Motilal Oswal Financial Services: BUY. Motilal Oswal Financial Services: Promising prospects

For investors willing to bet on the Indian equities market for the long term, the stock of Motilal Oswal Financial Services (MOFS) is a good buy.

The stock has fallen 10 per cent since its June quarter results. Profits declined 34 per cent and revenue was down 14 per cent sequentially.

The weak results as such emanated from lacklustre market volumes and not from the company’s weakness.

MOFS’ equity market share increased to 1.8 per cent in the June quarter from 1.6 per cent in the March quarter (according to the company’s disclosure), and its asset management business saw strong inflows with assets crossing ₹31.9 billion, up 32 per cent since March.

The company stands to benefit from an expected uptrend in the equity market in the long term, increased household savings flowing to financial markets and more companies listing in the capital market.

The number of demat accounts in the country, including both the depositories NSDL and CDSL, is just about two crore. Of the household savings, only 2 per cent goes into equities compared with over 40 per cent in the US.

At the current market price of ₹317, the MOFS stock trades at 23 times its expected earnings for 2015-16. In the last three years, the stock has traded in the valuation band of 12-30 times.

The stock is not comparable to Edelweiss Financials or, say, India Infoline or JM Financial, where the lending business contributes a chunk to the revenue.

Strong business In the June quarter, though the market was lacklustre, the company expanded its reach and recruited people to support its futures-and-options desk.

MOFS’ total retail and distribution clients stood at 7.5 lakh in the June quarter (versus 7.42 lakh in March) with presence in 528 cities (520 in March) and 1,953 locations (1,743 in March).

Its institutional clients count stood at 582 with new accounts of both foreign and domestic institutions.

The company’s investment banking arm too recruited people and its headcount rose 37 per cent, year-on-year, to monetise the opportunities arising from the initial public offering (IPO) market that is gathering steam.

On a year-on-year comparison, the company’s growth was robust in the June quarter.

Revenue grew 26 per cent year-on-year to ₹211 crore buttressed by higher income from the AMC business and fund-based activities (housing finance and lending against shares).

About half the company’s revenues come from broking and related activities (wealth management). Income from the broking business increased 5 per cent in the June quarter over the same period last year.

Margin reduced to 14.3 per cent from 23 per cent in the June 2014 quarter due to higher employee costs (manpower increase of 63 per cent) and increase in revenue contribution from the futures and options segment where brokerage is low.

The asset management and advisory business, which contributes close to a fifth of the revenue, did well with revenue doubling. The mutual fund AUM increased to ₹3,190 crore, up 230 per cent, year-on-year, with a few well known names like Citibank and HDFC Bank added as distributors in the recent quarter.

Assets under ‘portfolio management service’ stood at ₹4,130 crore, up 130 per cent, year-on-year, with its second real estate fund closing for subscription, raising about ₹500 crore.

Housing business

Aspire Home Finance, the company’s subsidiary that started out in 2014-15, lends to houses with average ticket size of ₹10 lakh.

As of end-June, the loan book was ₹560 crore with over 5,560 accounts and revenue of ₹20.7 crore (up 29 per cent sequentially).

Given the focus on affordable housing where the market is less crowded due to the lack of large banks and only few players, such as Dewan Housing, Gruh and Repco in the fray, the company’s prospects seem promising.

The government’s efforts, including the ‘housing for all’ agenda, should improve demand from the country’s low and middle income groups over the next one to two years.

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