Motilal Oswal Financial Services Limited (NSE:MOTILALOFS) Q2 FY23 Earnings Concall dated Oct. 21, 2022
Corporate Participants:
Navin Agarwal — Director and Chief Executive Officer
Shalibhadra Shah — Associate Director & Chief Financial Officer
Analysts:
Sahej Mittal — HDFC Securities — Analyst
Unidentified Speaker —
Vinod — Individual Investor — Analyst
Deepak Sonawane — Haitong Securities — Analyst
Presentation:
Operator
Good evening, ladies and gentlemen. I’m Shehzan, the moderator for this conference. Welcome to the Second Quarter FY ’23 Earnings Conference Call for Motilal Oswal Financial Services Limited. We have with us today, Mr. Raamdeo Agrawal, Chairman; Mr. Motilal Oswal, Managing Director and CEO; Mr. Navin Agarwal, Director and CEO, AMC; Mr. Ajay Menon, CEO, Broking; Mr. Shalibhadra Shah, Chief Financial Officer; Mr. Chetan Parmar, Head, Investor Relations.
[Operator Instructions]. Please note that this conference is being recorded.
I would now like to invite Mr. Navin Agarwal to make his opening remarks. Thank you, and over to you, sir.
Navin Agarwal — Director and Chief Executive Officer
Good evening friends, and wish you all a very, very happy Diwali. It is my pleasure to welcome all of you once again to the Motilal Oswal Financial Services earnings call for the second quarter of the financial year ending March 2023.
Let me first start by taking you through the key highlights of the performance for the quarter. During the quarter, we reported one of the highest quarterly profit after tax at INR509 crores, which is up by 11% year-on-year. This is our profit excluding the private equity profit share. Our operating profit without considering the private equity profit share grew by 16% year-on-year and 22% quarter-on-quarter to INR221 crores. The core businesses were robust with Capital Markets business profits being up by 9% year-on-year and 46% quarter-on-quarter to INR132 crores. Asset and Wealth business reported profit after tax of INR66.7 crores, up by 2% year-on-year and up by 15% quarter-on-quarter. We saw traction in the Home Finance business and the business reported a profit of INR33.4 crores, up by 67% year-on-year and up by 4% quarter-on-quarter. Our consolidated network stands at INR5,970 crores. Net debt is at INR5,520 crores. Excluding Home Finance, our net debt is INR3,000 crores. Our total debt equity stood at 1.3 times. And ex Home Finance, debt equity stands at 0.9 times.
I’ll now deep dive into the individual businesses, starting with the Capital Market businesses. The Capital Market business comprises of retail broking and distribution, institutional equities and investment banking businesses. Revenues for this segment were at INR719 crores, up by 18% year-on-year and 18% quarter-on-quarter. Profit grew 9% year-on-year and 46% quarter-on-quarter to INR132 crores, led by healthy volume growth of 198% year-on-year and 45% quarter-on-quarter. We also saw improvement in our retail F&O market share by 63 basis points quarter-on-quarter. As you know, this part of the market now contributes to a vast majority of the overall market volume, and we have seen steady traction overall within the F&O market as well as specifically within the auctions market.
In Retail Broking and Distribution, a total of 351,000 clients were acquired in the first half with traction, specifically in the online channel. The NSE-active clients have registered a 26% year-on-year growth at 9.1 lakhs as of September of 2022. Our average daily turnover market share improved by 50 basis points quarter-on-quarter through robust growth of 45% quarter-on-quarter in the average yearly turnover. The distribution AUM grew by 17% year-on-year to INR18,600 crores as of the second quarter. Robust distribution net sales of INR710 crores during the first half and our outlook on this remains quite positive. We see the opportunity for cross-sell to the entire 52 lakh client base of the group. Interest income increased by 20% year-on-year to INR156 [Phonetic] crores, primarily due to a 39% increase in the margin trading funding book, which has gone up to INR2,920 crores. Our currency market share improved by 150 basis points quarter-on-quarter to 12%, while our commodity market share stood at 7%.
We launched Research 360 app, which is a one-stop shop to get 360 degree knowledge and research to the retail client base of Motilal Oswal. Institutional equities successfully hosted the 18th Annual Global Investor Conference, which saw a participation of over 160 companies. The investment banking business completed three deals with a total fund raise of INR2,330 crores during the quarter.
Turning to the Asset and Wealth businesses. In the Asset Management business, our AUM across mutual funds, PMS and AIF grew by 8% quarter-on-quarter to INR46,700 crores. In the second quarter, our revenue stood at INR143 crores. Mutual fund AUM grew by 6% quarter-on-quarter to INR29,140 crores. We’ve seen improvement in performance of nearly all of our mutual fund schemes with top quartile rankings in one, three, six, nine months and our mid-cap fund now seeing top rankings across one, three and five years as well. We expect this to result in improved gross sales and a reduction in redemption in the coming quarters. We added around 55,000 new SIPs during the second quarter with traction in active funds, which grew by 16% quarter-on-quarter. Our net revenue yield was impacted 78 basis points during the first half of the year.
The AMC onboarded Prateek Agrawal during the quarter to lead investments at the AMC business. He brings over 28 years of experience in the business. The private equity business fee earning AUM was at INR8,520 crores across three growth capital private equity funds and four real estate funds. In second quarter, revenues excluding the share of profit on investments grew by 41% year-on-year, 23% quarter-on-quarter, actually [Phonetic] INR39.1 crores. We also announced the final close of our largest private equity fund, the Series IV India Business Excellence Fund, which had a fund size of INR4,500 crores, in the month of October. And the full impact of this in terms of the top line and the bottom line of the business will be visible in the third quarter.
Our Wealth Management business, AUM grew by 22% year-on-year to INR38,400 crores. Revenues grew by 7% year-on-year to INR51.1 crores. Net sales during the first half was at INR3,360 crores. The RM count, the relationship manager count increased from 123 at the same point in time last year to 155 now. Our operating margins are lower as we continue to invest in this business by adding more relationship managers. Overall, the Asset and Wealth Management revenues grew by 5% year-on-year, and 7% quarter-on-quarter to INR234 crores. Profits were at INR66.7 crores, up by 2% year-on-year and 15% quarter-on-quarter.
Turning to the Home Finance business. We reported a profit of INR33.4 crores, up by 67% year-on-year. NII grew by 11% year-on-year. NIM expanded by 88 basis points to 7.8% for the first half of the year. Yield on advances stood at 13.8% in the first half. Costs of funds were down by 53 basis points to 7.9%, resulting in a spread expansion of 46 basis points to 6%. Disbursements grew by 74% year-on-year, by 65% quarter-on-quarter to INR280 crores, and we are gearing up for stronger disbursements in the coming quarters. Our gross NPAs improved to 1.5% with collection efficiency of 100% during the quarter. Net gearing for the Home Finance business stands at 2.3 times and Tier 1 capital adequacy remains robust at 49%. We also saw an upgrade by ICRA of our long-term rating to AA stable from AA minus, stable as per the last rating.
Finally, turning to the fund-based activities. This business includes forms of commitment to our AMC, PE, RE funds and strategic equity investments. The total investments including unrealized gains were at INR4,720 crores. The cumulative XIRR on these investments ever since inception has been about 19%.
To sum up, we’ve achieved one of the highest quarterly profits of INR509 crores following robust and sustainable performance across all our businesses. Our retail broking business, which is our cash cow, continues to improve its market share and benefited from market expansion as well as industry consolidation. Asset Management business has seen improvement in performance across most of the products and is hoping to start reporting positive flows from the coming quarters. The private equity business has successfully delivered on the fund raise of its largest ever fund, while investments in building Wealth Management business continued during the quarter. Our Home Finance business has witnessed turnout by improving disbursements and asset quality trends, which is now geared up for sustainable growth. There is immense potential and opportunities in the market for each of our businesses to grow strongly in the coming years.
Thank you, and we can now open the floor for Q&A.
Questions and Answers:
Operator
Thank you very much. [Operator Instructions]. The first question is from the line of Sahej Mittal from HDFC Securities. Please go ahead.
Sahej Mittal — HDFC Securities — Analyst
Hi, good evening, everyone. Sir, a couple of questions from my side. So, I mean, on the Wealth Management business, while the investment in hiring the team has resulted in a drop in our margins, but how should we look at the growth outlook for maybe next 12 to 18 months in terms of the top line growth? And how should we look at the margins reverting back to the last year levels? So, if you can talk a bit about that.
Navin Agarwal — Director and Chief Executive Officer
So, there are two things here. Firstly, the investments in augmenting the RM base is likely to continue, as we’ve highlighted in our earlier calls, even in the coming quarters and the next couple of years. However, this half year also saw a fall in the upfront income on a year-on-year basis. We had very strong alternate asset sales in the first half of last year, and they were lower in the first half of this year. So, that — all of the other revenue line items within this business continue to grow on a year-on-year basis. So, that was the second driver for the lower margin that you saw. We see that coming back in the second half as well as in the coming years. However, the investment in the RM base is something that we expect to continue going forward.
Sahej Mittal — HDFC Securities — Analyst
But then on the productivity of these RMs, right, because we are up-fronting these costs, but what about the productivity?
Navin Agarwal — Director and Chief Executive Officer
Yeah. So typically, year three onwards, you start seeing profitability from these RMs. So I think in the ramp-up phase you will see some pressure on margins in this business. But eventually, profitability should come back as the productivity builds up. Also, it should build up as the incremental additions fall as a proportion of the denominator base or the opening base.
Sahej Mittal — HDFC Securities — Analyst
Right. If you can index the productivity of the new agents maybe which we hired a year back versus our vintage agents, sales managers, I mean, so to get us some sense.
Navin Agarwal — Director and Chief Executive Officer
I think, that, we can discuss offline. We will not be readily having all those things.
Sahej Mittal — HDFC Securities — Analyst
Sure. Sure. And something — I mean, your Capital Markets business has done quite well. So, on the — but for the industry, there’s this one trend which we’ve [Indecipherable] active clients have been seeing a decline across most of the players, right? So, what is your sense? I mean, why is there [Technical Issues] for a player like — for fintech brokers, we do understand, they were actually expanding their customer base at a very fast pace, but that was not really the case for a traditional bank-based broker — the traditional brokers or bank-based brokers. So, why are even these players seeing a sharp drop?
Operator
Ladies and gentlemen, the line for the management has got disconnected. Request you all to please stay online while we reconnect them. Thank you.
Ladies and gentlemen, thank you for patiently waiting. The line for the management is reconnected. Mr. Mittal, please repeat your question.
Navin Agarwal — Director and Chief Executive Officer
Yeah, Sahej.
Operator
Mr. Mittal, please repeat your question.
Sahej Mittal — HDFC Securities — Analyst
Sorry, am I audible now?
Operator
Yes, sir. You are audible.
Sahej Mittal — HDFC Securities — Analyst
Yeah. Sir, I mean, sir, there is this one trend, which shifts like in the broking industry, right, that the clients have been dropping from most of the players. So, we expected that — so our sense was that for most of the fintech brokers who are actually acquiring clients [Technical Issues] this trend to happen, right? But even for a traditional or a banker-based broker, this was not expected. So, if you can give us some sense, how should we look into this?
Unidentified Speaker —
So, you’re right, as far as we were concerned, we were looking at really that the accounts were increasing [Indecipherable]. But if you know that during the IPOs, there were a number of accounts increased more. So if you look at the quarter, there were no much IPOs per se. And at the same time, the quality focus was there. And typically, retail clients also look at the market conditions. So, these were the only factors whether it’s the IPO, whether it’s the market situation. So based on that. So our parameters are always on quality and getting the margin accounts. So, to that extent, there is a marginal dip, but we feel that the consistent growth of our accounts will continue to happen as we grow from there.
Sahej Mittal — HDFC Securities — Analyst
And if you could talk a bit about the customer behavior, who’s coming from the Tier 2, Tier 3 city, are we trading into futures auctions or maybe cash? Give us some sense maybe.
Unidentified Speaker —
So, we are also seeing the trend towards auctions trading and futures. But as we have got advisors aligned to each client, surely, there’s a mix to the cash market also for us. But, surely, the trend towards F&O is increasing, and that can be seen in the growth of our market share also on the F&O side.
Sahej Mittal — HDFC Securities — Analyst
Right. And generally, what’s the order size in the auctions segment?
Unidentified Speaker —
Order size, you mean to say number of lots?
Sahej Mittal — HDFC Securities — Analyst
Number of lots, that’s correct.
Unidentified Speaker —
So, typically, our typical lot size is around three to four lots [Phonetic] for the retail client.
Sahej Mittal — HDFC Securities — Analyst
Right. And does this change materially, I mean, in a bull market or a bear market?
Unidentified Speaker —
Not really. I don’t think so, because from a retail perspective, surely lesser, but from high-end PCG clients, it can change, but from the retail, it remains the same.
Sahej Mittal — HDFC Securities — Analyst
Right. And generally, the customers who are new to market, right, what’s the initial ticket size, initial check which they write into Motilal?
Unidentified Speaker —
So, we look at a margin in the range of INR25,000 to around INR50,000 for retail client coming into the system.
Sahej Mittal — HDFC Securities — Analyst
Got it. And any plans for a buyback, given the kind of cash we have?
Shalibhadra Shah — Associate Director & Chief Financial Officer
No. We just completed our buyback in Q2 only in the month of July. So, no, we don’t have any plans for further buybacks.
Sahej Mittal — HDFC Securities — Analyst
Got it. Thanks for answering all the questions and happy Diwali.
Navin Agarwal — Director and Chief Executive Officer
Happy Diwali to you as well.
Operator
Thank you. [Operator Instructions]. The next question is from the line of Vinod, an Individual Investor. Please go ahead.
Vinod — Individual Investor — Analyst
Hi. Thank you first of all for giving me the opportunity. [Indecipherable] retail investor, I just want to ask for a little extra time and some extra questions. So, please allow me for that. So — okay. So, now my first question is that in March ’22, we had a net worth of INR56.7 billion, and now we have INR59.7 billion. So, it’s an increase of INR300 crores. And if we see the profit of the half year, it’s INR500 crores. So, I’m not sure, is there a mismatch between like INR200 crores, some-odd amount or how it is, if you can clarify that?
Shalibhadra Shah — Associate Director & Chief Financial Officer
Yes. So, we actually completed a INR200 crore buyback. So, the difference is on account of that. So, if you see in July month, we did a INR200 crore buyback. That will reduce the net.
Vinod — Individual Investor — Analyst
Okay. Got it. Got it. Okay. Now on the — our brokerage segment, I just want to [Technical Issues] questions I have. One is that our cash market turnover is up by almost kind of 50%, but the revenue is not up by 50% or — so that’s so much difference between the revenue upside or the turnover upside. So, if you can clarify something like whether we have reduced our brokerage plans to some of the customers or kind of that?
Shalibhadra Shah — Associate Director & Chief Financial Officer
So, cash market turnover is actually up 7% on a quarter-on-quarter basis. So, there is no such 50% number. Cash market turnover is up 7%.
Navin Agarwal — Director and Chief Executive Officer
And the difference can also be because of the mix between delivery turnover and the trading turnover. So the delivery profit will be different to our trading turnover.
Vinod — Individual Investor — Analyst
Okay. Okay. Okay. Maybe that was one of the reasons. Okay. Now the second question is like about the employee addition. If I remember like last quarter, there were around like 1,400 employees who were added and predominantly on the sales side, right? And now this quarter, we take like 1,300 core employees on the advisory and technology side. But if I look at the number of client acquisitions, let’s say, if the 1,400 employees were added and number of clients last quarter added were 2.1 lakh. And the one year before, also we had an average of 2 lakh per quarter client additions. So, I just want to know like the — how those new employees are working or how we are getting the benefit of the new clients if those are in the sales side?
Shalibhadra Shah — Associate Director & Chief Financial Officer
So, actually, first of all, this last one year, we have added net 1,300 people. That’s what we said. That’s a net number of addition. So — and in quarter one, what we said is 1,400 gross number of addition. As far as the overall client addition is concerned, so that is in line with the overall market as well. So, that’s the update.
Vinod — Individual Investor — Analyst
Okay. And another question on the like interest on the brokerage, like whatever we are running, that funding book. So, it seems like going good. So, how do you see the future of this particular funding, because that seems like an elephant in the room, right? Because going forward, the market looks — so I wanted your perspective on that particular area on the funding in the brokerage side?
Shalibhadra Shah — Associate Director & Chief Financial Officer
So, typically, the funding book runs in line with the market volumes. If the market volumes grow, you’ll see the margin funding book increasing. So, always that has been the case. So, that’s an opportunity which because of our strong balance sheet, we have that ability to raise resources and find the customer.
Vinod — Individual Investor — Analyst
Okay. Okay. Now on the private equity and the real estate, that business side. I see that this quarter, we have a reduction in the fee earning AUM. Like last quarter, we have around INR11,000 crores, and now we have around INR8,500 crores. So, what is the reason behind that reduction?
Shalibhadra Shah — Associate Director & Chief Financial Officer
So, there is no reduction. Actually, that is the total AUM in our private equity business is INR11,000 crores. However, fee earning AUM has been INR8,000 crores, and the fee earning AUM has been increasing because of our last closing that we have done of the fourth fund of INR4,500 crores. So, there are a couple of initial funds where these are not charged, which are on the verge of getting fully exited.
Vinod — Individual Investor — Analyst
Okay. So, current fee earning AUM is INR8,500 crores or INR11,000 crores.
Shalibhadra Shah — Associate Director & Chief Financial Officer
Fee earning AUM is INR8,500 crores.
Vinod — Individual Investor — Analyst
INR8,500 crores, okay, okay. And yeah, on the AMC business side, now like I just want to recommend that if you can show one slide, which shows that what was your opening AUM and what was the net sales and what was the M2M and that how it gets the closing, if you get that, I think that would be — answer questions, which always we have in one or two calls. So, if you can answer like what was our gross sales in the AMC side and PMS side?
Navin Agarwal — Director and Chief Executive Officer
Are you asking that question or you’re suggesting that we should show that in future?
Vinod — Individual Investor — Analyst
No, one is suggesting that going forward, if you can include one slide, which shows that what was your opening AUM and what was your net sales and what is the plus/minus in the M2M and that makes your closing balance, right, on the closing AUM. So, if you can — going forward, if you can add that slide, then probably we don’t need to ask, we can just go through the slide and we can understand. So, for this quarter, can you just let us know like what is the net sales amount for [Indecipherable] and the mutual fund side?
Navin Agarwal — Director and Chief Executive Officer
Yeah. So, basically, the gross phase is INR1,800 crores. Redemptions are INR2,300 crores overall. So, the net sales is minus INR500 crores. Most of these net sales, minus INR500 crores is in the mutual fund side, about 80%, 85%, the balance is on the alternate side.
Vinod — Individual Investor — Analyst
Okay. Okay. Got it. Got it. And now one more question on the private equity side, like, how these fees or profit [Indecipherable] when this exits happens, at that time, how that is calculated? I mean, I think those are already like part of our income, right? We evaluate that during the quarter and move these [Indecipherable] into our income. So, when actual exit happens, at that time, what is the implication come to the — only the tax amount that we have paid or only the actual profit gets included?
Navin Agarwal — Director and Chief Executive Officer
So, there are two components. One is the management fees, which is charged on the originally raised [Indecipherable] and not mark-to-market, unlike mutual funds or equity funds in the public market. And as far as the carry is concerned, the — there is no carry book from the initial exit till the capital is fully returned. And only after the capital is fully returned, all incremental returns beyond the capital that is committed are eligible for carry, which is at about 20% share of profits.
Vinod — Individual Investor — Analyst
Okay. Okay. So, 20% profit will come at the end and between like whatever our own investment on that, we will calculate M2M and it will become part of our regular financials, right?
Navin Agarwal — Director and Chief Executive Officer
No, there’s no mark-to-market. Okay, on our own investment, there is a half yearly mark-to-market that is done, and that is accounted in the network.
Shalibhadra Shah — Associate Director & Chief Financial Officer
Yeah. As far as the profit share income is concerned, that is accounted as and when that gets realized.
Vinod — Individual Investor — Analyst
Okay. And on our own investment, that is half yearly for this particular private equity and [Indecipherable]?
Shalibhadra Shah — Associate Director & Chief Financial Officer
Yeah, we do the fair valuation of each of these investments on a half yearly basis.
Vinod — Individual Investor — Analyst
Okay. Okay. Got it. Got it. Thanks. That’s all from my side. And happy Diwali.
Operator
Thank you. [Operator Instructions]. Next question is from the line of Deepak Sonawane from Haitong Securities. Please go ahead.
Deepak Sonawane — Haitong Securities — Analyst
Hi. Thank you, sir, for the opportunity. Sir, my first question is regarding our funding book in capital market. So, we have reported quite a strong growth in Q2 on a year-on-year basis, but compared — but this compared to other — your peers who have reported the results for Q2, they’re seeing kind of flat or negative growth in margin funding. So, can you just explain, I mean, what our strategy is that is implied for us to grow this book?
Unidentified Speaker —
So, you’re talking about the funding book, right?
Deepak Sonawane — Haitong Securities — Analyst
Yeah, yeah.
Unidentified Speaker —
So, basically, the whole proposition is that because we have a good mix of clients on the cash market, and as of now, there is a decent push from our side on the PCG [Phonetic] customers to build on to the funding book and because of our advisory base, we are able to get the plan to buy good delivery ideas. And based on that, the funding book has got increased during the last quarter on a quarter-on-quarter basis. So, it’s mainly to look at it because the NPA book, which has now become very popular on the booking side, that is also seeing traction. Because of the SEBI regulations of the margins, clients also prefer on the NPA book to build up the overall base when they have to make the margin payments also as per the revised guidelines of the exchange. So, that has also resulted in increasing the NPL book side.
Navin Agarwal — Director and Chief Executive Officer
In addition, we’ve always been very under indexed compared to full-service brokers as far as the margin trading funding side is concerned.
Deepak Sonawane — Haitong Securities — Analyst
Okay, sir, understood. Sir, my second question on cost side for capital market. So, we reported a breakup of your new client sourcing between online franchisee branch and other. So, I could see that online contribution has dropped quite significantly since last quarter. And if you look at your other expense for capital market, that has grown even on a quarter-on-quarter basis. So, is there any correlation that marketing cost, just because online sourcing has been lower, so that marketing cost has inched up?
Shalibhadra Shah — Associate Director & Chief Financial Officer
No. So, there is no increase in the marketing cost. In fact, it has marginally eased on a quarter-on-quarter basis. The increase is mainly due to the marketing and the advertisement expenses and some of the CSR [Phonetic] expenses and also the standard provision because the funding book has increased, so we also need to provide the standard provisioning on that as per the ECM model. So, that is the reason of the increase in the cost on a quarterly basis.
Deepak Sonawane — Haitong Securities — Analyst
Okay. And what is the reason for the fall in contribution from online sourcing for Q2?
Unidentified Speaker —
So, on the online sources, two factors. One is that we were building in the quality focus much further down to get more margin accounts. And as you know, overall industry also, there has been a fall in the overall digital account acquisition. So, we were very clearly focusing on the quality aspect. And to that extent, we also reduced the spend so that we can [Indecipherable].
Deepak Sonawane — Haitong Securities — Analyst
Okay. Thanks. Thank you so much. And all the best.
Navin Agarwal — Director and Chief Executive Officer
Thank you.
Operator
Thank you. [Operator Instructions]. As there are no further questions from the participants, I now hand the conference over to Mr. Shalibhadra Shah for closing comments.
Shalibhadra Shah — Associate Director & Chief Financial Officer
On behalf of Motilal Oswal Financial Services, I would like to thank every participant for attending the Q3 FY ’23 con call. In case of further queries, please do get in touch with us. Thank you, and have a happy Diwali and a prosperous new year.
Operator
[Operator Closing Remarks].