Motilal Oswal Financial Services: A weak platform

Four brokers, including Motilal Oswal Commodities, have been held not ‘fit and proper’ to continue as commodity derivatives brokers by market regulator SEBI.

Currently, these brokers are carrying out commodity derivative business through their securities arms — Motilal Oswal through Motilal Oswal Securities — and have not been impacted by the SEBI order as it came in the name of their erstwhile commodity broking companies. But there could be serious implications of the order.

One, if SEBI moves to ensure that the brokers involved in the NSEL scam do not get to operate in the commodity derivatives space, directly or indirectly, there would be no broking income from the segment. Two, given the damage to their reputation, these brokers may face loss of business in equities too.

Investors with shares in Motilal Oswal Financial Services may consider exiting them. From ₹1,500 in January 2018, the price has reduced to almost a third now. There may be further loss in value if there are some unfavourable developments in the NSEL case.

At the current market price of ₹565, the stock discounts its estimated earnings (assuming all its current segments remain stable) for 2018-19 by 30 times. The multiple was around 50 times a year back.

Background

The SEBI order has held four brokers, including Motilal Oswal Commodities, as not ‘fit and proper’ to carry on commodity derivative broking as they had facilitated transactions in paired contracts on the NSEL platform.

Various courts and authorities in the country have made serious adverse observations against the NSEL and paired contracts as they have been violative of the FCRA. The adverse observations of various courts have eroded the reputation and belief in competence, fairness, honesty, integrity and character of the brokers, says the order.

The order on Motilal Oswal Commodities came on February 22. In a press release to the BSE and the NSE following the order, Motilal Oswal Financial Services, however, said that the order on its subsidiary, Motilal Oswal Commodities, doesn’t have any impact on the company’s business.

In September 2017, SEBI allowed the integration of broking activities in equity and commodity derivatives markets under a single entity by amending the Securities Contract Regulation Rules. Previously, a stock broker carrying on the activity of buying/selling in securities other than commodity derivatives was not allowed to undertake buying/selling in commodity derivatives or vice-versa , except by setting up a separate entity.

In 2018, thus, many brokers, including Motilal Oswal, applied for a membership in MCX and NCDEX, the commodity exchanges through their securities arm, in this case Motilal Oswal Securities. Since then, they have been into commodity derivative broking through the securities arm itself.

Weak performance

While Motilal Oswal Financial Services has diversified into other businesses apart from dealing with the capital markets (equity and commodity retail broking, institutional equity and investment banking), their performance has not been up to the mark.

The capital market business contributes 45 per cent to the company’s revenue.

The asset and wealth management businesses add about 30 per cent, while the home finance business (through Aspire Home Finance) chips in with 25 per cent.

For the nine months of FY19, the company reported consolidated revenue of ₹1,971 crore, down 15 per cent over the same period last year.

Revenue from broking services was up 5 per cent Y-o-Y, while revenue from investment banking was down 22 per cent and that from private equity fell 49 per cent.

Income from investments in equity MFs, PE funds, real-estate funds and AIFs was down 98 per cent. Revenue from the housing finance business was down 3 per cent.

The asset management and wealth management businesses were the saviours, with revenue increase of 21-12 per cent.

The company’s consolidated PAT was down 76 per cent for the nine months on a Y-o-Y basis.

There is no data on how much revenue from broking services is contributed by commodity derivatives.

There are concerns around whether the equity broking business would lose market share because of the loss of reputation following the SEBI order.

In 2017-18, the company reported that it had over 950,000 retail broking and distribution clients. In the December 2018 quarter, the company had 91,200 live SIPs with an average ticket size of ₹4,000 per month.

Aspire Home Finance, which now contributes to a fourth of the revenue, is focussed on the affordable housing segment. There has been a slowdown in the disbursements in the last few quarters.

Costs have gone up, given the increase in manpower for collection. The gross NPA of the business stood at a high 8.68 per cent in the December 2018 quarter.

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