Our aim is to generate sustainable 20% RoE: Motilal Oswal

NEW DELHI:Motilal Oswal Financial Services Ltd. (MOFSL), a leading stock-broking firm in the country, expanded its business activities to the affordable housing finance segment last year. In an e-mail interview, Motilal Oswal, Chairman and Managing Director of the company explained the rationale behind the move.

Motilal Oswal

What efforts has MOFSL made in terms to realign its businesses?

Our goal is to generate sustainable 20 per cent RoE (return on equity) and build strong competitive positioning in each of the seven businesses we operate in. We have executed this through focus on four key pillars.

The first is the traditional capital markets business which includes Retail Broking, Institutional Broking, Private Wealth Management and Investment Banking. Most of these businesses have seen market cycles and have time-tested robust business models. We are strengthening our value proposition in each of these businesses to further consolidate our market share in each of these segments.

The second pillar is the investing businesses which includes Asset Management and Private Equity. We have been able to build a strong positioning in this space and have seen growth of both AUM (assets under management) and profitability. This is now a meaningful contributor to both top-line and profits of the group.

The third is the newly set up Housing Finance Business, Aspire Home Finance, which focuses on the affordable housing space. Under a strong leadership team with focus on systems, processes and technology we have been able to build considerable scale in this business. The fourth and last pillar is the fund-based business.

The capital market business has now contributes to less than 50 per cent of yourrevenues. Will this fall further?

Our revenue mix is already showing the impact of the transformation in our business model. Asset management and home loans comprised around 20 per cent each in the firm’s revenue mix in FY2016 while the proportion of capital market business went below 50 per cent for the first time since inception.

We expect the proportion of revenue from capital market-based businesses to go down further as the asset management and housing finance businesses gain traction.

However, we have also invested in critical front-end skills in our capital market businesses as we remain highly optimistic about that opportunity. Any meaningful turnaround in market activity should impact its proportion in the revenue mix commensurately. Lastly, our sponsor investments made in our mutual funds and private equity funds are held at cost and gains are unrealized. As and when gains are booked, this segment will also contribute in the revenue mix. Hence, it is difficult to give any figure of how the revenue mix will move but our investments into each of our business segments should help drive revenues at an absolute level. As it is, our revenue in FY16 was the all-time high of the last 10 years as was our PAT.

AMC and Aspire have both been the main growth drivers for the group. What is your strategy for the two?

The asset management business has brought in regular annuity-based revenue while the home finance business has brought in stable revenue flows. These two have helped counter the inherent cyclicality of the capital market businesses.

In asset management, we are seeing good business traction with large distributors.

In the home finance business, the opportunity to deepen the mobilisation from our existing branches in Gujarat, Maharashtra and Madhya Pradesh remains significant.

Apart from these, we will also launch more new branches in these states as well as adjoining states like Rajasthan, Chhattisgarh and Karnataka in the coming months. Apart from scale, our focus will remain on maintaining operational processes, underwriting quality, risk management and bank lines for fund flows since these are also critical drivers for success in this business.

Does competition from discount brokers, who offer flat broking fees, serve as a fundamental disruption to retail broking?

There are three models within the broking business, each focusing on distinct client segments and offering a distinct value-proposition. One is the discount broking model where there is no advice or relationship manager. They focus on high-frequency, self-directed traders who want an execution platform.

Another is the supermarket model which gives online resources, product-choice and enables handholding of new clients. These are mostly the bank-backed brokers who target new-to-market customers.

The third model is of a personal relationship manager with strong research and advising capabilities. This caters to clients who value the advice and the personalised service. We would fall in this segment. We have not seen any kind of pricing threat in our segment specifically. Rather, the pricing threats might be more in the self-directed discount segment since the scope of differentiation is very limited there.

We have seen these trends in the market for some time now, and it is nothing new. Now, with our added focus on the distribution of financial products, our relationship with the customers should get strengthened even further.

What is your view on the Indian equity markets?

In the long-term I am quite bullish. There is no asset class other than equity which has given such returns in the past on a long term sustainable basis. In the short-term, the fourth quarter earnings season has been good so far.

Going forward, arrival of the monsoon and legislative action on reforms will be important factors to watch out for. Buy the right stocks and just sit tight.

What is a sustainable growth rate for Aspire?

The underlying opportunity pool in the affordable housing segment is huge and largely untapped. This segment has also come in focus of government initiatives. As such, we expect healthy growth rates in line with market estimates. What is more important is to focus on the operational processes.