INVESTOR UPDATE

Motilal Oswal Financial Services reports Q4FY18 PAT of Rs 148crores, +64% YoY and FY18 PAT of Rs 541 crores, +50% YoY.

Mumbai,May 21, 2018: Motilal OswalFinancial Services Ltd. announced its results for the quarter ended and yearended March 31, 2018 post approval by the Board of Directors at a meeting heldin Mumbai on May 21, 2018.

PerformanceHighlights

Final dividend declared of Rs 4.5 pershare

Performance for the quarter and year ended March 31, 2018

• Consolidated revenues were 2,784 crores in FY18, +44% YoY and Rs 756 crores in Q4FY18, +38% YoY.

• In FY18, Asset & Wealth Management business top-line was +66% YOY, Capital Market business was +47%YoY and Fund based business was +71% YoY. In FY18, 54% of revenue came from linear sources like Asset & Wealth Management and Housing Finance. Capital Markets share in revenue during the year was 38% led by market tailwinds coupled with operating leverage. Broking business has clocked its highest ever yearly revenues, its distribution arm clocked 71% YoY growth in AUM and Investment banking profits and pipeline continued to grow strongly. Notwithstanding this strong performance in Capital Markets, the share of annuity revenue streams went up, led by AMC's AUM growth of 76% YoY and Housing Finance business reporting a loan book growth of 17% YoY.
• Consolidated PBT was up by 52% YoY at Rs 781 crores in FY18. Consolidated PAT was Rs 541 crores in FY18, +50% YoY, despite 3 factors – Rs 25.6 Cr impact of MAT credit provisioning, Rs 22.9 Cr impact of change in ESOP accounting policy and accelerated provision of Rs 19.4 Cr and write off of Rs 71.5 Cr in AHFCL. All these 3 charges to income statement were at the discretion of the management. This incremental PAT growth was contributed by Asset & wealth management business, +60% YoY and Capital Market business, +64% YoY. PAT ex-Aspire is up 81% YoY.
• Significant investments have been made in manpower. Ad expenses are +54% YoY in Asset Management. The full impact of operating leverage from these sizeable investments is yet to unfold in our businesses.
• Consolidated net worth stood at Rs 2,248 Cr, gross borrowing was Rs 5,314 Cr and net borrowing was Rs 4,958 Cr (including Aspire). Excluding Aspire, gross and net borrowings were Rs 1,428 Cr and Rs 1,071 Cr respectively and this is less than the market value of quoted investments at Rs 1,535 Cr. Overall gearing remains conservative at 2.4x; ex-Aspire it is at 0.7x and considering market value quoted investments, we are effectively net cash balance sheet.
• RoE for FY18 was 27% on the reported PAT. However, this does not include unrealized gains in our quoted investments at Rs 560 Cr as of March-18. Had this been included, RoE in FY18 would have been ~31%.
• Board has declared final dividend of Rs 4.5 per share (FV Re 1/share) taking total dividend to Rs 8.5 per share. Dividend payout policy is 25%-35% of PAT.

Speaking on the performance of the company, Mr. Motilal Oswal, CMD said

“Our strategy to diversify our business modeltowards linear sources of earnings like Asset Management and Housing Financecontinues to show results, with bulk of the revenue pie now coming from thesenew businesses. Each of these businesses offers significant headroom forgrowth and operating leverage as they scale up. Even our traditionalbusinesses also saw strong uptick during the quarter by registering recordrevenues. With this strategy, we have achieved highest ever annual revenue andprofit during FY18. Our brand is now being recognized in each of ourbusinesses”.

Performance ofBusiness Segments for the quarterand year ended March 31, 2018

·      Capital markets Businesses (Broking& Investment banking)

o  Capitalmarkets comprises of Retail Broking, Institutional Equities and InvestmentBanking business. Revenues were Rs 1,066 Cr in FY18, +47% YoY for this segmentand contributed ~38% of Cons revenues. Profits grew much faster at 64% YoY andcontributed ~32% of Cons PAT.

o  In RetailBroking & Distribution, our Market share in high-yield cash segment hasimproved strongly on YoY basis. Overall market share has been maintained at 2%in FY18 despite higher F&O volumes.

o  Our strategy to bring in linearity through thetrail-based distribution business is showing results. Distribution Net Saleswere Rs 3,497 Cr in FY18, +119% YoY, and AUM was Rs 7,530 Cr, +71% YoY. Withonly 10% of the near 10 lakhs client base tapped, Distribution income isalready at 17.5% of retail broking gross revenues. We expect a meaningful increase in AUM and fee income asnumber of clients to whom we have cross sold and number of products per clientcross sold rises.

o  In InstitutionalBroking, rankings with existing clients improved, domestic institutionscontribution improved and new client additions were encouraging. Every aspectof the business, research, sales, sales trading and corporate access is beingstrengthened. Tailwinds for local firms remain strong.

o  Investment Banking revenues grew strongly by 29% YoY to Rs 113 Cr in FY18 while profitsgrew much faster at 62% at Rs 60.3 Cr. We have completed 15 ECM transactions inFY18. Some significant transactions have been closed in Q4FY18 and the overalltransaction pipeline remains quite encouraging. 

·      Asset Management businesses are nearingcritical mass

o  Asset Management business across MF, PMS & AIF reached the mark of Rs 35,640 Cr AUM, +76%YoY this year, comprising of Rs 18,159 Cr MF AUM, Rs 14,952 Cr PMS AUM and Rs 2,417Cr of AIF AUM. Our AMC now ranks among the Top-10 players by total equityassets, PMS ranks #1 while AIF is growing rapidly. Net Sales were Rs 12,842 Crin FY18, +125% YoY and compares with Rs 5,720 Cr in all of FY17. Net yield was~0.9% in Q4FY18 and 0.92% for FY18. Revenues were Rs 668 Cr in FY18, +96% YoYand PAT is Rs 131 Cr, +164% YoY. The asset management business offers thehighest scalability and operating leverage among all our businesses.

o  OurEquity MF AUM of Rs 18,159 Cr is just 2% of the Industry Equity AUM of Rs 8.3 lakhcrore. However, our market share in Equity MF Net Sales has scaled up to ~4% inFY18. Our endeavor would be sharpen the QGLP philosophy to sustain alphageneration, to increase our share of Net Sales as funds form part ofperformance league tables and there is stronger distribution pull. This willaid closing the gap between our share in AUM and Net Sales while improving ourshare in Net Sales. Ad & marketing spends were Rs 27.9 Cr in FY18, +54%YoY, forming 9% of net revenue. Our ongoing ad campaign “Think Equity ThinkMotilal Oswal” is reiterating our positioning as equityspecialist. Separately, our pricing power in MF is improving and thedirect net sales contribution is rising – up from 17% in Q4FY17 to 31% in Q4FY18.This will help improve net yields.  

o  Ourshare of Alternate assets, comprising of PMS & AIF, is the highest amongAMC’s at ~50% and continues to grow very strongly. Yields and profitability ofAlternates is higher. As of March 2018, ~20% of Alternates AUM isperformance-fee linked, and our target is to increase this further.

o  Private Equity manages an AUM of Rs 4,694 Cr across 3 growth capital PE funds& 3 real estate funds. This business has delivered on profitability andscalability fronts. The 1st growth fund (IBEF 1) has delivered an XIRR of 28%,and alpha of 10% and is expected to return nearly 5.4x MoC (Multiple of Cost).Till date, 3.3x MoC has been returned for INR investors and 2.2x for USDinvestors. Strong performance and positioning has also aided new fund raise. Welaunched IBEF-3 this year and received phenomenal response by garnering Rs 1,470Cr and expected to achieve targeted size of Rs 2,000 Cr by June 2018.

o  Wealth Management business AUM grew by 46% YoY at Rs 14,713 Cr with highest-ever Netadds in FY18 at Rs 2,660 Cr, +50% YoY, revenues grew 47% YoY and PAT grew 134%YoY. EBITDA margins improved to 35% in FY18 vs 31% in FY17. RM count of thisbusiness has reached 118 in FY18 from 78 in FY17, +51% YoY. Investments in strongRM addition suppressed reported profitability of past years. As ratio of newadds to opening RM's falls and the vintage of RM's improve, both productivityand profitability of the business will scale up.  

o  Overall Assetand Wealth Management revenues were Rs 845 Cr in FY18, +66% YoY andcontributed 30% of consolidated revenues. Profits grew by 60% YoY and thissegment now contributes 37% of consolidated profits, with highest scalabilityand with least capital employed among our portfolio of businesses.

·      Housing finance business

o  Aspire Home Finance’s loan book grew by +17% YoY at Rs 4,863 Cr.We plan to grow loan book at about 15% in FY19.

o  In FY18,profits of the company declined on account of provisioning of Rs 56.4 Cr andwrite off of Rs 71.5 Cr.

o  In FY18,AHFCL has accelerated provisions of Rs 19.4 Cr over the regulatory requirementsresulting into substantial increase in PCR to 35% from 18% in FY17. We plan toincrease PCR further in coming quarters.

o  Strongramp-up in collection headcount, +60% QoQ to ~215 officers. Average age ofcollection officers into the system is ~35-40 days. We expect meaningfultraction in collection as their customer touch base increases in-line withtheir vintage. Cost to Income ratio stood at 38% in FY18.

o  Disbursementsin Q4FY18 were Rs 183 Cr versus Rs 900 Cr in Q4FY17. Overall, disbursements inFY18 were Rs 1,436 Cr versus Rs 2,430 Cr in FY17.

o  NNPA stoodat 3.3% in Q4FY18 from 3.6% in Q3FY18. In FY18, overall rise in NPA was onaccount of seasoning of book coupled with delay in setting up collectionorganisation. Further, prolonged impact of external shocks in economy alsoaffected asset quality. Impact of collection organization has now startedshowing positive results.

o  Weremain confident of the long term outlook of the home finance business. Rs 50Cr equity capital has been infused during the quarter and we are committed toprovide further capital as the business scales up.

o  Managementteam has been strengthened with additions and changes in Heads of Credit,Technical, Collections, Operations, HR, Business Process & Quality andCompliance. The process of strengthening the team further will continue in thecoming quarters.

o  Marginsstood at 4.1% in FY18 versus 3.6% in FY17. This margin expansion, despiteinterest reversals, was on account of lower cost of funds.

o  Branchexpansion is being pursued in the new states where we commenced operations yearago. 4 new states launched in FY17 are performing better.

o  Gearingremains conservative, with the Debt/Equity ratio at 4.9x. 

·      Fund based business includes sponsor commitments to our AMC & PE funds,equity investments and NBFC LAS book.

o  Fund Based activities like commitments to our asset management products, notonly helped seed these new businesses by investing in highly scalableopportunities, but they also represent liquid resources for futureopportunities.

o  Investmentsin quoted equity investments stood at Rs 975 Cr at cost, while the unrealisedgain on these investments as of March-18 stood at Rs 560 Cr. Thesegains are not reflected in the reported PAT. The post-tax cumulative XIRRof these investments is ~25%, which is the see-through RoE vs reported RoE of tisbusiness just 12%. As per IND-AS, these gains will form a part of reportedearnings from FY19.  

o  Investmentin seeding our PE funds is Rs 269 Cr at cost. IBEF-1 is expected todeliver a 5x MoC. NBFC LAS book is Rs 183 Cr as of March-18, which is now runas a spread business.

o   Inline with the goal to achieve a sustainable 20%+ RoE, consolidated RoE for theGroup for FY18 was 27% (without including unrealized gains on quoted equity investmentsof Rs 560 Cr). Within this, Asset and Wealth Management RoE was 200%, CapitalMarkets RoE was 156% and Fund based 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, Institutionalbroking & Investment banking), Asset & Wealth Management (Asset Management,Private Equity & Wealth Management), Housing Finance & Equity basedtreasury investments. Motilal Oswal Financial Service won the ‘Brand of theYear’ award at the IBLA CNBC TV 18. Motilal Oswal Securities won the ‘Best Performing National Financial Advisor EquityBroker' award at the CNBC TV18 Financial Advisor Awards for the 6^th time.It was ranked the Best in Events/Conferences, ranked amongst Top-2 for OverallSales Services & Best Roadshows/Company Visits & amongst the Top-3 inBest Local Brokerage, Best Execution & Sales Trading Visits at the Asia MoneyAwards 2015. Motilal Oswal Private Equity won the ‘Best Growth CapitalInvestor-2012’ award at the Awards for PE Excellence 2013. Motilal OswalPrivate Wealth Management won at the UTI-MF CNBC Financial Advisor Award in HNIWealth Management category for 2015. Aspire Housing Finance was awarded‘India’s Most Admired & Valuable Housing Finance Company’ at India LeadershipConclave 2015.

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