Rationale

 ICRA has assigned a rating to the Rs. 1,000-crore commercial papers (CP) and reaffirmed the ratings for the Rs. 100-crore longterm principal protected market linked debentures (PP-MLD), Rs. 300-crore non-convertible debentures (NCDs) and Rs. 300- crore bank lines of Motilal Oswal Financial Services Limited (MOFSL). To arrive at the ratings, ICRA has taken a consolidated view of the Motilal Oswal Group (comprising MOFSL and its subsidiaries). The ratings take into account the Group's healthy operational profile, given its track record and established position in capital market related businesses, and the increasing diversification in revenues with the scaling up of the annuity-based businesses. The ratings also consider MOFSL's healthy financial profile with the steady performance of the core business and the comfortable capitalisation and leverage levels on a consolidated basis. MOFSL reported a profit after tax (PAT) of Rs. 1,259.46 crore (Rs. 1,197.69 crore excluding share of joint venture and associates) in FY2021, up from Rs. 189.58 crore (Rs. 215.40 crore excluding share of joint venture and associates) in FY2020, supported by the strong performance of the core business as well as the mark-to-market (MTM) gains during the year. The leverage ratio improved to 1.27 times as of March 31, 2021 from 1.48 times as of March 31, 2020. In Q1 FY2022, the Group reported a PAT of Rs. 220.10 crore and the leverage ratio stood at 1.08 times as of June 2021. These strengths are partially offset by the inherent volatility in capital markets and the highly competitive and fragmented nature of the broking industry. This, coupled with the changing product mix (increasing share of derivatives and non-delivery cash volumes), has resulted in pressure on the broking yields. The ratings also factor in the Group's limited experience in the lending business with asset quality issues in the housing finance business (housed under Motilal Oswal Home Finance Limited; MOHFL) in the recent past. Subsequently, the Group undertook several remedial measures, including the strengthening of the systems and processes. It also extended greater managerial support (with increased oversight) and infused capital in the housing finance company (HFC), thereby underscoring its commitment to the venture. This, coupled with the divestment of bad loans, resulted in a significant improvement in the asset quality (MOHFL reported gross non-performing assets (GNPAs) of 2.2% of advances as of March 2021 compared to 1.8% as of March 2020 and 9.2% as of March 2019). The asset quality, however, moderated in the current fiscal (GNPA of 4.7% as of June 2021) impacted by the Covid-19 pandemic, which had a bearing on collections as well as disbursements.

Going forward, the Group's ability to maintain healthy asset quality and profitability in the housing finance business, given the current challenging operating environment, would remain critical from a credit perspective. Nevertheless, ICRA draws comfort from the performance of the core business coupled with the healthy capitalisation profile, which provides adequate buffer to absorb losses and incremental credit costs over the near term. The Stable outlook reflects ICRA's expectation that MOFSL would maintain its credit profile supported by the performance of the core business.