically, the funding book runs in line with the market volumes. If the market volumes grow, you'll see the margin funding book increasing. So always that has been the case. So that's an opportunity which because of a strong balance sheet, we have that ability to raise resources and find the customer.

Okay. Okay. Now on the private equity and the real estate, that business side. I see that this quarter, we have a reduction in the fee earning AUM. Like last quarter, we have around INR 11,000 crores, and now we have around INR 8,500 crores. So what is the reason behind that reduction?

So there is no reduction. Actually, that is the total AUM in our private equity business is INR 11,000 crores. However, fee earning AUM has been INR 8,000 crores, and the fee earning AUM has been increasing because of our last closing that we have done of the fourth fund of INR 4,500 crores. So there are a couple of initial funds where these are not charged, which are on the verge of getting fully exited.

Okay. So current fee earning AUM is INR 8,500 crores or INR 11,000 crores.

Fee earning AUM is INR 8,500 crores.

INR 8,500 crores, okay, okay. And yes, on the AMC business side, now like I just want to recommend that if you can show one slide which says that what was your opening AUM and what was the net sales and what was the M2M and that how it gets the closing, if you get that, I think that would be -- answer questions, which always we have in 1 or 2 calls. So if you can answer like what was our gross sales in the AMC side and PMS side?

Are you asking that question or you're suggesting that we should show that in future?

No, one is suggesting that going forward, if you can include one slide, which shows that what was your opening AUM and what was your net sales and what is the plus/minus in the M2M and that makes your closing balance, right, on the closing AUM. So if you can -- going forward, if you can add that slide, then probably we don't need to ask, we can just go through the slide and we can understand. So for this quarter, can you just let us know like what is the net sales amount for the [ period ] and the mutual fund side?

Yes. So basically, the gross phase is INR 1,800 crores. redemptions are INR 2,300 crores overall. So the net sales is minus INR 500 crores. Most of these net sales, minus INR 500 crores is in the mutual fund side, about 80%, 85%, the balance is on the alternates side.

Okay. Okay. Got it. Got it. And now one more question on the private equity side, like, how these fees or profit sharing be. When these exits happens, at that time, how that is calculated? I mean, I think those are already like part of our income, right? We evaluate that during the quarter and move these [indiscernible] into our income. So when actual exit happens, at that time, what is the implication comes to the -- only the tax amount that we have paid or only the actual profit gets included?

So there are 2 components. One is the management fees, which is charged on the originally-raised quarters and not mark-to-market, unlike mutual funds or equity funds in the public market. And as far as the carry is concerned, the -- there is no carry book from the initial exit till the capital is fully returned. And only after the capital is fully returned, all incremental returns beyond the capital that is committed are eligible for carry, which is at about 20% share of profits.

Okay. Okay. So 20% profit will come at the end and between like whatever our own investment on that, we will calculate M2M and it will become part of our regular financials, right?

No, there's no mark-to-market. Okay, on our own investment, there is a half yearly mark-to-market that is done, and that is accounted in the network.

Yes. As far as the profit share income is concerned, that is accounted as and when that gets realized.

And on our own investment, that is half yearly of this particular private equity and [indiscernible].

Yes, we do the fair valuation of each of these investments on a half yearly basis.

[Operator Instructions] Next question is from the line of Deepak Sonawane from Haitong Securities.

Sir, my first question is regarding our funding book in capital market. So we have reported quite a strong growth in Q2 on a year-on-year basis, but compared -- but this compared to other -- your peers who have reported the results for Q2, they're seeing kind of flat or negative growth in margin funding. So can you just explain, I mean, what our strategy is that is implied for us to grow this book?

So you're talking about the funding book, right?

Yes, yes.

So basically, the whole proposition is that because we have a good mix of clients on the cash market, and as of now, there is a decent push from our side on the PCG customers to build on to the funding book and because of our advisory base, we are able to get the plan to buy good delivery ideas. And based on that, the funding book has got increased during the last quarter on a quarter-on-quarter basis. So it's mainly to look at it because the NPA book, which has now become very popular on the booking side, that is also seeing traction. Because of the SEBI regulations of the margins, clients also prefer on the NPA book to build up the overall base when they have to make the margin payments also as per the revised guidelines of the exchange. So that has also resulted in increasing the NPL book side.

In addition, we've always been very under indexed compared to full-service brokers as far as the margin trading funding side is concerned.

Okay, sir, understood. Sir, my second question on cost side for Capital Market. So we reported a breakup of your new client sourcing between online franchisee branch and other. So I could see that online contribution has dropped quite significantly since last quarter. And if you look at your other expense for Capital Market, that has grown even on a quarter-on-quarter basis. So is there any correlation that marketing cost, just because online sourcing has been lower, so that marketing cost has inched up?

No. So there is no increase in the marketing cost. In fact, it has marginally eased on a quarter-on-quarter basis. The increase is mainly due to the marketing and the advertisement expenses and some of the CSR expenses and also the standard provision because the funding book has increased, so we also need to provide the standard provision on that as per the ECM model. So that is the reason of the increase in the cost on a quarterly basis.

Okay. And what is the reason for the fall in contribution from online sourcing for Q2?

So on the online sources, 2 factors. One is that we were building in the quality focus much further down to get more margin accounts. And as you know, overall industry also, there has been a fall in the overall digital account acquisition. So we were very clearly focusing on the quality aspect. And to that extent, we also reduced the spend so that we can [indiscernible].

[Operator Instructions] As there are no further questions from the participants, 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 Q3 FY '23 con call. In case of further queries, please do get in touch with us. Thank you, and have a happy Diwali and a prosperous new year.

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