Motilal Oswal Financial Services

From being a pure brokerage few years back, Motilal seems to have build two new solid businesses over the last 1-2 years.
Low cost home financing(average ticket size 10 lacs) is growing at a strong pace with ~1000cr of loans disbursed as of Sep 30 2015 in just one and a half year of operation. And the Management has a plan to increase this to ~3000-3500cr by Mar’17. The yield on loans they provide is 13.5%. The inspiration on this business seems to have come from Gruh and Repco. They aim to reach 20% ROE by increasing the leverage to 7-8x in coming years.
The other second business is Asset Management including PMS where they have grown 3-4 x in last one year and have total assets ~10,000cr as of Sep 30. 2015. Their Mutual funds performed one of the best in last one year, so that is one cause for AUM to rise in addition to subscribers rise. Other thing is being a good performer, this pulls lot many individual investors to their Mutual funds in coming years. That will mean strong increase in AUMs in coming years.
Other thing Motilal management points out is that both these business have breaken even. So, any further rise in AUM or Aspire Home finance business should disproportionately add to profits going forward as fixed costs are recovered. Their guidance is that brokerage business will reduce to 1/3rd of overall business in next couple of years…so that will address lumpiness of earnings to large extent and also fortells the confidence of Management in rapid rise of these businesses.
The current Market cap is ~4600cr.
I haven’t researched or studied it in lot of depth, but at the outset it seems to me a super-multibagger in the making. Other than Good Management which aims at building new businesses, opportunity size is humongous in both home loan (low cost, 10lacs cr. opportunity)and Mutual fund(if you are perceived to be one of the best). Above all current size is small to be able to make big strides for atleast next few years.
Risks of execution(as businesses are new especially home loan) and also stock markets(going up and down) to some extent are the ones I foresee.
Disclosure; I have initiated a position ~10% of my portfolio.


Navin Agarwal, MD of the co addressed the call:Highlights by Capital Mkt
The company has posted 51% jump in consolidated revenues to Rs 2.7 billion in Q2FY16, while consolidated PAT moved up 33% to Rs 43.4 crore.Balance sheet had networth of Rs 13.9 billion and gross borrowings of Rs 15.8 billion at end September 2015.Borrowings ex Aspire Housing Finance stands at Rs 7.3 billion end September 2015.
Broking and related revenues
In Q2FY16, overall cash market volumes were flat QoQ and up a marginal 2% YoY. Within this, retail cash volumes were down 4% YoY, while institution cash volumes were up 13% YoY.
The company has invested significantly into advisory and sales teams, distribution network and technology offerings.The company has started real estate broking and advisory service under MOSL.Equity market share was 1.8% in Q2FY16 (1.8% in Q1FY16 and 1.5% in Q2FY15), with improved market share in the cash segment on both QoQ and YoY basis, including the high-yield delivery segment.Given the improvement in cash business, blended yield increased from 3.4 bps in Q1FY16 to 3.7 bps in Q2FY16.Branch count is up 23% YoY and DP assets are up 27% YoY.The monthly runrate in retail client addition in H1FY16 was 2X of the FY14 average, and 1.2X of the FY15 average.The company is revamping its digital initiatives across delivery and engagement touch-points, to reduce the cost of servicing clients.
Wealth management business:The business managed assets of Rs 50.3 billion, showing a growth of 59% over previous year.
The team had 64 sales people as of September 2015, up 35% YoY.
Investment banking:Investment banking fees were Rs 73 million in Q2FY16, up 49% QoQ.
The company was involved in the IPOs of Pennar Engineered Systems and Powermech Projects during this quarter, as well as in the upcoming IPO of Parag Foods.The company is in advanced stages of closure in a couple of mandates in the M&A and private equity raising side
Traditional capital markets contributed 52% of total revenues this quarter, as compared to 67% a year ago
Asset Management:Asset Management fee were Rs 575 million in Q2FY16, up 43% QoQ and up 169% YoY.Total AUM/AUA across mutual funds, PMS and PE businesses was Rs 113.5 billion, which is up 2X on a YoY basis.Mutual fund AUM was Rs 43.1 billion, up 236% YoY, PMS AUM was Rs 48.3 billion, up 123% YoY and PE AUA was Rs 22.0 billion, up 10% YoY.Net inflows this quarter were up 4.5X on a YoY basis, from Rs 5 billion in Q2FY15 to Rs 21 billion in Q2FY16.This traction in net sales has been driven by investment performance, new distributor relationships across channels, as well as scaling up of the existing distributor relationships.The company ranked #14 in the industry in terms of PMS and mutual fund AUM as of Sep 2015, up from #18 in Mar 2014.In the private equity business, the 1st growth capital fund saw 2 partial exits this quarter. The fund is likely to exit by FY17. The company is expected to earn meaningful carry as well profits on Sponsor commitments in FY17.
Asset management segment (public market equities and private equity together) contributed 21% of total revenues this quarter, as compared to 12% a year ago. The company expects asset management contribution to revenue to continue to improve.
Housing Finance:Housing Finance related income was Rs 457 million in Q2FY16, up 121% QoQ.During the quarter, Rs 5.7 billion were sanctioned and Rs 4.4 billion were disbursed. The disbursements during Q2FY16 were 2X of each of the previous two quarters.
The HFC loan book stood at Rs 9.9 billion across 9,700 accounts, as of Sep 2015. These are pure retail housing loans, with an average ticket size of Rs 1.0 million.Distribution reach expanded to 37 branches across 4 states.
Cumulative disbursements have crossed Rs 10 billion after 5 full quarters of commencing operations. As of now, Maharashtra and Gujarat are 89% besides small presence in MP and Telangana.Yield stands at 13.5%, NIM is 300 bps, GNPL is 0.04%, Cost to income ratio is 39%, RoA is 3.8% and RoE 14%.The company proposes to improve the loan book to Rs 2000 crore end March 2016, while expects PAT of Rs 35-40 crore for FY2016.The company proposes to improve housing finance RoE to 20%, by raising the debt-equity ratio to 8-9 times.
Aspire has sanctioned lines of credit of Rs 14.1 billion, through a mix of long-term bank loans, non-convertible debentures and commercial papers.Equity commitment is Rs 2 billion, as of Sep 2015.Fund based activities:This include strategic allocation of capital to long term RoE enhancing opportunities like Aspire Home Finance, sponsor commitments to mutual fund and private equity funds of MOFSL, apart from the NBFC loan bookFund based income was Rs 261 million in Q2FY16, down 8% QoQ and down 23% YoY.NBFC loan book was Rs 3.3 billion. The NBFC lending business is now being run as a spread business with a healthy mix of short term and long term borrowings.The total borrowings in MOFSL (ex Aspire) stood at Rs 7.3 billion as of Sep 2015 resulting in incremental interest cost (ex Aspire) of approx Rs 6.0 million as compared to previous quarter and Rs 111.7 million as compared to same quarter of the previous year.Investment in own mutual fund products is Rs 5.7 billion (at cost) and Rs 1.7 billion (at cost) in own private equity products.The unrealized gain on MF investments was Rs 1.7 billion, as of Sep 2015. The same is not reflected in the profit and loss account for the year

With returns from real estate and gold slowing down, with government emphasis on reduction of black money, with more and more people getting banked(aadhar/payments banks…), with the improvement in economy, I believe there is going to be a big spurt in overall investments into equities in coming years. MOFS can and I believe will be a BIG BIG beneficiary. Early trends already show this if e consider the rise in its MF AUM including PMS and the home loan portfolio… The best part is MOFSL is still small with around 4600cr market cap and available at around ~25-30x current year earnings.

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One thing I missed mentioning is that as per screener, the Dividend Payout last year was 29% and the current dividend yield is .9% which is equally great! So superb growth with great dividend yield.

Promoters are above average on all three fronts of integrity,passion and competence,which one should look when evaluating a company or promoters. Retail side is going more towards mfs or pms in place of direct equity.Opportunity is big as this trend has just started.I am equally bullish.

Samvat 2072 to be better; expect tsunami of local money


Q: Last Diwali to this Diwali FII net investment is practically zero and domestic money is Rs 50,000 crore, you see that trend being more pronounced next year or are you hopeful that foreign money will also start coming in over the next 12 months?

A: I think CLSA has predicted in a report and even Morgan Stanley and I agree with them this will turn to USD 20 billion.

How much will MOFSL benefit from this psumani?

Q4 -

  • Aspire home finance disbursed Rs. 1800 cr in FY16 (up 5x). NIM = 389 bps. Avg. loan size= 10 lacs. It operates in same segment as Gruh and Repco. This is almost the same amount Repco disbursed in FY15 ( So, Aspire home fin. is growing pretty fast.

  • MF+PMS AUM is Rs. 10,500 cr (5100cr+5400cr). MF AUM grew 110% yoy, PMS AUM grew 47% yoy.

  • Both home finance and Asset management constitute 20% each in the revenues.

  • Brokerage business still contributes 48% (down from 65% an yr back).

Disc.: Bought recently.

Some Comments -

Broking Business - As customers also mature, the broking business will make less and less money. The smart guys will move to a Discount Broker. The Bigger players will take NSE membership to avoid brokerage fees. The mid level guys will stay. Question is whether this group will grow at a reasonable rate or not.

Asset Management Business - Once again as the market for MF matures, customers will get a good aversion to funds with high fees. The introduction of Direct funds are reduced the Broker Incentives. Also they don’t have captive customers like ICICI/HDFC/SBI to offer MF products. Thus they need tieups that eat into the margin or pay Distributors fees YoY. That once again causes Customer dissatisfaction.

Investment Banking and Housing Finance - This seems like a good diversion from the other 2 business. Longer term this should help. To what extent as its a late entrant to the market already full of Banks and other Financing Companies.

Finally Valuation - At current valuation ( as compared to DHFL, Shriram, AB Nuvo, Manappuram etc), I would dare to say it’s expensive. DHFL or AB Nuvo or in Banking ICICI / YES Bank would be a better choice.

Disc - No holding of MOFS. Hold AB Nuvo, Yes Bank

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Regarding asset management: if we take the asset management fee (also known as expense ratio on mutual funds etc ) to be say 2.3% ,then on 10,000 cr assets under management, the fee would be 230 cr per annum or 57.5 cr per quarter. This is consistent with Hemant’s post as well.

Anyone has an idea how much would it typically contribute to the bottomline (to PAT)?


Housing finance company to expand to 3 new states, expand branches at 20-25% qoq

The company has posted 72% growth in consolidated revenues to Rs 3.7 billion in Q1FY16, while consolidated PAT moved up 179% to Rs 79.2 crore. Housing finance and Asset Management Businesses contributed to the healthy growth in revenues, The company has also made exceptional gains comprising of share in profit on sale of investments (carry share) made in the 1st PE growth fund, as well as the impact of write-off on account of doubtful NPA.Balance sheet had networth of Rs 15 billion and gross borrowings of Rs 36 billion at end June 2016. The employee base of the company stood at 3000 employees at end June 2016.

Broking and related revenues
The average daily trading volumes of the company increased 34% to Rs 75 billion in Q1FY2017, against market growth of 2% to Rs 3.2 trillion.Equity market share improved to 2.4% in Q1FY2017 from 1.8% in Q1FY16.The blended yield was 3.1 bps in Q1FY2017.

Investment banking
Investment banking fees were Rs 82 million in Q1FY2017, up 699% YoY.ECM business has gained momentum, and the company completed the Rs 7.5 billion Parag Milk Foods IPO and the Rs 2.6 billion Indian Overseas Bank QIP

Asset Management
Asset Management fee were Rs 652 million in Q1FY2017, up 62% YoY. This contributed 18% of consolidated revenues this quarter, as compared to 19% in Q1FY16.Total AUM/AUA across mutual funds, PMS and PE businesses was Rs 151 billion, up 58% YoY. Mutual fund AUM was Rs 59 billion, up 84% YoY, and PMS AUM was Rs 64 billion, up 56% YoY.Rank in equity AUM improved to 12, up from 18 in FY14. Market share in Equity MF AUM was 1.3% in Q1FY17 and in Equity MF Net Sales was 4.0%. These reflect considerable headroom for growth.In private equity, the 1st Growth Capital Fund - IBEF I has returned 198% capital (in INR terms) from 4 full-exits and 4 partial exits in 3 companies till-date. The fund is in advanced stages for 3 exits in the next few months, which may allow it to return an additional 20% capital. The fund is likely to deliver a gross multiple of over 3.5 times. The 1st Real Estate Fund - IREF I has returned 86% capital from full/partial exits from 6 projects. The 2nd Growth Capital Fund - IBEF II has committed 64% across 8 investments. The 2nd Real Estate Fund - IREF II has committed 85% across 8 deals. The 3rd Real estate Fund - IREF III announced its 1st close, raising commitments of Rs 6 billion.

Wealth management business
Wealth management assets were up 54% YoY to Rs 74 billion.the traction in RMs from 54 to 75 YoY has led to a 54% YoY growth in AUM and a 28% YoY rise in clients

Housing Finance
Housing finance related income was Rs 1 billion in Q1FY17, up 391% YoY.HFC loan book stood at Rs 25 billion vs Rs 5.6 billion a year ago. It has funded 25,000 families till-date.Aspire disbursed Rs 4.8 billion in Q1FY17, up from Rs 2 billion in Q1FY16.It currently operates in 4 states, and the branch count has increased from 28 to 62 YoYIt has credit lines from 23 banks and 1 NBFC, up from 8 a year ago.As of Q1FY17 (on an annualized basis), NIM was 380 bps, RoA was 3.5%, RoE was 16.6% and D/E was 5.7X. Gross NPL was 0.2% as of Jun 2016.Capital infusion made by the Sponsor is Rs 4 billion till-date.Housing Finance contributed 27% of consolidated revenues this quarter, as compared to 10% in Q1FY16.The housing finance company operates through 62 branches spread across 4 states – Maharashtra, Gujarat, Madhya Pradesh and Telengana. The branch expansion is taking place at hefty pace of 20-25% quarter
over quarter. The company propose to expand to three new states, while would continue to expand at strong pace.
Fund based activities Fund based income was Rs 459 million in Q1FY17, up 61% YoY. This includes share in profit on sale of sponsor investments made in the 1st PE growth fund.Investment in own mutual fund products is Rs 6.1 billion (at cost) and Rs 1.9 billion (at cost) in our own private equity products. The unrealized gain on MF investments was Rs 1.8 billion as of Jun 2016.NBFC loan book, which is now being run as a spread business using borrowed funds, was Rs 2.6 billion.


Aspire disbursed 4.8 billion Rs. in Q1 FY17 Vs. 7.3 billion Rs. in Q4FY16 -

The disbursal figure is showing big drop QoQ. Maybe the 7.3 billion figure was a huge one-off jump which was not to be sustained.

Disc: Was invested (at 290/- from a couple of months back) . Booked profit last week.

This would be my first post on valuepickr. A quick background, I am a new investor and got interested in stocks a couple of years back, after reading for about a year I have been directly investing in stocks for the past one year.

While reading “one up on wall street” I learned about the sudden rise of mutual fund companies in US during the 80s. In his book Peter Lynch confesses that he initially missed this trend under his nose while he was picking other terrific companies. He only bought the MF companies a few years later.

We are also seeing something similar in India. More and more Indians are moving away from investing in gold and Real State to investing in equities. During my research I came across MOSL which I think would be a direct beneficiary of this trend at least for a few years to come.


MOSL has 5 main business:
• Broking
• Mutual Funds/Wealth Management
• Housing Finance
• Investment Banking
• Private Equity

Below is the rationale for my investment:

• I liked the dynamics of this business. In both broking and Mutual Funds the company would charge a fixed % based on the transaction value and AUM respectively.

Hypothetically assuming that the market doubles in next 5 years and there is no increase in number of transactions or number of customers for MOSL; still the revenue doubles without increase in cost. Since they have completed their capex for the broking business and MFs, there is a lot of operating leverage and the profits may almost directly trickle to the bottom line.

Generally we see larger participation in bull markets, so the number of transactions in broking and new fund inflows in MF may rise. This could have a multiplier effect on profits over the next few years in addition to the point above

*I am assuming there is and will be a bull market in the next few years.

Overall Broking and MF business are free cashflow businesses particularly in bull markets with little capex.

• The company has ventured into the housing finance business over the last couple of years and expects a 20%+ ROE. The housing finance business allows to deploy the free cashflows from broking and MF business at high rate of returns for long periods of time.

This is a new business and they are experiencing rapid growth due to smaller base effect. Also, Housing finance is asset backed, so it gives me some comfort and security.

In addition the average housing loan is Rs 10 lakh and it seems that they must have given large number of loans and therefore are reasonably diversified.

• ROE: They have had poor ROE in the past. Based on last quarter’s transcript the ROE was poor in the past was because of their investment of free cashflows was in debt type securities which gave them 7-8% return net of tax. Now with the investment of cashflows in housing finance the ROE may improve going forward.

• The surprise for me has been their private equity and investment banking divisions. I really didn’t fully understand these two segments and also didn’t pay much attention as they were relatively small. Recently these two segments have also started doing well.

• Management: I don’t think I have the skill sets or the experience to judge the management. So I assume them to be innocent until found guilty. However Raamdeo Agarwal (co-founder & chairman), is a value investor. I am hoping that he would leverage his investing knowledge to run the business well.

• The only other point I have is a guess and if at all will only be true in the long term. The fund management team of MOSL is frequently seen on CNBC and other news channels which I think gets them good free publicity. This will help them improve their brand. They are a consumer/corporate facing company (except housing finance) and a good brand in turn would improve the inflows and longevity of their business.

• The MF and Broking business is definitely cyclical in nature. Anyone buying the stock would also need to figure out the valuations at which they exit. Ideal time would be the peak of Bull market which is near impossible to catch.

• Broking business may come under threat from low flat fee brokers like zerodha. Also their Mutual fund business has slowed recently inspite of a buoyant market.

• They are new to the housing finance business and there is always a risk of execution. It is also difficult to comment on the underwriting quality at least till a few years.

• It seems that they are also involved in the NSEL scam. However their exposure is only Rs 250 cr based on a management interview. We need to be watchful of any red flags.

Valuations: At the current prices I find the stock to be a bit expensive as I have been accumulating since 270 levels till last month. However I think the stock can still double in 3 years on back of their rapidly growing Housing finance business. Please note that they have approx. Rs 1000 Cr invested in their own MF and private equity schemes and an office building of approx. 300 cr in Bombay.

I invite your thoughts on the analysis above.

Disclosure: I am a novice investor who is invested and may be biased.


Just to quickly summarize, the key rationale for investment is that MOSL has free cashflows from their core business and a housing finance business in which they can deploy capital to generate high ROE over the next few years.

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MOFSL performance review:

Performance for the Quarter ended Sep 30, 2016
· Consolidated revenues were Rs 4.6 billion in Q2FY17, up 71% YoY. It was Rs 8.3 billion in H1FY17, up 72% YoY
· Every business has fired in terms of revenue growth during the quarter. Housing finance was up 222% YoY, Asset management fee was up 48% YoY & Capital market businesses (broking & investment banking) were up 46% YoY
· Full exit of the 1st growth capital PE fund, IBEF I, would also be a meaningful contributor in FY17/18
· Consolidated PAT was Rs 1.0 billion in Q2FY17, up 134% YoY. It was Rs 1.8 billion in H1FY17, up 152% YoY
· Q2FY17 included exceptional items, which comprised of share in profit on sale of investments (carry share) made in the 1st PE growth fund, as well as the impact of write-off on account of doubtful NPA. PAT impact of carry share was Rs 627 million in H1FY17; of this Rs 372 million was earned in Q2FY17
· Impact of operating leverage is becoming visible, as PAT Margin improved to 22% in Q2FY17 from 16% in Q2FY16
· Balance sheet had net worth of Rs 16 billion & gross borrowings of Rs 47 billion (including Aspire), as of Sep 2016
· ROE for Q2FY17 was 26% on reported PAT vs 13% in Q2FYFY16. However, this does not include unrealized gains on investments in Motilal Oswal’s mutual fund products (Rs 2.7 billion, as of Sep 2016)

Speaking on the performance of the company, Mr. Motilal Oswal, CMD said
“Each one of our businesses delivered robust revenue growth this quarter as compared to the previous year, as our investments into critical resources are now bearing fruit. Our business volumes, asset mobilization, market share and client addition have seen visible improvement. Our profits this quarter were the highest-ever quarterly profits for the Group, and our ROE for the quarter is double as compared to the same quarter last year. With diversification of business lines, contribution of Capital Markets businesses (Broking and Investment Banking) to overall profits has been coming down since the last couple of years. It was ~26% in H1FY17 vs ~62% in FY15. Contribution of Asset & Wealth Management was up from ~14% in FY15 to ~47% in H1FY17. Housing Finance contributed ~19% in H1FY17, while Fund based business comprised another ~8%. We have built strong a competitive positioning in each of our businesses and we are very excited about the scalability of our Asset Management and Housing Finance businesses and the potential returns from the Capital Market business and Fund based business”

Performance of Business Segments for the Quarter ended Sep 30, 2016
· Capital markets Businesses (broking & investment banking) are showing results following investments
o Broking & related revenues were Rs 1.9 billion in Q2FY17, up 39% YoY. During Q2FY17, MOSL’s revenue was up 34% YoY & 25% QoQ. PAT was up 51% YoY & flattish on QoQ basis. Q1FY17 included profit on sale of mutual funds of Rs 77 million. Excluding this, the operating PAT in Q2FY17 was up 43% QoQ. Proactive investments into manpower, brand & technology have driven a meaningful traction in our business, & our overall equity market share has risen 1.8% in Q2FY16 to 2.2% in Q2FY17
o In retail broking & distribution, our investments into sales, advisory & technology are bearing fruit now. During the quarter, our monthly addition of retail clients was up 69% YoY, our retail market share improved in cash & F&O on YoY basis, & DP AUM was up by 52% YoY. Our tech-platforms evinced increased interest, & online business was ~41% of our retail volumes in Q2FY17, up from ~27% in Q2FY16. Mobile app comprised ~8% of business in Q2FY17 & it has been steadily rising. Our vast network of 2,200+ outlets is being leveraged to deepen product-penetration. Financial products AUM was up 64% YoY, & this will help build a sustainable annuity revenue stream
o In institutional broking, the 12th Annual Global Investor Conference was one of the biggest format events in this industry. It saw participation from 120+ companies & 750+ global investors, resulting in 4,000+ corporate investor meetings. The share of Blocks has steadily increased within our institutional volumes
o Investment banking fees were Rs 202 million in Q2FY17, up 177% YoY. Our ECM business has gained definite momentum in recent quarters with deal closures & revenue growth. We successfully closed a QIP, IPO, OFS & Buy back in Q2FY17. Key transactions include Rs 7.5 billion QIP of Bharat Financial Inclusion, Rs 2.4 billion IPO of SP Apparels & OFS of Igarashi Motors Ltd. Lower growth in PAT as compared to the topline is attributable to higher personnel cost provisions during Q2FY17. We are optimistic on the growth prospects for this business
o Capital markets businesses contributed ~45% of revenues in Q2FY17, as compared to ~52% in Q2FY16
· Asset and Wealth Management Businesses have seen strong business traction
o Total AUM/AUA across asset management & private equity businesses was Rs 181 billion, up 59% YoY. Wealth management AUM was Rs 86 billion, up 70% YoY
o In asset management, our AUM across mutual funds, PMS & AIF was Rs 150 billion. In Q2FY17, revenue was up 28% QoQ but EBITDA was up only 6% QoQ. This was due to an incremental Rs 42 million spent in advertising. We are methodically building our positioning as “equity specialists” with our QGLP philosophy, which has consistently delivered on performance. Our rank in Equity AUM improved to 11 as of Q2FY17 vs 18 in FY14. Our market share in Equity MF Average AUM was ~1.3% in H1FY17. Importantly, our market share in Equity MF Net Sales was significantly higher at ~4%. Our overall net inflows remained strong at ~Rs 11 billion in Q2FY17 vs ~Rs 8.7 billion in Q1FY17, as we deepened existing distributor relationships & added few large distributors. Our new AIF platform mobilized a commitment of Rs 6 billion, with a drawdown of Rs 1.96 billion as of 30 Sep 2016. Our new Dynamic Equity Fund raised Rs 3.3 billion in its offer period. We are tapping global pools of capital with our offshore business initiatives, which is underway with the launch of Motilal Oswal India Fund
o In private equity, we manage an AUM of Rs 30 billion across 2 growth capital PE funds & 3 real estate funds. The PE business has demonstrated high profitability & the RE business has shown significant scalability. We expect these attributes to continue, going ahead. The 1st growth fund, IBEF I, has seen 6 full-exits & 2 partial exits in 2 companies, translating into ~201% capital returned (INR). It is in advanced stages for 1 exit in the coming months, which may allow it to return an additional ~14% capital. It is likely to deliver a gross multiple of ~3.5X. The 2nd growth fund, IBEF II, has committed ~89.5%, after raising commitments from marquee institutions. The 1st real estate fund, IREF I, has seen full/partial exits from 6 projects, translating into ~86% capital returned. The 2nd real estate fund, IREF II, has committed ~96% across developers. The 3rd real estate fund, IREF III, is in fundraise stage with an AUM target of Rs 12.5 billion. It announced its 2nd close & raised commitments of ~Rs 8.5 billion. It has committed ~27% from the fund
o Asset Management fee (asset management & private equity together) were Rs 854 million in Q2FY17, up 48% YoY. This contributed ~19% of consolidated revenues this quarter, as compared to ~21% in Q2FY16
o In Wealth management, the traction in RMs from 64 to 82 YoY, led to a 70% YoY growth in AUM & a 21% YoY rise in client families. We have seen good traction in deepening of client wallet-share & product penetration. We enjoy a high yield, due to the higher share of equity & real estate products in our AUM. This business offers enormous scope for scalability as it builds synergies with the Group’s other businesses to deepen its reach
· Housing finance has shown traction in assets & liabilities, while maintaining risk & operational parameters
o Housing finance related income was Rs 1.5 billion in Q2FY17, up 222% YoY
o On the assets side, the loan book was Rs 30.7 billion, up 210% YoY. It has funded ~32,000 families so far
o Disbursements for Q2FY17 were Rs 6.7 billion vs Rs 4.4 billion in Q2FY16, up 51% YoY. Disbursements in H1FY17 stood at Rs 11.5 billion vs Rs 6.4 billion in H1FY16, up 78% YoY
o The traction in the book is in line with the strategy of deepening our network in existing geographies. The branch count was 74 as of Sep 2016, up 100% YoY
o On the liabilities side, it had credit lines from 25 banks & 1 NBFC vs 11 a year ago. Approx 61% of borrowings are from the capital markets. The ratings of Crisil A+/Stable & ICRA AA- (Stable) augur well for future fund-raise
o Cumulative capital infusion by sponsors till-date is Rs 5 billion. The total infusion in H1FY17 was Rs 2 billion. The strong liquidity in the Group’s balance sheet (~Rs 8.8 billion) allows us to fund investments in Aspire Home Finance
o As of Q2FY17 on an annualized basis, our ROA was 3.6%, ROE was 17%, GNPL was 0.3%, NIM was ~418 bp & D/E ratio was 6.0x
o PAT for Q2FY17 was Rs 227 million vs Rs 95 million in Q2FY16, up 138% YoY. PAT for H1FY17 was Rs 361 million, as compared to Rs 400 million in fiscal year FY16
o Housing Finance contributed ~32% of consolidated revenues this quarter, as compared to ~17% in Q2FY16
· Fund Based Business includes sponsor commitments to our AMC & PE funds, and NBFC LAS book
o Fund based income was Rs 194 million in Q2FY17, down 21% YoY
o Our investments in Motilal Oswal’s mutual funds (at cost) stood at Rs 6.1 billion. The unrealized gain on these was Rs 2.7 billion. The same is not reflected in the P/L. The XIRR of these investments (since inception) is ~25% & is significantly higher than the 7-9% post tax returns earned prior to the shift in capital allocation two years back. This validates the demonstrated long term performance track record of our QGLP investment philosophy
o Our investments in Motilal Oswal’s alternative investment products stood at Rs 2.3 billion. The 1st Growth fund, which is in exit mode, has returned close to 2 times till date. The portfolio gains booked in H1FY17 were Rs 286 million; of which Rs 62 million was booked in Q2FY17
o Both these commitments have not only helped “seed” these new businesses by investing in highly scalable opportunities, but they also represent highly liquid “resources” available to use for future investments, if required.
o NBFC LAS lending book was Rs 2.6 billion, as of Sep 2016, which is run as a spread business
· Other income was Rs 18 million in Q2FY17
· In line with its goal to achieve 20%+ ROE, consolidated ROE for the Group for H1FY17 was 24% annualized (without unrealized gains on mutual funds of Rs 2.7 billion). Within this, Housing Finance was 15% annualized, Asset and Wealth Management business was 272% annualized, Capital Markets was 36% annualized and Fund based business was 4% annualized (without unrealized gains on mutual funds).

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The other income contribution is 66 Cr in Q2 and 41 Cr in Q1. What’s the nature of these component in P & L? Is this the profit made by their PE investment? If yes, this may continue in the future from their profitable PE investment right?

MOSL presentation highlighting key growth areas.

Acquisition of Equity Stake in NBFC - MAS Financial Services Limited

Looks like Aspire housing finance is planning for a Pan India presence and are raising more from PEs:

Couple of things I was not able to figure out:

  1. Throughout MOSL’s concall and annual reports management indicated to use their own cash flows and investments to fund Aspire’s expansion (housing finance company). Why raise money from PEs now? Are they expanding more aggressively than anticipated and need more funding or are they getting a good valuation riding on HFC boom.

  2. Based on the ET article they are expected to value their HFC company at 4,000 cr with an earning of approx. 53 cr for the first 9 months or approximately 70-80 cr for the full year. This gives a PE multiple of 50-60 which is significantly higher than MOSL’s stock which has a trailing multiple of 38. Why would a PE investor pay such a high multiple?

Motilal oswal Q1 net profit up 28% YoY . At 101 cr from 79 Cr in same qtr last year.
All segment posted robust growth except home finance where profit dipped 50% Q-o-Q.
Unrealised gain on MF investment - 356 Cr and Unrealised gain on AU Small finance investment 176 Cr (on investment of 18.8 Cr so 10 beggar returns on AU)

There was 11 cr of exceptional gain last year so quarters not strictly comparable.
Everything looks good except home finance. Need to check what are the reason behind profit drop even after increase in income compared to last qtr

They said last time also that they are currently investing a lot in Home Finance business to build it up. My concern was rise in NPAs. It has moved to 1.6 . It would be interesting to see what management says for that.

Disc. Invested