Bad numbers as expected this quarter
Unless markets bounce back, I imagine next quarter results too will probably not be too great. While AMC and broking business stands on strong footing, the fund based segment is again likely to show some red because they have to now show MTM gains/losses each quarter. HFC remains a question mark and while they have provisioned a huge sum of money but there is no evidence that asset quality will improve. However, they seemed to have really slowed down the disbursement until it all comes together which is great. Finally IB business also seems to have slowed down.
I have been tracking this company for 3 years for an investment opportunity but didnt get one because of expensive valuations at peak profit. Also, the sudden surge of flows into equity MF’s and discretionary investment schemes post demoni has also made me cautious. Overall, I feel it is a good business and the steps taken by management will certainly reduce the cyclicality of the business. Despite all the talk of low financialisation and low penetration of equity as a percentage of savings, I would ideally like to wait for the time when there is a bit more panic on dalal street and people are exiting their PMS investments and stopping SIP’s as opposed to today where everybody seems quite hung ho and a lot of money seems to be flowing in despite corrections. Such an opportunity presented itself in 2013 but we havent seen it since. Such a situation will provide an amazing entry point to buy in with good conviction! It might come, it might not. Until then, there is a large stock universe with steady compounders available! Mistakes of omission tend to be less painful than mistakes of commission!
In the meanwhile, I am more comfortable with HDFC AMC which is significantly “smoother” through cycles as evidenced by growth in profits even in 2013 and 2014. Obviously, it also means having to pay up.
It would be good to have some views!
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The AMC business doesnt require any money to grow. So a company like HDFC asset management though having great ROEs has to return the capital through dividends after paying DDT. However Motilal Oswal which is the premier equity AMC in the country can redeploy the funds thrown up internally into the Housing Finance business. Since the stock market is now looking up, the market expects the results to improve in the next quarter, also considering that most of the losses in the housing finance business have been provided for.
This is FYI only … Nothing much as the % of revenue of this LOB to topline is miniscule and this is speculative as of now … Nothing concrete.
Saurabh Mukherjea on Motilal Oswal Financial services
As a franchise. what would you bet on or as a stock which would you bet on? Would you bet on HDFC AMC, Motilal Oswal or Reliance?
"As a stock, I would say now that the Aspire Housing Finance thing has been sucked out of Motilal stock price, Motilal Oswal as a well run long-term play on savings in India does make sense. I wish the Aspire Housing Financing had never happened but it is what it is. In capital allocation decisions, we are allowed to be human but their asset management business, their broking, their wealth management business have got strong legs to benefit from the financialisation of the Indian economy.
Why not IIFL Holding or HDFC AMC or…?
So let us take it one by one. In case of IIFL Holding, they have got two NBFCs. One above and one below. My views on NBFCs are relatively well known now. In HDFC AMC’s case, almost all largecap equity MFs face a big challenge. It is a very difficult for the largecap equity MFs to generate meaningful outperformance and that constraints there the long-term growth."
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Completely concur with the rationale …
Nice forward @Julian
In that recent interview, Raamdeo Agarwal has stated that the scope of opportunity in Asset management business is something like 100 lakh crores, and MOFS even growing at 25% cagr will have the capacity to service only 2% of the market in 10 years. The scale of opportunity is mind boggling considering that a tsunami of retail investors money is waiting to come to the share market. And Raamdeo Agarwal says that the scale of opportunity is even bigger in Housing Finance. This was the reason for their Aspire gambit. Not able to compete with the moat enjoyed by the top 5 in housing finance who have captured 85% of the market, they are going after the low income groups, where the NPA is higher, and hence the underwriting requires to be of the top order, similar to that of Gruh. They need to post people from Gruh, instead of DHFL, which itself is in shambles, having to reinvent their business model itself again. Management is honest and competent. Company is modelled more like Berkshire Hathaway and Warren Buffett is the guru of Raamdeo Agarwal.
Disclosure: Invested
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Is MOSL really comparable in any way to BH? Are these platitudes necessary? I cringed when Anand Piramal was compared to WB few months back. Does WB really stand for helter-skelter lending with questionable underwriting?
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Even Warren Buffett had a horrific learning experience in the textile business. Even Warren Buffett replaced the CEO of Dexter and the CEO of another company dealing in fractional ownership of jets recently. Now Raamdeo has replaced the CEO of Aspire. Mohnish Pabrai recently had opined that MOFS could be a compounding machine. Startups like AU small finance bank etc., were discovered, financed and later partially divested in IPO by Raamdeo Agarwal. Even last quarter they were doing it with some real estate firms and several are in the pipeline. The interviews, the past performance record etc., of Raamdeo Agarwal set him up as the only Indian candidate for the post of Warren Buffett of India. Tell me of anyone else you know.
Motilal Oswal PE fund to invest Rs 200 crore in Happy Forgings
Business doesn’t move in a straight line. Motilal Oswal inherent strength is their wealth and asset management business which also at one point in time was struggling but eventually picked up due to CAN-DO attitude of management.
In Aspire too the organization has leant early in the cycle. I see this again on growth path in FY20.
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Motilal Oswal started as brokers and proprietary investors when the market was like the wild west. Nearly three decades later, the founders have built it into one of India’s leading broking businesses https://www.fortuneindia.com/enterprise/motilal-oswal-street-smart/102513
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Financial results for Q3FY19.
Disastrous performance. However in the investor presentation MOFS has reported 15% growth excluding Aspire, PE and fund based income which are irregular. Even if Aspire contributes 7 crore next quarter, as in Q3 18, MOFS should make a profit of 142 crores next quarter and cross life time high in profits in FY 20 resulting in a rerating of the stock.
Disastrous results, their presentation is just marketing and I think they are not delivering and aspire will still be bad for them in March and then they i’ll grow moderately what ramdeo suggested. I don’t see the kind of growth we have seen will come and also valuations. I exited completely as there are better consistent growth stories.
Thanks,
Kumar
You have not mentioned the rate at which you brought and the rate at which you exited. Only novices buy high and sell low. For those who bought at higher rate, this is not the right time to exit as the underlying business is just getting better. While the stock dropped drastically in the light of the results, there was pretty good support in the later part of the day, especially with management guiding that they do not expect any further write offs in Aspire, and that they have actually started recovering some of the written off amount and that there is a sales pick up in the housing finance business.
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It’s amazing that people were at 1 point willing to pay 50 times PE or 11x PB at the peak when retail money was flowing into equity like there was no tomorrow. For 3 years in a row retail flows into equity consistently averaged between 16-20 percent for all 6 month periods. People started to extrapolate those numbers into the future. If you look at AMFI data - we are yet to see net retail outflow from equity in any 6 month period for more than 3- 4 years. Im yet not a believer in the “this time’s different” story. Historically retail investors are known to run during periods of panic and periods of panic are an inevitable part of the stock market. Even today, SIPs are garnering 8000 crore each month despite the correction leading me to believe that retail investors are still believers! Ofcourse penetration in india is low and retail flow into equity has just started and the runway is long, however if we apply the principle of mean reversion, it’s a matter of time before money also flows out and SIP flows reduce temporarily. Surely as a company which is to a great extent dependent upon retail inflow into equity, there might be a better time to enter MOFS than today. Even today it is trading at 3x PB which is significantly above 10 year average. During the 09-2010 bull run it was trading at peak PB of 2.75). I would wait for a time similar to 2013 (which is likely to come at some point now or later) when there were net outflows from equity by retail. Until that point, HDFC AMC seems like a less volatile (because of debt component + equity) way to make the AMC play.
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We would be making the same mistake if the earnings of HDFC AMC would be as volatile as MOFS. However, in the past, even during periods where there have been net retail outflows from equity HDFC AMC has been able to grow its earnings. This is because a big chunk of AUM is coming from debt. Everyone witnessed what happened when there was panic in the debt market 2 months back. The AUM of HDFC liquid fund only increased by a factor of more than 1.5 in a matter of just 2 months despite the run on other liquid funds because of the perceived security in HDFC AMC! This is the reason I believe HDFC will be able to command a significant premium over MOFS in valuation.
Disc: invested in HDFC AMC. Not invested in MOFS
Regarding investing in growth, you will notice HDFC retains about 60 percent of its earnings to grow while paying out the rest as dividend consistently over the last several years. Very similar to Page and a number of high quality companies. HDFC AMC is able to grow its earnings at a rate of 15-20 percent and despite that pay out a dividend due to their high ROE which is significantly higher than MOFS. At the end of the day, in the long run the business can only ever grow as fast as its ROE. In your definition that makes all dividend paying companies as category B?
Incremental ROE continues to be well above 35%. I do agree with you on the timing of listing. It seemed to have been timed perfectly. It is upto individual investors to determine what price offers enough MoS. HDFC AMC at peak was priced above Rs. 1950 per share. I believe there was enough MoS at Rs 1300 and entered at that price. Only time will tell. There’s an entire thread on HDFC AMC for that.
Im sorry but are you now arguing against yourself by saying that HDFC AMC will retain a higher part of their earnings to fund growth? Or are you saying 47% dividend payout is a bad thing? Again, I do not know how to respond to someone who believes above average growth (15% is the hurdle rate for me) despite significant dividend payout is a bad thing! I am a novice and I thought value of a stock is the net present value of all future FREE CASH FLOW a clear measure of which is dividends. I am sure that you are trying to make a point which I dont seem to be able to understand. Kindly do enlighten me.
Anyway, this will be my last reply on this subject.