Don't take a crazy call when things are down: Raamdeo Agrawal
We want to make the HFC biz cleaner; stabilise the current book of about Rs 3,900 crore.
Will this be a new year, new beginning for Motilal Oswal Financial Services? Before I get into specifics, I want to talk about your numbers. Same time, last year, everybody including me were worried about HFCs. What is happening?
It takes time to build a business. At least at our end, it definitely requires time. We keep doing wealth creation study. We have seen nothing builds in two-three or five years. It takes time. It took about seven-eight years for the AMC business -- from 2008 to 2014 -- to break even. Broking business we started in 1987. By 1991, when Harshad Mehta led bull run came, we broke even. It always takes time. First comes a failure and from there, if you can get up, a solid company can be built. The same thing happened with the HFC business.
We took off like a rocket four years back and last year we saw that on the back of demonetisation and our own rapid growth and lack of understanding of the space, we had a problem. This quarter, everything is sorted as far as I understand in terms of creating a clean deck for this company to become even more cleaner and a much deeply understood space.
So now we will have a company where we understand this business and we will stabilise first and then consolidate and then slowly start growing at 5-7-10%. Right now, it is clean but we want to make it even cleaner.
When you say clean, what do you mean?
Clean means as it is seen. What are the stressed assets in lending organisation? How much are stressed assets? It used to be about 6% and now after the ARC transaction of about Rs 540 crore which we had done in this quarter, it is just about 2%. That is a normal level of gross NPA. Net NPA is about 1.75%. As far as the current management team is concerned, it is absolutely clean and the book is behaving the way it should behave. The new book is what we have created in one and a half years. It is absolutely pristine. It is literally like 0.1% or 0.2% gross NPA. We understand what to underwrite and what not to. But we have become so conservative, that we are literally not underwriting a little bit of risk because if you have 0.1-0.2% kind of gross NPA, obviously you are not taking enough risk. At that level of risk taking, I do not think you can build a book. So from here onwards, whatever understanding we have and the new team that we have, will go at a little faster pace and we will try to stabilise the current book of about Rs 3,900 crore. But the whole effort is not to grow faster. The whole effort is to make this Rs 3,000-4,000 crore or Rs 4,200 crore in an absolutely pristine situation.
So one, I will not have pressure on the liability; second, my current liability cost will start coming down as the quality of the book starts improving and all the rating agencies and every lender is seeing how Motilal Oswal has stood by their franchise. The cost of lending or cost of borrowing will start going down for us, which is the biggest margin you can have, because home buyers are not going to give me even a penny more. I can only make my operating cost lower, my credit cost lower and my liability cost lower. That is going to be our effort for at least one more year and then we will see how it works. The opportunity size is immense.
You have a large liquid balance sheet which means at a time when others are suffering, you can really lend more.
Yes, yes. See others have problem of equity. Today we have a very liquid equity base. We can give Rs 500,000 crore of equity to this company but this company should deserve to get more equity.
But you will not get into real estate lending. It is only for HFCs.
No, no, our hands are full with the businesses we are doing. Broking, wealth management, asset management and housing finance. This is enough. We are not number one or two in any one of them. There is a lot of scope for us to vertically go up rather than horizontally start anything new.
The mutual fund industry has seen a little bit of churn. You have always given the message that you would give quality stocks which will do well in three to five years. What is happening to the AMC business?
It is very stable. We started actively big time in 2014 and by 2017 end -- in almost four years -- we had world beating performance. It was 15-17% compounded kind of outperformance. That could not have continued. We knew the reversion was going to come. We will have underperformance because you cannot squeeze the same lemon. Then in last 12 months or in 2018-2019, we had one of the worst performances vis-à-vis the index. The performance was not bad but while the index went up by 12-13%, we were up by about a percentage or two. So, we had underperformance of about 12%. Now that underperformance has become the base. So, after 12 months now, we are looking again at one of the best performing funds on a 12 months basis. But even if you look at five years and all, in any case we are the best. Our ranking is in the top two, three or four and not only in one fund.
Fresh money has started coming in?
No. The market takes time to absorb the transition from a negative to positive but there is not any major outflow. We are sitting on Rs 38,000-39,000-crore AUM and we are pretty happy with that. It will take its own time.
The turnaround in performance is only six-month-old. The existing investors, the new distributors will grasp this may be after three-four months. May be post Diwali, naya saal nayi shuruaat could happen. But I am not in a hurry to get more money because $600-$700 billion is a lot of money. The whole stress is not on growth; it is on improving competence because the industry is going to get tonnes of money.
In the next 10 years, we are looking at almost 100 lakh crore of equity mutual fund. If you can manage well, you will have enough of it to manage. The issue is, can we manage well? Whether it is HFC or broking or here, we have to improve the competence and outsider customers are looking at you. They would like to go to the best possible plays where you get the best suites. You do not have to go and tell. It is a word of mouth.
Reputation is all word of mouth.
It is all data driven.
There is a very large prop component that is lying in your balance sheet.
That is the unique part of it.
That is a very unique part. Nobody talks about it. We focus on broking business, we focus on HFCs. What is the size of your prop book? Can you share it with us?
Let me explain how the company looks. This quarter, our net worth is about Rs 3300 crore. Of that, Rs 2,000 crore is the prop book, in the sense that it is lying in mutual funds and private equity investments.
It is cash equivalent but it is not in cash form. It is in a mutual fund form in public listed and about Rs 455 crore in private equity which is a less liquid. But it is under private equity and so all of them are equities. So Rs 2,000 crore equity and now thanks to the government and finance minister, they have removed the MAT on unbooked profits which was the main point for holding this stuff in. Now what is going to happen is if we do not book profits in these portfolios, we have to do mark to market through P&L. In the next six months, the market goes up by 10%. On this, we get Rs 200-crore markup of the portfolio. The whole thing will come in PAT.
It is PBT because you are not booked in. So, you are not paying taxes?
Yes, we must say that this is not operating profit. I have two components of profits that 1000-1200 crore which is deployed in the operating business like broking, asset management, wealth management and private equity. They have operating profits. So, that is about Rs 400-500 crore. Depending on the time, that is absolutely free cash flow with no charge.
So the book value keeps growing?
Yes, book value keeps growing and balances whatever happens to mark to market positive or negative. That will bring a lot of volatility as the book size keeps growing because we pay about one-third of the profits for the shareholders and two-thirds remain in the book. But in the book, we do not go to fixed income, we go to the equity.
What is the CAGR return of this book of yours?
As of yesterday, it was about 17-18% for the last five years.
So it has scope of giving a double digit return in the next five years?
At the high, it was about 25-26%. It is at the low right now.
So this is another trigger where if the book does well, if market improves...
It will do well. The whole company is wired around equity. My asset managers are centrepiece...
That is a great point that Motilal Oswal franchise is wired around equity.
Raamdeo Agrawal: So equity does well, broking does well.
If you are bullish on equity, Motilal Oswal as a franchise...
That is the place to go to because if broking does well, asset management does well. We are the biggest investors in our own asset management company. If I am managing Rs 38,000 crore, of that, about 7-8% would be my own money, prop money. So 8-9% that percentage will keep coming down because my net worth is not going to grow that much.
Why do you not sell the HFC business once it stabilises? Would you sell it in two, three years?
Yes, we have given ESOPs. So, obviously, it will go for an IPO.
No, but sell it out completely. If you are wired around equity, why do you want HFC business in it?
This is not the forum to discuss this thing but whatever is good for the company we will do it. Whatever creates value and what is right for the growth of the business and the entire Motilal Oswal Group and good for the shareholders of the company, more particularly for the minority shareholders.
I understand if a franchise is centred around equity, when equity markets go bad the franchise will see volatility and markets will punish it.
But the whole idea was to stabilise the underlying profitability. Earlier, we had broking. It used to gyrate between 0 and 1, then we said let us do fund management, That has brought in the AMC. It is a very stable business. So, there is a very volatile broking and then we have a very stable asset management. We thought that another small-fund based business we do, that is in HFCs, will give further stability.
If the two operating businesses are stable and one is vibrating a little, you still get a fairly printable kind of a P&L and that helps as market is all about jo dikhta hai, woh bikta hai (what can be seen, gets sold). If you bring more predictability and stability to the earnings, the discounting is much better. That was the thought process, but man proposes, God disposes.
Everybody makes mistakes.
One should not take any kind of a crazy call when things are down. You must think about doing something structural when things are booming and at that point, nobody thinks about that.
A month and a half ago, there was only gloom and doom. Now markets are sending you a feeler that sentiment has improved. Is it time to revisit equities now?
Raamdeo Agrawal: There was never a question mark against my faith in equity, but as far as sentiment is concerned, it has dramatically shifted. The courage and the extent of government action that used to be a dream, is becoming kind of a day-to-day affair like cutting the corporate tax rate and this MAT benefit. We have been calling for it for so many years and it comes in just 110 days! They are even talking about PSU divestment. Okay it has not happened and that is why the market is really apprehensive.
In the first round, Air India divestment did not go through. I wish this time they first plan and plan well. They must understand how it can be sold and they must not hesitate about throwing it out completely. Once the entrepreneurial spirit comes in this large consolidated companies, like what happened in Hindustan Zinc post divestment will get repeated in every single company.
It depends on how much the government wants to sell, how much they want to hold, but they must relinquish the control. Let it go to the people who can do a good job.
That seems to be the broader thesis also.
Even the deregulation of petrol marketing. Yesterday that ranking for ease of doing business came, We have now jumped to 63rd position. This is staggering but then we got to see which are the components where there is a lot of scope. They are going in the right direction as far as the economy is concerned, I am not an economist but last year we could not understand the downfall post IL&FS, the way market fell after July.
The way demand collapsed.
The way demand collapsed I had no clue that it was going to happen like that, frankly speaking. That was the main pain point in our portfolios. We had 23-24% autos and that saw the worst of the declines.