Rationale

 ICRA has taken a consolidated view of the Motilal Oswal Group (comprising Motilal Oswal Financial Services Limited (MOFSL) and its subsidiaries). The rating takes 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 rating also considers 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, on a consolidated basis, witnessed a strong uptick in earnings in FY2021 with a profit after tax (PAT) of Rs. 1,259.5 crore (Rs. 1,197.7 crore excluding share of joint venture (JV) and associates), up from Rs. 189.6 crore (Rs. 215.4 crore excluding share of JV and associates) in the previous fiscal, supported by the strong performance of the core business as well as the mark-to-market (MTM) gains during the year. The performance remains strong in the current year with a PAT of Rs. 1,009.8 crore (Rs. 1,008.7 crore excluding share of JV and associates) in 9M FY2022 (Rs. 804.7 crore (excluding exceptional loss); Rs. 736.3 crore excluding share of JV and associates in 9M FY2021). The leverage ratio stood at 1.04 times as on December 31, 2021 compared to 1.3 times as on March 31, 2021 (1.5 times as of March 31, 2020). 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), has resulted in pressure on the broking yields. The rating also factors 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 MOHFL, thereby underscoring its commitment to the venture. This, coupled with the divestment of bad loans to asset reconstruction companies (ARCs), resulted in an 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. While there was some improvement in the reported asset quality indicators in the current fiscal following the sale of stressed exposures to ARCs, the GNPAs and NNPAs increased to 3.4% and 2.3%, respectively, as of December 2021 from 2.2% and 1.4%, respectively, as of September 2021 with the implementation of the revised asset classification norms. MOFSL also remains exposed to the attendant market and credit risks associated with margin funding, given the nature of the underlying security. However, its monitoring systems and hitherto healthy performance in this business provide comfort. The Stable outlook reflects ICRA's expectation that MOFSL would maintain its credit profile supported by the performance of the core business.