Motilal's H2FY17 profit growth will be robust: Raamdeo Agrawal

Strength in all three business – broking, asset management and housing finance – along with a favourable business mix helped post a strong second quarter says Raamdeo Agrawal, Joint MD at Motilal Oswal Financial Services.

In an interview to CNBC-TV18 Agrawal says healthy operating performance is likely to boost overall profits even in the second half.

The company’s revenue from the capital markets business grew 46 percent while for AMC business it was up 48 percent and housing finance was up 200 percent albeit on a low base.Below is the transctript of Raamdeo Agrawal’s interview to Prashant Nair and Reema Tendulkar on CNBC-TV18.Reema: A good quarter for the company. Do you believe it is sustainable, what are you picking up and how this current quarter that we are in is likely to be for Motilal Oswal?A: Coming to our results, it was a very strong quarter. I would say it is almost planned kind of a situation. So, we had planned for this kind of a change in our mix, but the strength in the business has been very strong in broking as well as asset management. And of course, housing finance also. So, all the three segments have done very well and we expect that the rest of the year at least, what we see is that same kind of performance is likely to remain operating businesses. There is a Rs 35-37 crore of carry share from our private equity business. That of course, the fund one is coming to a close, so that we have done about Rs 65 crore in the first half. So, same amount of carry share will come in next four quarters. We do not know in second half how much will come. It depends on the sale of some of the assets. To that extent it is exceptional, but otherwise, operating businesses will do as strong and on a higher base. So, overall profits will be quite robust at least for the second half.Prashant: Carry from the private equity business, is it?A: Yes.Prashant: What is the total carry which you have not booked so far?A: Total carry book is about Rs 63 crore. Of that Rs 37 has come in this quarter and balance was in the first quarter.Prashant: And what is the overall carry? Will you be able to reveal that figure on the book?A: Reveal, in the sense at what price it will be sold we do not know.Prashant: But I am sure you do reasonable assessments of right now, right?A: Yes that is what I am saying. About another Rs 63-65 crore should be coming in the next four quarters out of that.Prashant: Capital markets up 46 percent, AMC up 48 percent, housing finance up 200 percent. Of course the base in housing finance is small as you yourself alluded to in the press conference. Could you tell me what is the size in the asset under management (AUM) business?A: Asset management is now Rs 15,000 crore. More closer to Rs 16,000 crore. So, actually it has grown very rapidly. I was looking at some numbers. In two and a half years we have grown by 10x. We started in 2014 march at about Rs 1,500 crore. Now, we have crossed Rs 15,000 crore. So, it has been a very rapid build up on a very small base. The thing is that now, we are about four percent of the incremental flow. So, right now, it is too early, most of the mutual funds products are not being distributed by the banks because it is not yet three years. So, as it completes three years next year sometime in April-May, we will start seeing better distribution of our main products.Reema: You spoke about operating leverage kicking in, in your brokerage business. Could you tell us what the profit growth has been for the broking business and considering the strong growth rates you have seen, have you increased your market share and have you share those numbers with us?A: So, both have happened. Actually what happens is that whenever the bull run starts and the new clients start coming in, the big brokerages, they start getting market share. That is what happened in 2003 to 2007. We literally went from 2 percent to 8 percent between 2003 and 2008. And then, that thing actually fell off and we were at lower level for last 7-8 years. But the costs assumed at the peak of the Bull Run, that does not come down. So, then the operating leverage works in the negative way. Now as again market picks up, we start getting market share and costs are rationalised and the incomes come very rapidly. So, when you grow 35-40 percent, the costs grow at about 15-20 percent and the operating margin kicks in. And since we have a very large operations in broking, the operating leverage impact is pretty significant in the overall bottomline.Q: What would have been the profit growth in your brokerage business?A: in capital markets business, we have grown by about 46 percent. Revenues have grown at about 46 percent. So, I am sure the profit must have, I do not have the exact number. It is there in the presentation, but profit has grown faster than the topline.Prashant: So, for H1, you have done around Rs 180 crore in profits. Would you do at least Rs 360 crore if not Rs 400 crore for the year?A: There are three parts of the business. I would say four parts of the business, one is the core broking, that gives us about Rs 100 crore in a year. Then you have the housing finance and asset management and third piece which is the largest part of the business, that is the investing business. So, we do not book the profits out of that. So, these three operating businesses, they give us about Rs 400 crore.Prashant: That is what I am saying. I began by asking you the total carry. You told me Rs 65 crore. I was actually asking the money that you have put in your private equities business investing and at this juncture what is the value of those? So, that is what I was asking.A: There are two buckets. One is a private equity bucket. That Rs 63 crore that I was talking about, that is in private equity. But there is a public equity fund of about Rs 800-900 crore. There we have Rs 280 crore unbooked profit. That is not part of this current result what we have declared.Prashant: That you will book in the future?A: As and when we need the capital. So, if you want to give Rs 500 crore to housing finance company. We liquidate this portfolio, at that point of time we will show the profits.Prashant: This relates to the Tata-Mistry which has been playing out all over for the last three days. I want your thoughts on specifically one thing which is the allegations with regards to Tata Finance, that Rs 4,000 crore amount, how that was on Tata Motors’ books. Is there clarity enough? Are you worried about that? I know that you do not own stocks there, but what is your view really?A: That part, I read the letter 2-3 times. I could not figure out whether that Rs 4,000 crore is the loss they incurred in the last 4-5 years between 2013 and 2015 or is that still lying there unbooked. If it is unbooked, then the books look very bad. And I do not think that would be the case. Whenever they do the clarification, obviously, Tata Motors will definitely come out and say what is the situation of that Rs 4,000 crore because rest all is a business decision in the sense that we are appraising with hindsight and whosoever took a business decision that is with foresight. So, business mistake and business going wrong and all, that is fine. But are the books in Tata Motors, that Rs 4,000 crore, is it already written off or is it still standing as an undisclosed loss in the books. At least in my mind it was not clear.