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

Good evening, ladies and gentlemen. I'm Rio, the moderator for this conference. Welcome to the Q3 FY '24 Earnings Conference Call for Motilal Oswal Financial Services Limited. We have with us today Mr. Raamdeo Agrawal, Chairman; Mr. Motilal Oswal, Managing Director; Mr. Navin Agarwal, Director and CEO, AMC; Mr. Ajay Menon, CEO, Broking and Distribution; Mr. Ashish Shanker, CEO, Wealth Management; Mr. Sukesh Bhowal, CEO, Housing Finance; Mr. Shalibhadra Shah, Chief Financial Officer; and 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, Mr. Agarwal.

Thank you. Good evening, everyone, and welcome to the Motilal Oswal Financial Services Earnings Call for the third quarter ending December 2023. I will take you through the key industry trends and how we look at the larger opportunity for Motilal Oswal Financial Services and what specific moves we are making to exploring this opportunity. Over the last decade, India has been one of the fastest-growing economies in the world. And we expect this to sustain with GDP expected to cross $30 trillion as India reaches the 100 years of milestone post-independence as per a study run by us. The exciting news is that as a consequence of this, we expect savings to multiply from $13 trillion in the last 25 years to over $100 trillion in the next 25 years. We believe that this is a once in a lifetime opportunity for financial services businesses in India and particularly for the underpenetrated capital markets and asset and wealth businesses, which form the core of Motilal Oswal Financial Services. For the capital market businesses, COVID-led eKYC and digital onboarding has been an inflection point for retail participation, with demat accounts having grown 3x in the last 3 years. This, in turn, has led to a very strong growth in the retail broking volumes, ADTO, which have grown 12x during this time period of 3 years. But the future is equally exciting according to us, with December '23 monthly additions of over 4.2 million demat accounts on a base of 140 million demat accounts. We believe this provides -- this run rate of demat account addition provides a runway for a continued 20%-plus growth for quite a few years in the capital market business. In the asset management business, with persistent efforts of the distribution community and AMFI, the mutual fund industry has witnessed a very robust growth in industry SIP flows. In the last 7 years, the monthly SIP flows have compounded at 24% per annum from INR 39 billion 7 years back monthly run rate to INR 176 billion in the month of December '23. Here again, on an equity base of INR 22 trillion as of December and SIP run rate of INR 176 billion and which is rising month-on-month, some mark-to-market and some lump-sum flows provide a runway of 20%-plus growth for quite a few years for at least the equity-focused asset management companies. For reference, India's financial savings are at about 5% compared to 45% in the U.S. And India's equity mutual fund AUM, as a proportion of GDP, stands at 7% compared to 98% in the U.S. In the backdrop of this growth runway, let me share how Motilal Oswal Financial Services is placed. Our unique business model comprises of twin engines of our operating businesses and our treasury investment book. Our operating businesses have generated a profit after tax growth compounded for the last 10 years at 31% per annum and faster at 38% compounded in the last 4 years. Profits from our operating businesses, post-dividend payout of 25% to 30%, are reinvested in our treasury investment book, which, in turn, serves as a very solid foundation to grow our operating businesses. Our treasury investment book has compounded at 45% per annum over the last decade. The math of this 45% compounding is a return -- ex IRR return of 18.5% since inception, and the balance 26.5% compounded growth contribution has come from the reinvestment of the 70% to 75% of the operating profits of the group. This twin engine business model has churned a return on equity of 27% to 28%. And the net worth has compounded in the last decade at about 22% per annum despite a 0 capital raise since the listing of the company, and after a 25% to 30% dividend payout and 3 buybacks. This makes it one of the fastest net worth growth during the last decade in the financial services industry. As the group has built a diverse distribution network over 36 years of 9,300 trust franchisees, 20,000-plus IFAs, over 2,500-plus strategically located business offices in more than 550 cities and towns across various regions, which, in all, cover about 98% of all the PIN codes of India. Our franchisees, our branches, our third-party teams, private client group teams, seamlessly delivered broking and several other financial services to 6 million-plus clients and are gearing to service a much bigger number in the next decade. We continue to add Motilal Oswal towers in other parts of the country with the latest additions being in Bangalore and in Ahmedabad. Each of our businesses is equipped with a robust organization structure and a strong leadership bench led by a professional CEO so that the business can scale in tune with the sizable growth opportunity that we envisage in the coming decade. The focus of leadership of each of these businesses is to deliver sustained revenue growth and profitability, while continuously evaluating adjacencies that can provide additional growth impetus. We strongly believe in the power of research and advisory and have a dedicated team of over 100 research analysts across our businesses and over 2,500 advisers that cater to various client needs. Our balance sheet is strong with a net worth of INR 8,267 crores as of December '23, and this has helped us in many ways. We have managed and navigated multiple cycles and volatility over the last 36 years. We have seeded multiple operating businesses and have been sponsored of the asset management company, our private equity funds as well as our real estate funds. This has served as a collateral to support the fast-rising working capital needs of the broking business in light of the changing margining requirements by the regulator. We have paid over INR 1,000 crores as dividend and returned INR 336 crores by way of buybacks during this time period. And our net worth, while doing all this, has been efficiently utilized in investments that have generated an IRR of 18.5% compounded per annum. Let me now take you through the key highlights of the operations and the financials. Our consolidated profit after tax, including OCI for the quarter, grew to INR 7.7 billion, up over 3x year-on-year. Our consolidated profit after tax for the 9-month period crossed INR 20 billion, up by over 2.5x year-on-year. Our consolidated operating revenues for the quarter at INR 13.78 billion, up by 30% year-on-year. We delivered the highest-ever quarterly capital market business profit at over INR 2 billion, up 44% year-on-year. Our Asset and Wealth Management businesses generated a profit after tax of INR 789 million, up by 17% year-on-year. Our housing finance business delivered a profit after tax of INR 363 million, up 11% on a quarter-on-quarter basis. I repeat our net worth was at INR 82.67 billion as of the end of December, up by 33% year-on-year. And we just announced in our Board meeting today a doubling of the interim dividend from INR 7 interim dividend last year to INR 14 dividend per share in the current year. Turning to our segmental performance for the quarter. Our capital market businesses, which comprise the retail broking, institutional broking and investment banking businesses, reported a revenue of INR 10.3 billion, up 36% year-on-year and profit of INR 2 billion, up 44% year-on-year. The ADTO grew by 95% year-on-year to [ INR 5.7 trillion ]. In retail broking and distribution, the retail cash ADTO market share for us grew by 164 basis points year-on-year, 42 basis points quarter-on-quarter to 7.5%. Our retail F&O premium market share grew to 8.1%, up by 124 basis points on a year-on-year basis and up by 60 basis points on a quarter-on-quarter basis. The NSE active clients grew to INR 8.22 lakh as of December '23. We acquired 1.45 lakh clients during the quarter. Our distribution AUM grew by 25% to INR 263 billion. Distribution net sales was at INR 7.7 billion, up by 25% quarter-on-quarter. Net interest income grew to INR 1.5 billion, up by 51% year-on-year. Our Investment Banking business completed 6 deals with issue size of INR 52 billion and revenues of INR 193 million. Our capital market PBT margin on net revenues improved to 48% from 42% in the same quarter last year. Our Asset and Wealth Management business reported revenues of INR 2.87 billion, up 14% year-on-year; and profits of INR 789 million, up 17% year-on-year. Asset Management business, AUM grew strongly to INR 649 billion, up 40% year-on-year, and revenues were at INR 1.72 billion, up 22% year-on-year. We have seen strong performances across most of our products, which has resulted in a gross sale of INR 49.4 billion. This is up nearly 3x on a year-on-year basis. Our mutual fund AUM grew to INR 429 billion, up by 45% year-on-year, led by strong performances across our active mutual fund schemes, which have resulted in a gross sales of INR 28.2 billion, up by about 4x year-on-year. Our small cap NFO, new fund offering, garnered inflows of INR 12.4 billion, which is one of the highest flows among small cap funds launched in India. Our large cap NFO is launched in the month of January. And we expect one more fund launch in the coming months. Our endeavor is to increase our coverage of equity mutual fund categories of AMFI by AUM from about 45% last year to 65% at the end of these NFO launches. We added 261,000 new SIPs during the quarter. Monthly SIP flow for December stood at INR 2.8 billion. This was, again, up strongly by 127% year-on-year. Our alternate AUM grew to INR 220 billion, up 30% year-on-year. And our AIS AUM crossed the INR 100 billion mark in January, and we continue to be one of the leading AMCs in the CAT III AIF space. All 19 of our 19 alternate asset schemes have outperformed the benchmark. Our private equity business fee earning AUM stood at INR 94 billion across our growth and real estate funds. Our Wealth Management AUM stood at INR 896 billion, up by 117% year-on-year. We added net 51 wealth RMs during the 9-month period, which impacted our EBITDA margins for the Wealth Management business. We expect to recoup these margins back to our historical trend of 35% to 40% in the coming years. Our wealth net sales stood at INR 30 billion in the third quarter, up by 152% year-on-year and revenues grew to INR 700 million, up 20% year-on-year. Turning to the Housing Finance business. We reported a profit after tax of INR 363 million, up 11%; AUM of INR 37.8 billion; our disbursements grew 22% year-on-year to INR 2.5 billion. Net interest income stood at INR 801 million, up 6%; NIMs stood at 7.7%; yield on advances, 14.2%, up 40 basis points year-on-year. With rise in cost of funds, we've maintained our spreads at 5.9%. We've strengthened our sales RM team at 856 RMs. We've added 232 RMs during the third quarter and added 373 RMs during the last 12 months, which has impacted our cost-to-income ratio. We expect this to come down as we grow our AUM in the next year. Our collection efficiency improved to 101% in third quarter. Gross NPA stood at 2.1%. Net NPAs at 1.3%. Our gross NPA on new book, which includes old disbursements starting April of 2018 and accounts for 52% of the book, the gross NPAs for this part of the book stood at 0.9%. Our net gearing stands at 2x and our capital adequacy ratio in the housing finance business is robust at 47.5%. ROA is 3.6%. And as we leverage over the course of the next year, we hope to improve our return on equity in this business as well. To sum up, our capital market businesses have demonstrated a remarkable performance, reporting all-time high quarterly profits and strengthening our retail market position in both cash as well as F&O premium to 7.5% and 8.1%, respectively. In fact, we've exited the December quarter on a high note and January continues to scale up to newer highs compared to December. A dedicated pan-India distribution team has also put in place to improve the cross-sell ratio. Our asset and wealth management AUM touched a new high of INR 1.64 lakh crores. Our asset management business has seen strong improvement in performances as well as flows, and we're looking to meaningfully scale up the AUM over the course of the next year. The wealth management business is progressing towards scalability, bolstered by strengthened leadership team and ongoing investments in relationship managers. In our home finance business, we are strengthening sales force and optimizing productivity to drive improved disbursements and AUM growth in the next year. We are excited by the growth prospects offered by each of these core businesses of Motilal Oswal Financial Services over the next 2 years. With this, we are open for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Praveen Desai, who is an Individual Investor.

Congratulations for good set of results. The only thing that we now expect bonus, no buybacks, no further buybacks. We expect probably early bonus. It's a good way for investor to enhance their value.

Sure. Sure. No, we'll definitely share your feedback to the Board.

And that's what we are waiting eagerly for that. We have kept this equity since long so that we can take advantage of this. Of course, you have given good buyback. It's a good thing, but one can increase the value of our -- enhance the value.

Sure.

The next question is from the line of Avinash Singh from Emkay Global.

Great set of numbers. A couple of questions. The first one is on retail broking. So if we see -- I mean, from March '22 to now, I mean, the overall client base has almost increased 50% from like somewhere 2.8 million to 4 million. But the number of active -- NSE active clients have been sort of stagnant or decline. So I mean client activation rate almost has gone down from 1/3 to 1. So is it to do with some kind of -- that the kind of clientele that came during the COVID lockdown and that period. So what is happening here? I mean, what explains the sort of a client activation rate going down? So that is on retail broking. And secondly, on the private equity side, I mean, this IREF II was expected to be exited in this financial year, but now suggests that it's going to be in FY '25. So what's sort of a highlight to change in this plan? And also because we have a couple of more exited lined up over the next sort of 1, 2 years, what are the sort of plans on the fund raise on this private equity or real estate side?

Yes. On the broking business, retail broking business front. So actually, our active clients have been stable. So in fact, industry has degrown. In fact, a lot of players have reduced active clients, but our client base has been pretty stable. And our focus has been actually to add quality customers over last few quarters. And what has happened is that, that by doing that, our overall ARPUs have also gone up because of getting in the quality customers. So there has been a cleanup, which has happened where though there has been a lot of clients we've got added in the system. But overall, incremental active ratio has been better at 30% and while the overall ratio in the book continues to be 20%, but the ARPUs have actually grown. So if you look at our ARPUs over the last few quarters, it has been growing. And the overall -- ARPUs are overall good, both have actually grown. So our focus is to grow the ARPUs on the active client base. At the same time, we continue to add quality clients with high margins. So that's how our focus has been.

Turning to the real estate side, IREF II exit, as you will see in our presentation, the IREF II IRR stands at 18.7%, well above the hurdle in carry for this IREF II. The exact end of the fund life is typically determined by what best value can we create it for the investors. And based on our current assessment and given the tailwinds in the real estate business, we think that exiting this fund over the course of FY '25, preferably in the first half, but definitely during the course of FY '25, maximizes the value for the investors in IREF II. In any case, as of December '23, end of December, the IRR on this fund stands at 18.7%. We have put out the expected exits of funds in FY '25, IBEF II as well as IREF II should see exits and closures in the next financial year.

Okay. Okay. And anything on fund raise? I mean, are you -- anything in the pipeline?

In terms of fund raise?

Yes, for private equity.

Yes. So the IREF VI, first close is expected in the month of January, right, in the next one week's time. This is a INR 2,000 crores fundraise plan. The final close will happen sometime in the next year, right? And next year will also mark the launch of the IBEF series V.

Plan size?

The growth fund, IBEF V will get launched in FY '25. IREF VI will most likely complete its fund flows in FY '25. We expect to close and carriers on IREF and IBEF II in FY '25 as well. So a lot of activity in terms of new fund raise, both on the growth capital side and the real estate side as well as final fund closure and carry booking, both on the real estate as well as the growth fund side.

[Operator Instructions] The next question is from Rohan Advant from Prad Capital.

My first question is on our capital market segment. If I look at the profit growth that has come in sequentially, a large part of that is only to expense reduction. So expenses have gone down from INR 780 crores to INR 760 crores, and that has led to a PAT expansion of INR 20 crores. So I mean, can you elaborate on the expense reduction. Employee costs have gone down there, other expenses have gone down. So can you throw some light on that?

Yes, sure. So if you look at the sequential quarter, so actually broking revenues have actually gone down by 8% on a sequential basis. And the people cost typically flows in -- the variable portion flows in line with the revenue reduction. At the same time, even our OpEx, which is our commission expense that we paid to our channel partners that will also go down because the brokerage revenues have gone down. And even our administrative costs, actually where there were a bulk of marketing spends and advertising spends, which we had done and even annual conferences and those things which were hit in quarter 2 of this year. So a lot of these spends were not there in the quarter 3 of this financial year. So that is why you would see a bit of markdown on each of these expenses largely in line with our revenues or in line with our onetime ad hoc expenses in quarter 2 of this year.

Got it. And the brokerage expenses going down would be a function of yield that we make?

No. It's a function of the sharing that we do with our franchisee channel partners. So if the top line is down, the revenue sharing will also go down absolutely.

No, I understand that. I'm asking our brokerage expense has gone down from [ 582 to 536 ]. So why is that?

So that's actually -- so that's on account of the actually lower volumes on our institutional equity business in quarter 3 as compared to the quarter 2 numbers. So largely, it's on account of our industry volumes.

Understood. Understood. And on the Wealth side, we've said that because we've hired RMs and there is a margin pressure initially, but we expect to get back to higher margins in the next few years. So by when can we get back to the earlier margins on the Wealth side?

Best guess would be in the next 6 to 8 quarters.

[Operator Instructions] The next question is from the line of Swarnabha Mukherjee from B&K Securities.

Congrats on a good set of numbers. I wanted to understand on the brokerage fees. So as you mentioned that volumes are lower in the institutional business. So if I think about the retail business on a quarter-on-quarter basis, what are the trends there? How has been the growth? Or if you could highlight the mix of brokering institutional and retail brokering? And also, if there was any kind of compression on the yields because of which some impact has been there on the brokerage revenue? So that is the first question. And the second one is that your premium market share is around 8.1% this quarter. I think if I remember correctly last quarter, on a notional basis, the market share was between 4%, 4.5%. So how to read this? Why is the premium market share significantly higher than the notional market share? Is this that your set of customers are writing more out of the money contracts? Or would they be repeatedly writing these contracts? If you could highlight the reason for this, sir.

So firstly, as far as the retail brokering business is concerned, we've seen a huge pickup in volumes in the month of December, both cash and F&O side and particularly in cash volume, which is unique to full-service brokers like us. And so this quarter, while the overall numbers may have been flattish, the exit of the quarter has been very strong. And with more number of days in January, we are looking at an even stronger month here. Secondly, we've also seen improvement in market share, right, across both the segments that we highlighted. Thirdly, your question about market share in notional volumes versus market share in premium, please bear in mind that we have been consistently focusing on the quality of customers, the ARPU of customers. Our yields are much higher. So basically, exchanges have now started reporting only on a premium basis. So going forward, you will not have these 2 numbers anyways, correct? And they were earlier reporting volume numbers, right? So we are very happy with any reporting of premium and in fact, even better with the equity data or the commission numbers are reported, we have always highlighted that given the quality of our customers, our market share will appear much higher on any of these matrices. So yes, so that's as far as the premium market share is concerned. This is a new data series that all brokerages will report from the December quarter onwards, right? So...

Yes, sir, so just to again follow up on that. So premium market share being higher than the notional market share, and you highlighted that the quality of customers are much better. So compared to, say, an average customer who is trading in the market, what would be your set doing differently, which is resulting in higher premium? I wanted a little bit more color on that. And also as a follow-up to your first response, I wanted to understand if I got it correctly that -- so retail broking on a sequential basis has been flattish in terms of revenue. Would that be a correct assumption? And also, if you could comment on the yield part, how it has played out over the -- vis-a-vis last year.

On the second and third question, the brokerage revenue is actually down 8% on a sequential basis. And as far as the yield is concerned, there is no change broadly on a sequential basis. So the revenue is largely down with the overall bump up of the volumes on the institution business that has had happened in the quarter 2. So that is how it shapes up. Whereas if you look at...

Sorry sir, one quick thing, so 8% brokerage revenue down on a sequential basis, how do those numbers look like if you break it up between institutional and retail?

So retail is flattish. The impact is on account of institutional only.

Okay. And broadly, can you give a color of the mix, how it would appear for the quarter?

The retail and equity broking, Swarnabha, we haven't shared that number. We look at it as one single broking revenue composite. We are giving you this color just because of the big growth that we saw in the institutional block volumes in the second quarter because of which they are lower quarter-on-quarter, while the retail volumes are flat.

Sure. Got it, sir. Got it. If you could throw a little bit more -- yes, on the other question.

Yes, yes. So as far as your question on market volume share, so bear in mind that most of the exchanges among the top 5 brokers, you will have a few proprietary desks and algo high-frequency trading volumes, right? So basically, we really don't know the color and how those things really function. Our volumes are entirely agency client volumes, correct? And that itself may be one reason. Really for whatever Motilal Oswal does, we are research and advisory backed. And hence, the color -- even the cash volume that we will do and the mix of delivery versus intraday, et cetera, will all be different. Really, why is market premium color is different is something that we'll have to understand. But it's not something that we focus that much on. I can only tell you, even today, that a portion of our retail broking customers who are trading options still has a lot of headroom. Yes. So as I said, as far as the market volumes are concerned, they will include proprietary books, et cetera. And hence, we don't have a real color on how those function. Our volumes are entirely client volumes. And that may partly explain the difference that you were talking -- seeing in the market share.

One more reason for the premium turnover to be more is because if you know today, every day is expiry day and the participation on expiry day is mainly from the retail clients. So we have more quality customers who are doing much more quality premium turnover rather than the expiry day trades. So that is the reason the overall market share on the premium turnover is much more compared to the expiry day turnover. So that also makes a huge difference on the overall market share.

[Operator Instructions] The next question is from the line of Abhijeet Sakhare from Kotak Securities.

My first question is on the wealth business. So just looking for a little more color on the realization number that you reported about 0.5%. So if you could sort of break it down in terms of which are the major products that are getting sold here. And the other one on the wealth side was at an overall entity level or segment level, what's the double count AUM across AMC and the manufacturing -- between manufacturing and the wealth business generally?

Yes, Ashish.

Yes. Can you hear me?

Yes.

Yes. So in terms of products, we had a few category 2 products in the last quarter. Essentially, these are structured debt products as well as our real estate funds. We've seen pickup in equity sales as well. This is across PMS as well as AIF. And then we've seen a lot of bond -- direct bonds being bought by customers. So that's on the product side in terms of what customers are buying into. We've also seen our brokerage business go up quite significantly this financial year and last quarter as well. Other than that, the second question was on the double counting?

Yes.

Yes. Shali, double counting in terms of...

Yes. So actually the active assets, if you actually look at it. So that's 25% of our wealth AUM, which is the in-house sold assets of our asset management, private equity and real estate funds. And this 25% number is on actually -- absolute number would be approximately INR 8,000 crores.

Got it. And just one more, sorry, following up on the wealth realization. This 0.5% is more like a recurring normalized number, right? There's no impact of anything upfront or part of the upfront going away. So this is the number that we should kind of look at on a recurring basis. Is that right?

Yes, absolutely. So this will include certain transactional revenues, broking and trade revenues.

Understood. Understood. And the second question was on the capital markets side. So here, just looking for the sort of qualitative color in terms of house being the success or track record in terms of cross-sell of distribution products for your active client base on the trading side. So I look at the distribution AUM about INR 25,000-odd crores. But like how is it spread across the 8 million -- sorry, 8 lakh customer base? And what's been the overall, let's say, track record there, how easy it is to sell products and typically, which are the top products, which are the easiest to sell to those category of customers?

Yes, Ajay?

Yes. So the distribution AUM has been building up over the years, and we are very clearly focused on this model along with broking. So as of now, the penetration is around only 12% to 15% overall on the base of our active clients. And there is huge focus on increasing this penetration across all our businesses, be it the franchisee or the branch model. Currently, there is a good traction on the AIFs and the PMS product. We have done well even on the private equity products earlier, over and above the mutual funds, which is a standard product, which gets sold to the broking customers on an overall basis. So typically, we are able to also get the benefit of our own manufacturing. So all our in-house products are getting -- also being sold to our customers in a big way. So going forward, this team is getting ramped up more to ensure that we are able to cross-sell to a higher base of customers, be it on the mutual fund and the PMS along with the AIFs as such. And in this quarter, we surely will be building up on the insurance also in a big way, which, again, is always in the last quarter going to be a big play on overall distribution area.

Just to add to Ajay's point, we are super underpenetrated as far as the cross-sell of captive or third-party financial products to these active broking customers. Culprit partly is also the fact that the broking business has been booming and RMs have been very tied up with that. We are now putting up dedicated RMs for distribution and now data analytics should drive us to target the relevant set of customers within our active customer base. We are hoping that distribution business becomes an important growth driver in FY '25, FY '26 for the retail broking business.

Got it. Sorry, one last one. Navin here, the distribution side of the business is also channeled through the channel partners, right? I mean they will get part of the profitability or commissions that are earned while selling products?

That's correct.

That was the last question. I would now like to hand the conference over to Mr. Shalibhadra Shah for closing comments.

On behalf of Motilal Oswal Financial Services, we would like to thank every participant for attending the Q3 FY '24 con call. In case of any further queries, please do get in touch with our Investor Relations desk or with me. Thank you, and have a good evening.

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