Rev from broking to reduce to one-third in 2-yrs: Motilal

Speaking on the strong second quarter performance of the company, Raamdeo Agrawal, Joint M-D of Motilal Oswal Financial Services said the revenue contribution from the brokerage business has reduced and in the coming two years would come down to one-third of the total revenues.Initially, borking contributed almost 100 percent to revenues but after diversifying into asset management and housing finance business the dependence on broking has come down to almost 50 percent and is likely to reduce further as other businessed grow said Agrawal.Motilal Oswal Financial Services reported a massive 33.1 percent year-on-year growth (up 59 percent sequentially) in consolidated profit at Rs 43.4 crore on strong revenue that surged 46 percent (up 24.4 percent Q-o-Q) to Rs 259.1 crore in the quarter ended September 2015 on broad based growth.On sequential business, its brokerage business' EBIT (earnings before interest and tax) grew by 56.9 percent with margin expansion of 370 basis points and fund based business' EBIT jumped 71.6 percent with margin rising 60 bps. Asset management business EBIT increased 49.5 percent with margin expansion of 200 bps.The asset management business has grown almost 3 to 4 times. The business has also managed to breakeven and this was the first quarter of profits for it, he said. The housing finance company which is only 15 month old  has already disbursed around Rs 1000 crore in affordable segment.He is confident of better margins from both the asset management Company and housing business once they start growing substantially.Below is the transcript of Raamdeo Agrawal’s interview with CNBC-TV18's Reema Tendulkar and Mangalam Maloo.Reema: In the press conference you were just indicating that the dependence on the brokerage segment will come down. How much does it contribute right now and how much do you expect it to contribute in the coming, say, few quarters or one year?A: The whole initiative started with almost 95 percent of the revenue and profits of more than 100 percent used to be coming from broking. Then we started the initiative of diversifying into fee based businesses and now the broking has been about 50 percent -- 20 percent is coming from asset management fees and 20 percent is coming from housing finance. So, there is a complete re-jig of how the company looks in last 12 months.Reema: And going ahead?A: Now this trend will continue although broking will grow. Like this quarter year-on-year (YoY) it has grown at 11 percent but rest of the pack has grown at 100-200 percent. So, we broking will become much more smaller. Probably broking will become one-third in next two years' time and rest all pack will become two third very quickly in the next two years.Mangalam: Your funds business has really outperformed the top line growth scene of close to around 60 percent sequentially. At the same time your finance costs have also increased about 62 percent quarter-on-quarter (QoQ). So, could you give us a sense of what is the kind of capital that you have raised during the quarter in your funds business and also what has your disbursal rates been?A: There are two buckets to this. One is about the asset management business, which has seen YoY growth of almost 3- 4 times because now we manage upwards of Rs 9,000 crore purely in equities. Last year at this point of time it must have been about Rs 2,500 crore kind of thing. So, clearly this is 3 to 3.5 times in this period. So, that has lead to increase in the fee income. Till about a quarter back actually we were below break-even in asset management. So, it is a business where you have the fixed cost of Rs 50-60 crore and once the fixed cost crosses then you get the profitability. So, this is the first quarter of some kind of profit from asset management business. This will keep scaling up if the Assets under management (AUM) keeps scaling up.Second is the housing finance company which is about 15 months old now and we have disbursed more than Rs 1,000 crore so far and it is in an affordable segment. There we have given about Rs 200-250 crore kind of equity, and balance Rs 700 crore has been borrowed from the various banks. So, that particular borrowing in a console basis is looking as if we are borrowing a lot of money. So, that is one source of major borrowing and that has lead to spike in the interest cost.Reema: On the margin front out of the key three operating segments brokerage, fund based as well as asset management in which segments will the margin improve according to you in the next one year and any segment perhaps in the brokerage business where you expect margins to come down because of competitive pressures?A: No, as far as brokerage is concerned over a period we have devised a model where margins are pretty stable at about 30 percent kind of EBITDA margin and upwards of 20 percent net margin. So the problem with net margin is that we cannot grow very rapidly. So, now we have successfully launched this Asset Management Company (AMC) which has crossed the break even. Because it takes time to break-even - there are lot of fixed costs. So right now our net margin would be 15 percent but as the AUM doubles the margin also goes three times. So, if I go from Rs 9,000 crore to Rs 20,000, my fee will double but my profit will go at least four to five times. So, margin expansion will be relentless in AMC business as well as in housing finance because both have about Rs 40-50 crore start up cost, which we have crossed over and both of them have become profitable. So, over the next three to four years we will see continuous increase in the margins from both the segmentsMangalam: Apart from your earnings what is your sense on the earnings that we have seen so far. What is your view, are they up to the mark or do you think there is still room for improvement in the earnings that have come by so far?A: Typically good results they get announced very quickly after the end of the quarter. So, we will not get a true trend till about the end of the month. After that you will get to see really the whole line up of the companies coming in. So far I have not seen major disappointment, nor major firework but deflation taking over top line like in HUL result where we saw that volume growth is seven percent and yet the top line growth was just 2-3 percent. That will be the defining feature in the next three or four quarters of all the companies where the inflation was leading to kind of a top line bump up. So, that is where the disappointment is going to come. So, for a lot of good companies the franchise will be safe but growth will be visible in a limited way. So, that is the first trend I see in the results in this quarter.Reema: Coming back to the point that you were making about how the deflation worries will start showing up in the earnings and that could constitute a disappointment. We saw that in the case of HUL, which are the companies and therefore are these the stocks that you would avoid?A: That is a much deeper thing, then you would have to look at the price and those kind of things. I am just telling you what I am seeing in the earnings, because these are great companies and at particular price these companies are worth investing but the current prices they may not be great investments. If you want to earn 8-10 percent they are very good, but if you want to earn 20-25 percent probably they will not be able give that because earnings growth is not there to that extent.Mangalam: Could you give us a sense on the markets because we are seeing rapid falls close to that 8300 level. At the higher levels there seems to be some kind of concern or tentativeness from people in terms of getting into the market. So, what is your call on the market?A: Very difficult. If you had asked me last Diwali and if you run the tape clearly we would have said that we will do at least 15-20 percent from that level. Clearly at least we are completely wrong. So, again trying to figure out even for the shorter term is going to be tough but my sense is from 8000 the downside is limited. Yes, it can go to 7500 or 7200 whatever, 8-10 percent, but it will bounce back very quickly. So, at around 8000 for the long-term investor there is very little to lose and some day the story is going to happen, India's story is going to happen, world's story is going to happen and on a three year basis I will be surprised if we don't make a decent money. In any case the stocks are different from the market and you are buying stocks, not the market.