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Motilal Oswal Financial Services reports Q2FY18 Consolidated Revenues of Rs 713 crores, +35% YoY; and PAT of Rs 144 crores, +42% YoY

Mumbai 04-Nov-2017


Motilal Oswal Financial Services reports Q2FY18 Consolidated Revenues of Rs 713 crores, +35% YoY; and PAT of Rs 144 crores, +42% YoY

Mumbai, November 04, 2017: Motilal Oswal Financial Services Ltd. announced its results for the quarter ended September 30, 2017 post approval by the Board of Directors at a meeting held in Mumbai on November 04, 2017.

Performance Highlights

Rs CroresQ2FY18Q2FY17YoY ChgQ1FY18QoQ Chg
EPS (FV-1)1077

Performance for the quarter ended September 30, 2017

•Consolidated revenues were Rs 713 crores in Q2FY18, +35% YoY. 
•Strong growth in Q2FY18 across businesses. Asset & Wealth Management business top-line was up 62% YoY, Housing finance was +22% YoY, and Capital Market businesses +20% YoY. The revenue mix is seeing healthy diversification, as 61% of the revenue came from linear sources like Asset & Wealth Management and Housing Finance. While the share of Capital Markets reduced in the mix (34% in Q2FY18), it continues to grow strongly in absolute terms. Both, Asset Management and Housing finance businesses, saw strong growth in assets, and improved in profitability despite significant investments in manpower, distribution network and marketing. 
•PBT was up by 56% YoY at Rs 231 crores. Consolidated PAT was Rs 144 crores in Q2FY18, +42% YoY. This incremental PAT growth was contributed by Asset & Wealth management business (+52% YoY) and Capital Market business (+38% YoY). 
•Significant investments have been made into manpower in Broking (+44% YoY) and Housing Finance (+68% YoY). Ad expenses are +51% YoY in Asset Management business. These up-fronted investments will translate into operating leverage in the coming year. Some of this was visible, with PAT Margin of 20% in Q2FY18. However, the full effect of operating leverage is yet to unfold in our businesses.
•As of September 2017, Net worth was Rs 2,001 crores, Gross borrowing was Rs 5,470 crores and Net borrowing was Rs 5,260 crores (including Aspire). Excluding Aspire, Gross and Net borrowings were Rs 1,498 crores and Rs 1,213 crores respectively. Balance sheet has strong liquidity, with ~Rs 1300 crores as of September 2017 in near-liquid investments to fund any future investment needs of operating businesses.
•In line with our strategy to deliver sustainable 20%+ RoE in the long term, RoE for Q2FY18 was 29% on reported PAT. However, this does not include unrealised gains in our quoted equity investments (Rs 582 crores, as of September 2017). Including this, the RoE in Q2FY18 would have been ~32%.

Speaking on the performance of the company, Mr. Motilal Oswal, CMD said
“Our strategy to diversify our business model towards linear sources of earnings like Asset Management and Housing Finance continues to show results, with over half of the revenue pie now coming from these new businesses. Each of these businesses offers significant headroom for growth and operating leverage as they scale up. Even our traditional businesses also saw decisive uptick during the quarter by registering record revenues. With this strategy, we have achieved highest ever quarterly revenue and profit during Q2FY18 and H1FY18. Our brand is now being recognized in each of our businesses”.

Performance of Business Segments for the quarter ended September 30, 2017
•Capital markets Businesses (Broking & Investment banking) 
oCapital Market revenues in Q2FY18 were Rs 241 crores, +20% YoY. Market ADTO grew 65% YoY in Q2FY18, with F&O +68% YoY and cash +21% YoY. Our market share in high-yield cash segment was improved on sequential basis and overall market share improved to 2% in Q2FY18. Blended yield maintained at 2.9% in H1FY18. Some of the operating leverage from the investment in manpower (+44% YoY), brand & technology is visible, as PAT margin is at 17% in Q2FY18. However, the full benefit of operating leverage is yet to unfold.
oIn retail broking & distribution, our strategy to bring in linearity through the trail-based distribution business is showing results. Distribution Net Sales were Rs 816 crores in Q2FY18, +142% YoY, and AUM was Rs 6,110 crores, +130% YoY. Distribution income at 15.9% of retail broking net revenues. With only ~9% of our client base and ~18% of the distribution network tapped as of now, we expect a meaningful increase in AUM and fee income as cross-selling increases. Our efforts to improve sales productivity is bearing fruit, with over 60% of leads generated online. Online business continues to grow, reaching 42% of retail volumes in Q2FY18.
oIn institutional broking, blocks continued to gain solid traction within our volumes. Our empanelled trend remains strong with 15 new client additions during the quarter. Focus has been on making the most of the market tailwind while building sustained areas of competitive advantage.
oInvestment banking continues to have a strong pipeline. IB fee were Rs 46.5 crores in Q2FY18, +59% YoY. Our IB was among the top 10 investment banks in primary market equity deal ranking in H1CY17. It has completed 7 ECM transactions in H1FY18. 
oCapital markets businesses contributed ~34% of revenues in Q2FY18. The contribution of capital markets in the PAT mix was ~29% in Q2FY18.

•Asset Management businesses are nearing critical mass
oAsset Management business across MF, PMS & AIF reached the mark of Rs 28,906 crores, +92% YoY AUM this year, comprising of Rs 14,329 crores MF AUM and Rs 13,436 crores PMS AUM. Our AMC now ranks among the Top-10 players by total equity assets with leadership position in PMS business. Net Sales were Rs 6,118 crores in H1FY18, +141% YoY and compares with Rs 6,102 crores in all of FY17. Net yield was maintained at ~0.9% in Q2FY18. Revenues were Rs 146 crores in Q2FY18, +96% YoY and PAT is Rs 23.3 crores, +154% YoY despite significant investments in brand building. The asset management business offers significant headroom for growth and operating leverage.
oOur QGLP philosophy continued to deliver on investment performance; our F-35 scheme has delivered absolute returns of 31% and alpha over benchmark of 16%, since inception. Our 3 flagship mutual funds schemes completed their 3-year performance track record, leading to increased participation from distributors.
oWith equity mutual funds focusing on retail outreach, PMS and AIF serve HNIs, family offices and institutions and are able to differentiate with concentrated strategies affording scope for higher alpha.
oAs of Sep 2017, ~15% of non-mutual fund AUM is performance-fee linked, and our target is to increase this further.
oOur market share in Equity MF Net Sales has scaled up in Q2FY18 to ~4.3% compared to 3.6% in Q2FY17. Due to our recent vintage, our market share in Equity MF avg AUM is ~1.8%.
oAd & marketing spends were Rs 8.5 crores in Q2FY18, +51% YoY and 85% QoQ, forming 14% of net revenues.
oOur ongoing ad campaign “Think Equity Think Motilal Oswal” is reiterating our positioning as equity specialist. These branding exercise and strong performance of our products coupled with higher equity inflows in market are helping us to garner higher market share.
oSignificant investments in manpower and advertising have been up-fronted, which could result in a meaningful operating leverage in the future. With increase in financial savings to total savings, the domestic market should continue to benefit from this shift towards financial assets. In offshore, which is 1.7x of institutionally managed equity assets in India, we are seeing initial interest in our offshore products.

•In private equity, we manage an AUM of Rs 4,168 crores across 3 growth capital PE funds and 3 real estate funds. The PE business has demonstrated robust profitability and scalability. The 1st growth fund (IBEF 1) has delivered an XIRR of 29%, and alpha of 10% and is expected to return ~5x MoC (Multiple of Cost). Till date, 2.5x MoC has been return for INR investors and 2.2x for USD investors. Exits across our 6 funds at strong IRRs bring linearity to income stream. Strong performance and positioning is also aiding new fund raise. Fund III (IBEF III) launched during the quarter and received phenomenal response by garnering 1000 crores and expected to close FY18 with corpus of Rs 2000 crores.
•In Wealth Management, business AUM grew 51% YoY to Rs 12,900 crores. Highest-ever net sales at Rs 912 crores, +91% YoY. We have achieved highest-ever EBITDA margin of 41% for the quarter resulting out of improved RM productivity in line with vintage. Our capacity to hire additional RMs will increase as existing RMs vintage increases which will which will help sustaining growth and driving further operating leverage.
•Asset and Wealth Management revenue were Rs 255 crores in Q2FY18, +61% YoY. This now contributes to ~36% of consolidated revenues in Q2FY18 vs 30% back in Q2FY17. Contribution of Asset & Wealth Management in the Profit mix was ~50% in Q2FY18 vs 46% in Q2FY17.

•Housing finance has shown traction in loan book, while maintaining risk and operational parameters
oHousing finance loan book grew by 57% YoY at Rs 4,818 crores.
oNII grew 75% YoY to Rs 56.4 crores, as interest expenses declined, driven by lower borrowings and lower cost of funds. PAT remained stable YoY at Rs 22.4 crores.
oStrong ramp up in last year has driven 70% YoY growth in manpower and 62% growth in branches. However, YTD growth in manpower is 19% with no additions to branches.
oWe have maintained steady operating metrics. The average ticket-size was Rs 89 lakhs, LTV of ~58% and FOIR of ~46% as of September 2017.
oDisbursements in Q2FY18 were Rs 631 crores versus Rs 328 crores in Q1FY18 and Rs 666 crores in Q2FY17. Calibration in the pace of disbursements in H1FY18 was partly led by external factors in the economy, causing postponement of customer decisions. Investments have been made in building a collection and legal organisation while calibrating growth. This will create a strong foundation for sustainable growth.
oGNPA increased from 1.6% in Q1FY18 to 2.8% in Q2FY18 on account of seasoning of the book coupled with external shocks such as demonetization, RERA and GST. Also, in the first three years, absence of independent collection and legal organisation, resulted in higher slippages. The collection and legal engine is now in place.
oAverage yield held firm at ~13.4% on a YoY basis despite competition.
oIn liabilities, ~53% borrowings were from NCDs and ~47% from bank loans. As of September 2017, 26 Banks/NBFC had extended lines, apart from 24 institutions to whom NCDs were allotted. 
oOur credit ratings are CRISIL A+ Stable and ICRA AA-. We have kept gearing conservative, with the Debt/Equity ratio at 5.1x. 
oStrong traction in margin at 4.5% in Q2FY18 on account of lower incremental borrowings and sequentially lower cost of funds. Equity infusion in Q1FY18 also aided margin expansion.
oAverage cost of borrowings declined from 10% in Q2FY17 to ~9.8% in Q2FY18, despite negligible CP contribution in funding mix. Incremental borrowings from CP will bring down cost of borrowings in H2FY18.  
o ROA for Q2FY18 was 1.7%, while RoE was 11.6%.
oCumulative capital infusion from sponsor is Rs 600 crores and net worth is Rs 772 crores, as of September 2017.
oWe have been investing in technology to strengthen our database, analytics and risk framework. We are also investing in digital initiatives to reduce operating costs and turnaround time, and to improve customer experience. Our digital initiatives include new apps for sales, credit, collection, clients and vendors.
oAspire has been awarded the second prize for “Best Performing PLI (prime lending institution) under PMAY by MHUPA (Ministry of Housing and Urban Poverty Alleviation)”.

•Fund based business includes sponsor commitments to our AMC & PE funds, equity investments and NBFC LAS book. 
oFund based business income grew +324% to Rs 95.7 crores in Q2FY18, largely driven by dividend of Rs 45.8 crores from PE on account of carry income of Rs 53.9 crores.
oUnrealized gain on quoted equity investments (equity MF/Shares) as of September 2017 is Rs 582 crores (equity MF: Rs 414 crores against Rs 671 crores investment at cost; AU Small Finance Bank: Rs 167 crores). This is not reflected in the reported PAT; had this been included, RoE would have been ~32% against the reported 29%.
oReported RoE of 4% in fund based business; however, post-tax cumulative XIRR of ~29% (since inception) on equity investments, validating the long-term performance track record of our QGLP investment philosophy. 
oThese investments have helped “seed” our new businesses, which are scalable, high-RoE opportunities. They also serve as highly liquid “resources” available for future investments in business, if required. 
oOur investments in Motilal Oswal’s alternative investment funds stood at Rs 293 crores. 
oNBFC LAS lending book was Rs 224 crores as of September 2017, which is run as a spread business.

•In line with the goal to achieve a sustainable 20%+ RoE, consolidated RoE for the Group for Q2FY18 was 29% (without including unrealized gains on quoted equity investments of Rs 582 crores). Within this, Asset and Wealth Management RoE was 308%, Capital Markets RoE was 86% and Housing Finance RoE was 12%.

About Motilal Oswal Financial Services Limited
Motilal Oswal Financial Services Ltd. is a financial services company. Its offerings include capital markets businesses (Retail broking, Institutional broking & Investment banking), Asset & Wealth Management (Asset Management, Private Equity & Wealth Management), Housing Finance & Equity based treasury investments. Motilal Oswal Securities won the ‘Best Performing National Financial Advisor Equity Broker' award at the CNBC TV18 Financial Advisor Awards for the 6th time. It was ranked the Best in Events/Conferences, ranked amongst Top-2 for Overall Sales Services & Best Roadshows/Company Visits & amongst the Top-3 in Best Local Brokerage, Best Execution & Sales Trading Visits at the Asia Money Awards 2015. Motilal Oswal Private Equity won the ‘Best Growth Capital Investor-2012’ award at the Awards for PE Excellence 2013. Motilal Oswal Private Wealth Management won at the UTI-MF CNBC Financial Advisor Award in HNI Wealth Management category for 2015. Aspire Housing Finance was awarded ‘India’s Most Admired & Valuable Housing Finance Company’ at India Leadership Conclave 2015.

For further details contact:
Mrs. Rohini Kute
(Head of Corporate Communication)
Motilal Oswal Financial Services
Ph- +91-22-30102340,
Mob- +91-9820196838
Mr. Shalibhadra Shah
(Chief Financial Officer)
Motilal Oswal Financial Services
Ph- +91-22-39825500
Mob- +91-9819060032
Mr. Alpesh Nakrani
Paradigm Shift Public Relations
Ph-   +91-22 22813797
Mob- +91-9892343828 / +91-9869121167