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

Ladies and gentlemen, good day, and welcome to Motilal Oswal Financial Services Q2 FY '27 Earnings Conference Call. [Operator Instructions] Please note that the conference is being recorded. I now hand the conference over to Mr. Manish Kayal. Thank you, and over to you.

Thank you, Yashashwil. Good afternoon, everyone. I welcome all the participants on behalf of Motilal Oswal Financial Services Limited, to take time out to attend our Q2 FY '27 earnings conference call. We hope that you had an opportunity to go through our investor deck and press release uploaded on stock exchanges and on our website yesterday. We have also uploaded our Excel data book on our website that has all the operational and financial numbers. Please note that today's discussion may include forward-looking statements. These forward-looking statements are based on our macro assessment and the actual outcome may vary. To represent the group, we have the senior leadership members on this call. We will start this call with an opening remark by Navin, our Group MD, and then we will have Q&A session. Over to you, Navin.

Thank you, Manish, and good afternoon, everyone, and a warm welcome to our earnings call for the quarter ended September '26 to discuss the group's overall performance. Let me first, before I get down to the quarter performance, share some broader sense of the group strategic direction, which will -- which could drive continued strong performance like we have been delivering over the last decade. Motilal is one of the largest integrated capital markets player with rising share of annuity revenues and each business offering strong growth on way, leveraging the opportunities available with financialization of Indian savings. Our operating businesses have delivered a decadal compounded growth of 33% growth. EPS has grown at 26% compounded return on equity for a decade has averaged at 23%. This strong growth is supported by our investment book also, which is which has been growing compounded for a decade at 41%, led by strong IRRs as well as reinvestment of the operating profit post the dividend distribution that we do to shareholders. Since our listing in 2007, we have never diluted equity while consistently paying out dividends and executing 3 buybacks. This has only been possible due to our unique twin engine business model where in our large investment book serves as a strong backbone to all the operating businesses, which have seen regulatory changes, rising funding needs strong underlying business growth and a market share gain. All this required huge capital, which would only have been possible through this twin-engine business model. Tenable growth is witnessed in our ARR, annual recurring revenues and profit share ARR revenues now contribute 66% of the group's revenues. This number was 55% in FY '24. This has helped us in reducing the cyclicality in our revenues led by the transaction businesses. All this has happened mainly on account of the asset and drive itself profit after tax growing by 44% year-on-year. These businesses now contribute 57% of the group's profit after tax in first half. This number was 39% in FY '24. The non-broking revenue share, even in the wealth management business has increased to 65% in the first half versus 53% in FY '24. This transition is led by strong performance in all businesses, comprehensive offerings in the asset management business, which now spans all listed products to the less understood alternates franchise that we foresee a strong growth in the number of offerings, product offerings and profitability given our long history of strong IRRs. AUM of asset management business continues to grow and currently stands at INR 2.23 lakh crores, including alternate which is a new milestone for the group. This AUM has witnessed a compounded growth of 32% over the last 5 years since March 2021 with strong market share gains. Also during the second quarter, the group received license from SEBI to act as a custodian of securities. This approval allows at Motiwal complete the institutional product offering. This was after more than a decade that the regulator gave this license to a nonbank. We've already hired CEO and the senior management team for this business. and this business will commence operations in the fourth quarter of this fiscal year, subject to the completion of operational readiness. Our market cap ranking has also consistently improved along with our profit after-tax ranking among listed players. We are currently ranked among Top 151 companies on trailing 12-month profit after tax. This number 10 years back was and 345 and 15 years back was at 373. Also by market cap, we ranked 175 now. 10 years back, this number was 285. 15 years back, this number was 355. We see the next decade offering equally exciting opportunities and prospects, which will drive improvement in these banking further. Now starting with the detailed second quarter performance, highlight our corporate after tax grew by 29% on a year-on-year basis to INR 718 crores led by Atara private wealth businesses, which grew by 43% year-on-year. These businesses, I repeat now contribute 58% of the total operating profit versus 49% in FY '26 and 42% in FY '25. We expect that the share of Asset and Private Wealth businesses to continue to rise as these businesses have strong tailwinds and have been out in the rest of the businesses for the last few years. We have stepped up investments on all fronts, including people, brand, technology in the past couple of years, and we expect these to bear fruits in the coming years in terms of continued market share gains and improvement in profitability. Turning now to individual segments. I'll start with the asset in Private Wealth businesses, which comprise of the Asset Management listed, the MO alternate unlisted and the private wealth management businesses. The asset and private wealth business continued its momentum during the quarter with robust flows of INR 12,477 crores of net inflows, taking to INR 5.2 lakh crores as of September 26, which is up by 42% year-on-year. The operating leverage from rising AUM should be a strong driver to our profit growth. I'll start with the asset management business, which includes mutual funds, PMS and AIF as of 30th September, 99% of our outperformed their respective benchmark in the past 3 years. Our product bouquet has not only widened but also grown significantly. We now have 24 schemes that have crossed INR 1,000 crores AUM. This number was 16 schemes last year. Only 6 of our funds have a vintage of over 3 years. This number will be by March 27, it will be 16 by March 28. As most of these are category-leading funds in terms of performance since inception and are in the mainstream categories. That should help in continued strong flows as well as diversification of the AUM across more schemes over the next 2 years' time. This will also continue our trend of net mutual fund flow market share improvement, which currently stands in the month of September stands at -- our flow market share continues to be well above our AUM market share of 2.7%. Our passive fund AUM crossed INR 50,000 crore milestone demonstrating our focus on growing even the passive business, along with the active business. We are ranked 5 in the passive business, excluding the low-yield broad market indices like Nest, which have very large institutional capital deployed at needs. The unique pan catered by our AMC is more than INR 1 crore as of September 26. And so 1 in 6 investors in the mutual fund industry are now investors in Mutual Asset Management, showing strong confidence by retail investors in our franchise. The revival in 2Q was prepared by has opened our average AUM to grow from INR 1.67 lakh crores as of March 26 to 2.01 lakhs as of September 27, reflecting the continued momentum in the business. The Q2 SIP flows remained strong at INR 4,170 crores. Market share was 4.4%. And the SIP AUM stood at INR 42,000 crores as of September 26. We have a strong distribution reach with 2,400-plus distributors now contributing over for of gross flows in the last 12 months and 30% plus of our ex digital sales now come outside of the top 10 market. We believe that the AMC ASM growth will be supported by several factors, the AUM is outperforming its respective benchmark on a 3-year basis. This strong performance should drive net gross growth. annualized SIP run rate of about INR 18,000 crores should drive ASM growth. Growth across products and more products crossing 3-year vintage should be in Current average AUM of INR 2 lakh crores is 28% higher than the 1.57 lakh crore AUM average in FY '26. -- potential mark-to-market gains after 2 years -- 2 U.K. years should also help the AMC business. collections from our proposed and efforts besides subscription flows should be a driver. Finally, we are also tapping new growth avenues for our businesses, including entering the pension business, launching our launching outbound if city funds and broadening our hybrid preset. In summary, a strong growth of AMC led by the above factors continue AMC will remain a key growth driver and an ARR driver to mutase. Turning now to the MO alternates business. This business has a vintage of over 2 decades. We already have a strong franchise improved capital and real estate and are confident of delivering industry-leading IRRs to our clients in all the products that we offer. We are in the process of executing our final close of our main and private credit fund of INR 3,000 crores. Our made in commercial office real estate fund has just been launched. We are witnessing increasing allocation from family offices as well as institutions in this segment. This business should ease in my opinion, at the same stage of evolution as the mutual fund business was over a decade back. In summary, Asset and Private Wealth management business too will be an important growth driver and ARR driver for Motilal on the back of increasing fund sizes in every subsequent series that we have demonstrated over the last 20 years entry into newer categories like private credit, commercial offices and more funds entering the carry income recognition threshold, which will boost our carry income run rate. The asset management business now contributes 43% of the group operating profit after tax in the second quarter. This number in the same quarter last year was at 31%, and we believe should continue to rise in the overall profits. Turning to our private wealth business, the ARR revenue is strong at INR 10 crores. Net flows were up 65% quarter-on-quarter to INR 6,657 costs, leading to an AUM growth of 8% and year-on-year to INR 2.6 lakh crores or INR 443 RMs will also witness productivity improvement as the vintage increases, only 33% of the RMs have a vintage of over 3 years. For second quarter, profit after tax is up 2% year-on-year due to a high base of the second quarter of last year. However, the 3-year, 5-year profit after tax growth for the private wealth business has been at 25% and 29%, respectively, and we expect the second half coke after tax would also be much higher than the first half. We have made large investments in senior leadership RM and we will continue to do the same in a calibrated manner going forward as well. focus is to grow the ARR AUM through various initiatives, including advisory solutions on both equity and debt, including bespoke advisory segment, a product called Delfi, which is seeing strong traction, strengthening leverage solutions as a value add for the UHNI clients, exclusive co-investment, leveraging group synergies. In summary, we expect a strong growth in the private wealth business on the back of rising monetization and improving product and people proposition. Turning to our wealth management business, which includes retail broking, distribution and our retail lending book. We continue to have sharp focus on growing our ARR revenue which includes distribution income as well as NII. That is the share of these businesses in the wealth management franchise, increasing from 33% in FY '21 to 58% in Q2 FY '27. ARR revenue grew by 10% on a Y-o-Y basis to INR 328 crores this quarter. Distribution book grew by 26% to INR 48,000 crores year-on-year. We are confident that our distribution book will grow meaningfully as we continue to harness the cross-sell potential of our franchise. It stands at 18%. Our loan book in this segment rose by 42% to INR 10,200 crores. And MPF market share is close to 7% and will improve going forward. our broking business continues to retain its leadership as a full-service broker amongst the non-bank players. We are the largest broker in the cash segment on revenue market share in the nonbank segment. Our overall retail broking market share, including commodities stood at 7.9% this quarter, led by market share gains in asset and premium segment. from 7.6% to 8.8% quarter-on-quarter. And our cash market share in the same time period has improved from 6.8% to 8%. Headwinds for broking revenues due to regulatory changes and flat market over the last quarter, we live are in the base and expect growth to improve going forward. Turning to the capital market businesses comprising of institutional equities and investment banking. Despite challenging market conditions, our investment banking business successfully closed 41 deals in the first half, cumulative rate of INR 99,000 crores, fee income of 39% growth quarter-on-quarter to INR 94 crores. We rank #1 in QIPs and #3 in IPOs in the first half of this financial year as per the capital market league table. In the Institutional Equities business, we are continuously increasing our coverage. We crossed 400 companies coverage and are on track to cover 500 companies, which will not only increase our research debt, but also improve opportunities to engage with these corporates for other businesses. In summary, we have built a strong franchise and diversified our product portfolio over the years. Our size per deal is higher than in the past. And with a strong deal pipeline, we are well positioned to benefit from any market survivor. Turning to the housing finance business. The disbursements to 29% year-on-year to INR 701 crores. AUM grew by 24% to INR 6,476 crores. We expect housing finance business to witness similar growth as we have delivered in the last quarter, in the coming 3 years' time, business has a high capital adequacy ratio, low leverage, giving us enough growth levers without any external equity capital dependency. Our treasury investment book grew by 27% year-on-year to INR 11,346 crores. I repeat this business as -- this book has witnessed a compounded growth of 41% since March 2014, led by strong IRRs and reinvestment of the operating profit. To conclude, we believe that the regulatory headwinds of the broking business are in the base. Indian investors continue to display resilience as far as the SIP flows are concerned. I spoke about the rising share of ARR in our overall businesses and those businesses having strong tailwinds in terms of market share gains, and this should be an important growth driver for us in the second half of the year, like we've delivered in the second quarter just in the recently concluded second quarter. I will now open the floor for Q&A. Thank you.

[Operator Instructions] We'll take a first question from the line of Sagar Jethwani from Phillip Capital PMS.

Yes. Congratulations on a good Q2, but also on getting the custodian license. My first question is on the custodian business. How do you see the scale up in the next 2 years? Is it ARR accretive given the combination of transaction fees and custodian fees linked to the AUC. So that is my first question.

Very tough to comment anything. We are only hoping to launch this business in the fourth quarter of the year. The team has just come in place. The product offering is still formulated -- getting formulated. So I think we'll we'll hopefully be able to guide you on the broad product positioning strategy for this business maybe at least 3 quarters down the line. It's anyway not going to contribute, you can say anything in the -- even in the next financial year ending March '28.

Okay. But second is on -- second is on the private wealth management. What are your hiring plans and RM hiring plans in H2? And the RM hiring done in the last 3 years under this segment, what percentage of RMs have not broken even or generating less than 1x?

So yes, in the private well, if you recollect, when we had spoken a lot of the hiring that we have done, the plan is to harness the operating leverage from these bankers. About 1/3 of the bankers are vintaged and 2/3 of them are less than 3 years vintage. Now typically, what happens is that within a year, the RMs breakeven on their cost and then they start contributing to the organization. So within 2 to 3 years, generally, they are profitable for the organization. So largely, if I look at it from the 2/3, about than 1-year vintage. So those are the RMs. That is the cohort, which is -- which would have not yet broken even. But otherwise, rest of them would have broken even. And in terms of hiring, we continue to hire, but more judiciously, and a lot of the addition is happening in the ultra-HNI segment this year.

Okay. And our lending book has grown by a strong 90% under PWM segment. And since last 4 quarters, there is a sudden fast pickup in the lending book. So do we see this as a normalized growth?

As far as the book growth is concerned, bulk of the growth has also come from MTF book within this for the and HNI segment. So which is largely in line with how the cash volume growth has also happened in the market. So as the cash volume is growing much to that extent, and a portion of the book is loan against shares also, which is growing at a normal rate of about 20%, 25% a year.

[Operator Instructions] Next question is from the line of Nidhesh Jain from Investec.

Sir, first question is on the booking business, [indiscernible] business, market share in cash and F&O has picked up on a sequential basis. So what is driving that? And what are the steps we -- if you look at the data for some time, our market share was sliding downwards, but this quarter, we've seen a healthy pickup in market share. So what is driving that, if you can just share some light on that?

So mainly on the cash market side, if you look at it, the market share growth is mainly because of the MTF book, which has grown corresponding to the market growth. So to that extent, we have been able to grow the cash market, market share also, focusing on the MPO book and the overall cash market volumes. So that is connected to maybe the MPF. In the other side, if you look at it, we have always been on the side where we try to advise customers to be playing the option market very safely. So when the market volumes are much lower, we tend to do better. So to that extent, our market share has grown in this market in the option side. So -- and surely the futures, we are being better off on the overall market. So to that extent, the option market share is a little up on an overall perspective.

Sure. And sir, coming to AMC business, our net flows have been with moderate for the last few quarters. Last year, the trend was very strong from that base, the Midflow have moderated. So what is driving that? And how you see your net flow market share on AMC panning out ending quarters in FY '28?

Sure. So quarter 2, net flows are a tad higher than quarter 1. So active quarter 2 was 3,400 all was negative. Taxes were 1,600 and IP over INR 1,400 crores is IP is INR 1,400 crores a month that we have. Now yes, you are right, we underwent 2, 3 months of been period, but has to be September saw us get in INR 2,400 crores of net active inflows. And as we speak October, again, we should do over 2,000 net on active. So the trend has definitely come back to how it used to be earlier. Performance is a large part of what drives inflows and with a strong performance. Our funds did 6% kind of alpha last quarter, we believe traction in flows should continue.

Sure, sir. And then can you quantify the carry income in the quarter carry income booked in this quarter? .

Yes, that is -- that is INR 108 crores.

And the last question is on alternates. What are the plans for new fund launches over next 2 quarters in the alternate business?

Yes. So as I explained in my con call -- opening con call remarks, Nidhesh, we are at the verge of closing. We've already crossed a 90% threshold for the private credit fund. The pipeline is actually more than that 10% right now. So we get some domestic institutional flows for which we are holding back the pipeline as we would have reported a closure along with this quarterly con call. In the meantime, given that, that fund raises complete. We have launched our maiden commercial office real estate fund. This is the first of its kind. We already have a very strong resi real estate credit franchise. So this will be the fourth offering by the alternates business. Clearly, as I explained, this business is probably at the same stage of evolution as fuel fund business was 10, 15 years back. And so just a number of product offerings themselves will continue to go up every year. You will hopefully see the closure of this commercial offices fund over the next 6 months' time and the launch of potentially the next series of product in the calendar year 2027. So you'll see us broadening these product offerings. There's a lot of wind spaces that we have to cover. India has to cover importantly as as the allocation of alternates both by institutions as well as by family offices in their overall equity allocation continues to rise.

Next question is from the line of Dipanjan Ghosh from Goldman Sachs.