Rationale

 While arriving at the ratings, ICRA has considered the consolidated financials of Motilal Oswal Financial Services Limited (MOFSL or the Group) and has taken a consolidated view of the credit profiles of MOFSL and its subsidiaries, including Motilal Oswal Wealth Limited (MOWL), Motilal Oswal Finvest Limited (MOFL) and Motilal Oswal Home Finance Limited (MOHFL), as the companies have operational and business synergies in addition to a shared name and management oversight. The revision in the outlook to Positive considers MOFSL’s improving scale and diversification in the capital market & allied businesses, along with its strong operational and financial performance boosted by industry tailwinds. The Group has demonstrated its ability to retain its strong market position through capital market cycles despite the evolving operating landscape in terms of regulations and competition. Supported by industry tailwinds, MOFSL reported its best-ever performance in FY2024. The net profit was further boosted by the large MTM gains in the equity-oriented investment book amid the rally in the domestic markets. Overall, the credit profile remains supported by the Group’s long-standing track record and strong market position in the capital market-related business, its history of healthy profitability, comfortable capitalisation, and strong liquidity. These strengths are, however, partially offset by the inherently volatile nature of capital market-related businesses and hence the associated income, intense competition in the equity broking space and the risks emanating from technological failures and the evolving regulatory landscape. Nevertheless, the scale-up in the income stream from the relatively more stable businesses, such as asset and wealth management, depository, and home finance, is expected to offer some support to the Group’s revenue profile. The Group’s overall borrowings has been increasing due to the growing capital market funding and working capital requirements. However, strong earnings from operations and fair value gains from the treasury investments kept the gearing in the capital market business {excluding the housing finance company (HFC)} flat at 1.4 times (net gearing of 1.14 times) as of March 31, 2024 vis-à-vis March 31, 2023, though it was elevated compared to the past 10-year average of 0.8 times. The financial leverage in the home finance business was characterised by a gearing of 2.4 times as of March 31, 2024. Given the sizeable deployment of net worth towards equity assets, the gearing will be exposed to market movements. As per the management, the Group intends to maintain a gearing of less than 2 times (up to 3 times approved by board) in the capital market business (consolidated, excluding the HFC) and less than 4 times in the housing finance business. ICRA takes note of the gradual improvement in the asset quality of the housing finance business in recent years. The performance of the new book (originated after the strengthening of the processes and systems, after April 2018) has been satisfactory, though it remains relatively unseasoned. With the material scale-up of the capital market lending book, the Group is also exposed to the market and credit risks associated with this segment, given the volatile nature of the underlying asset class and its sensitivity to capital market movements. Nevertheless, sizeable cash accruals from established capital marketrelated businesses and the comfortable capitalisation profile provide adequate buffer to absorb any losses and incremental credit costs. Given the significant dependence on technology, the reliable performance of the systems, particularly in times of high volatility or market turmoil, and the ability to keep up with emerging advancements to maintain a leading market position remain imperative. The Group is in the process of reorganising its structure. The broking business housed under MOFSL will be transferred to Motilal Oswal Broking and Distribution Private Limited (erstwhile Glide Tech Investment Advisory Private Limited) while the wealth management business under MOWL will be transferred to MOFSL. The entities in the lending business, i.e. MOFL and MOHFL, would remain MOFSL’s subsidiaries. The proposed restructuring is not expected to impact the Group’s credit profile.