Part B - How would I value the business
This looks like a classical Sum of the Parts Valuation case, each business has a different quality to it.
- Broking & Distribution - Top 5 equity broker in the country, not into discount broking yet. Broking is a pure operating leverage play beyond a scale where one can have good, average or bad years based on volumes. The distribution part however brings in some stability to the business and is a pure cross sell play. If anything this increases the operating leverage part while bringing down cyclicality to some extent - as distribution AUM grows and revenue share within the segment starts crossing 35%, the cyclicality will start getting smoothened out.
Valuation - Take the FY19 PAT number and give it a reasonable multiple which I evaluate to be in the range of 12-15 TTM PE
- Asset Management including MF, PMS and AIF - My views on the AMC business are well elaborated in the PPT I’d made for the VP 2019 meet, one can see that here - VP Chintan Baithak Goa 2019 - Sector: Asset Management & Wealth Management
Valuation - At 45,000 Cr which is all equity the business will be more cyclical compared to an HDFC AMC which has a debt/equity combination. However this also means that Yield to AUM and profit will be markedly higher since the margins in equity fund management are way higher.
Once again take the FY19/FY20 PAT number and assign a conservative PE to it. I would go with 30 TTM PE since Nippon AMC is at 40 and HDFC AMC is at 50+
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Wealth Management - A marginal business actually, just take a valuation of 2.5% of AUM or a PE of 18-20 on FY19 PAT. IIFL Wealth Management trades at a PE of 25-30
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Fund Book - This is nothing but the company’s own money invested into own funds. Valued at 1500-1600 Cr as of Sep 2019. This is pure bottom line play since there is no cost associated with the valuation gains if any. I would not take a PAT approach to this, on a conservative value this purely at market value as of date
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Home Finance Business - Net Worth of 830 Cr as of Sep 30, 2019 (clarified in yesterday’s conference call). I do not understand lending businesses all that well, given the history of mismanagement, I would probably just value this at book and go with it
What is most important -
All numbers I have used to value are conservative multiples
Other than HFC all others are pure operating leverage businesses with minimal balance sheet risk. Any increase in revenue straightaway flows to PAT
Other than HFC all other businesses are asset light, they do not need external capital at all. The debt ex HFC is backed by 1.2X of that investment into debt mutual funds
Motilal Oswal Financial Services may well be a capital markets powerhouse masquerading as a lending business in the average investor’s eyes. If and when the equity markets deliver a double digit growth rate, all businesses other than HFC should do very well and throw a lot of cash. If one’s call is that the HFC business has seen the worst days behind it and can only get better going forward, this might start looking interesting at current valuation.
Please come to your own conclusions based on your evaluation of the various aspects. This is not a BUY/SELL recommendation or investment advice. This just presents my perspective on how I view this business at this point of time based on my risk profile & requirements
Disclosure: Invested (not a large position) and tracking closely, may add more based on market conditions. I am SEBI registered IA