Ticket To A Fortune Slung On A Boom

“At that time we were just into broking. Now we are into more than broking. We are a broking plus asset-management firm, managing more than $3.5 billion in assets, with a growing home-loan-financing arm,” says Motilal Oswal, managing director of Motilal Oswal Financial Services (MOFS). Across much of the initial broking-business landscape, a cluster of firms have evolved into bigger businesses with balance sheets running into hundreds of crores. It’s the same evolution in business and growth platforms that has seen this once two-man sub-brokerage transform into an investment power-house with thousands of employees across cities, and one that prides itself on research and its stock-selection prowess.

“Spending over Rs 50 crore on research now, we had long ago decided that giving institutional-quality research to retail investors for free when there was little research was the way to differentiate us from the rest,” says Raamdeo Agrawal, joint managing director. For Motilal Oswal, its suite of products now seem complete. Spanning the gamut of services, including wealth management, private equity, investment banking and low-ticket housing finance, among others, the financial-services outfit does not plan to get into any other business or expand horizontally, but scale up vertically and build a sizeable business.

When most other upstart brokerages back then were migrating to non-banking finance companies (NBFCs) or entering newer businesses, MOFS stuck to its core, ie., broking and investing. This continues. The firm recently entered housing finance, with a sole focus on providing low-ticket housing loans, largely in tier-2 and tier-3 cities. Back in 1987, Oswal wanted to start a business, but had little knowledge of broking and the stock markets. Agrawal knew the finer points and nuances, and the partnership clicked as they took on sub-brokership. “He had all the clients, and I have all the knowledge. We started with zero capital,” recalls Agrawal. Sheer enterprise and skill in deploying money into the stock markets raked in over Rs 15 lakh in three years by 1990. Says Agrawal, “We ran two families, and we were very happy.”

The duo decided to take a BSE membership of their own in the 1990s. Then the Harshad Mehta spurred boom happened. It turned out to be a blessing in disguise that propelled the firm from a small-time brokerage into a big-time investing house with its own sub-brokers. The real inflection point came when the brokerage business generated Rs 30 crore in business growth largely through investing. All the brokerage income got deployed into the markets and the firm began to hold a sizeable portfolio, both in value and number of scrips.

While the subsequent stock market crash of 1992 whittled down the portfolio to Rs 10 crore, for Agrawal, it only reinforced his belief in the power of the stock market. “If you look at it from when we started, we had a substantial balance sheet,” points out Agrawal. “And for us, we had everything going. We had an office and staff.” Soon the firm invested more in research and scaled up the analysts team and started its institutional-brokerage business. From 1997, it started expanding to other cities, generating cash from the broking business and investing in markets. Yet another boom — this time in technology stocks — catapulted the firm’s balance sheet to Rs 100 crore and yet again, the market crashed. Motilal Oswal had to write down stocks once more, which rolled back the firm’s net worth to Rs 30 crore.

The subsequent two years were very depressing for the brokerage business and the firm suffered a huge loss. “That was one of the worst depressions, and this slowdown is peanuts compared to those days,” reminisces Agrawal. The next phase of the market’s growth, which began in 2003 and extended to 2008, saw the business scale up over a hundred times. The firm notched a turnover of Rs 1000 crore and paid Rs 130 crore in taxes.

Says Oswal, “The most-luckiest (sic) time for us was the period 2003-08. The business expanded a hundred times in a mere five years. In that period, we invested in private equity, PMS, mutual funds and investment banking. All these pieces came together.” But by then, the firm had achieved a sizeable scale, expanding to many cities. At that time, it took private equity capital to funds to strengthen its leadership in the broking business, set up its asset-management business and a year later, got listed on the stock market.

By then, the firm was used to the ups and downs of the markets. While it listed at a huge market cap of Rs 6,000 crore, the subsequent crash pulled down the valuation of MOFS’s stock to about Rs 1,000 crore, while its holdings crashed from Rs 500 crore to below Rs 250 crore, after the collapse of Lehman Brothers. For MOFS, there has been no looking back. The firm continues to generate substantial free-cash flows that it continues to deploy to its own investments, and/or its housing-finance subsidiary — Aspire Home Finance — which was launched three years ago. Motilal Oswal Financial Services has invested over Rs 500 crore in the business, while Aspire Home Finance has seen its balance sheet flourish to over Rs 4,000 crore in assets and is likely to rake in Rs 50 crore in profits in the third year of operations. Says Anil Sachidanand, managing director, Aspire Home Finance, “There’s a growing market for affordable housing in the smaller towns, and small ticket loans is a fast growing segment.”

For a long time, the investment house has shied away from getting into the NBFC business, which has been the normal path of growth for most brokerages. “We are very conservative in our investments. Housing-finance is a fund-based business, but the downside is contained, and the business has a good return on equity, with very low NPAs,” says Oswal. The firm continues to generate much cash and because the stock market has been seeing volume growth, brokerage is the bread and butter business for the firm. Falling brokerage rates are not a concern, because investors, Agrawal reckons, will pay for quality research.

Agrawal has been a firm believer in the power of continuously investing in the stock markets. “Since half my bucket is cash, we will reinvest it in our products. We will try to keep deploying it at 20 per cent-25 per cent return. Even if there is a downturn, it will be there for a year or two. But, since we started, the markets have compounded at 20 per cent. So one or two years do not affect us.”

“We are dedicated to the stock market. If you look at the walkalator at the airport, it is moving fast,” says Agrawal, adding, “But, if you are on the walkalator, you will move even faster. That’s what we have been doing because this belt is doing 15 per cent-20 per cent compounded for the last so many years, with of course, ups and downs. But we have been totally focused because not a single penny has gone out of the business.”

For now, the firm has over Rs 700 crore of proprietary money deployed through its asset-management business and has sizeable investments of over Rs 500 crore deployed in the housing-finance arm. All the free cash generated is either deployed in the stock market or in the housing-finance business. If the housing-finance business does not require cash, Oswal reckons, it will be deployed in the company’s own products and investments.

The assets of Oswal and Agrawal are invested via the firm into the markets. Says Agrawal, “Even today, except for his house or my house, everything is here. My investment is here, my time is here.” He is not worried about another downturn. “There is always risk. You can come down by 30 per cent-40 per cent, but again you will start going up.”

For now, the duo believe there is still vast scope in scaling up the investment business. “Opportunities in AMC are vast. We are only Rs 25,000 crore. Equity is Rs 5 lakh crore AUM and even if I get 10 per cent, I will have about Rs 50,000 crore. The real challenge is to become very good in broking and AMC. We will now walk the excellence path, rather than the horizontal path,” says Agrawal. The asset management is also following a differentiated, moving away from the exchange traded fund business to a pure-equity-oriented business, where the strategy is to keep costs low by leveraging on the strength of distributors and independent financial advisors (IFAs). Says Aashish Somaiya, managing director, Motilal Oswal Mutual Fund,“Equity penetration is still much in India and IFAs have a big role in taking equity products to the masses.”

Even with a slice in three growing businesses, the firm still believes in conservative growth. In a fluctuating market, it plans its business three years ahead. “We have seen that if we are able to double our profits in three or four years, generally the market cap will double too. We don’t do leverage, we don’t borrow. We will be very conservative. Our net worth can come down, but that is fine,” says he.

For a company that generates free cash-flow from the AMC and the brokerage business, the firm has also been trying to deleverage its business from cyclicality. Already its stock price has surged 278 per cent in the past year while its market cap has expanded by more than Rs 7,500 crore. If the stock market continues to work its magic as it is doing — and in the long run — this focused approach to the markets and housing loans perhaps, can be a ticket to a larger fortune.