Aggressive Expansion In Wealth And Home Finance Will Compress Margins And Inflate Valuation

Key Takeaways

• High expectations for revenue and earnings growth may inflate stock valuation if actual performance doesn't meet these projections.
  
• Expanding workforce and significant investments may increase operational costs and strain resources, potentially compressing net margins if revenue growth lags.
  
• Strong earnings growth, efficient equity management, asset and client expansion, improved credit standing, and diversified business segments position the company for sustained success.

Catalysts

Offers financial services in India.

• The robust growth in assets under advice and distribution assets, with high market share in mutual funds and SIPs, may lead to an unsustainably high revenue growth expectation, potentially inflating the current stock valuation.
  
• The company's substantial increase in relationship managers and the focus on expanding its workforce, particularly in wealth management, could lead to increased operational costs, which may compress net margins if revenue growth doesn't keep pace.
  
• Strong performance across various segments, including asset management's top quartile returns, could lead to heightened expectations for continued earnings growth, contributing to the overvaluation if actual performance does not meet these elevated expectations.
  
• Significant investments in the home finance business with a focus on increasing the RM count could strain resources and temporarily affect net margins, especially if the loan book growth doesn't compensate for these additional costs.
  
• Plans to grow private equity and real estate funds, with expected exits in future years, may overly inflate future earnings expectations and current valuations if market conditions change or if the exits do not perform as anticipated.

Motilal Oswal Financial Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Motilal Oswal Financial Services's revenue will grow by 19.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 43.0% today to 29.6% in 3 years time.
• Analysts expect earnings to reach ₹40.2 billion (and earnings per share of ₹56.04) by about December 2027, up from ₹33.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹46.5 billion in earnings, and the most bearish expecting ₹32.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.0x on those 2027 earnings, up from 16.7x today. This future PE is greater than the current PE for the IN Capital Markets industry at 24.0x.
• Analysts expect the number of shares outstanding to grow by 6.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.34%, as per the Simply Wall St company report.

Motilal Oswal Financial Services Future Earnings Per Share Growth

Risks

• Motilal Oswal Financial Services delivered a consolidated profit after tax of ₹1,242 crores, representing a 123% increase year-on-year, indicating strong earnings growth that could be maintained if the company continues its effective management and market positioning. This may contradict expectations of a share price decline.
  
• The company's robust return on equity (ROE) of 48% suggests efficient management of shareholder equity to generate profits, which can positively impact earnings and support a strong share price.
  
• The significant growth in assets under advice, up 82% year-on-year to ₹5.7 lakh crore, indicates substantial client trust and business expansion that could fuel revenue growth in the future.
  
• The successful upgrade of the company's credit rating from AA stable to AA positive reflects improved financial health and could lower borrowing costs, thus positively impacting net margins and earnings.
  
• Strong performances across business segments, including wealth management, asset management, and private wealth, with major year-on-year growth in revenue and profit, highlight revenue diversification and a promising outlook for sustained earnings growth.

Valuation

• The analysts have a consensus price target of ₹1012.67 for Motilal Oswal Financial Services based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹135.6 billion, earnings will come to ₹40.2 billion, and it would be trading on a PE ratio of 27.0x, assuming you use a discount rate of 14.3%.
  
• Given the current share price of ₹946.1, the analyst's price target of ₹1012.67 is 6.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.