Digital Competition And High Compliance Costs Will Stifle Future Margins

Key Takeaways

• Rising competition from digital and low-cost brokers, along with a shift toward passive investments, is pressuring client growth, fees, and margin sustainability.
  
• Increased regulatory scrutiny and reliance on volatile equity markets are heightening compliance costs, operational risk, and earnings volatility.
  
• Consistent market share gains, tech investments, and favorable industry trends position the company for strong multi-segment growth and robust long-term shareholder returns.

Catalysts

Offers financial services in India.

• The company faces increasing competition from digital-native and discount brokerage platforms, particularly as younger and tech-savvy investors migrate toward low-cost, technology-first offerings. This ongoing trend threatens Motilal Oswal's ability to retain and acquire new clients in its core broking and wealth management segments, which could lead to slower revenue growth and pressure on both client assets and fee income.
  
• With the widespread shift toward passive investment products such as index funds and exchange-traded funds, active managers like Motilal Oswal are likely to face sustained pressure on both management fees and overall assets under management, dampening long-term recurring revenue streams and compressing margins.
  
• The intensification of regulatory scrutiny, particularly in derivatives and market-linked lending products, is driving increased compliance costs and operational complexity. This comes as new F&O regulations have already negatively impacted transaction volumes, significantly heightening the risk of eroding profitability and adding volatility to earnings going forward.
  
• Sustained competition from low-cost players continues to threaten the brokerage business, raising the risk of market share erosion in cash equities and F&O. Despite management citing past market share gains, the latest quarters have shown signs of weakness-any acceleration in client defection to discount brokers could cause core brokerage revenue to stagnate or decline, directly hitting operating income and net margins.
  
• Heavy reliance on equity market performance and market-linked products creates meaningful earnings volatility, especially as transaction-driven revenues remain exposed to cyclical swings and mark-to-market risks. A prolonged downturn or stagnation in Indian equities would likely result in sustained lower trading volumes, weaker mark-to-market gains, and a sharp drop in both topline revenue and overall profitability.

Motilal Oswal Financial Services Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Motilal Oswal Financial Services compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Motilal Oswal Financial Services's revenue will grow by 17.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 35.3% today to 28.4% in 3 years time.
• The bearish analysts expect earnings to reach ₹32.7 billion (and earnings per share of ₹53.64) by about July 2028, up from ₹25.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.8x on those 2028 earnings, down from 22.3x today. This future PE is lower than the current PE for the IN Capital Markets industry at 25.1x.
• Analysts expect the number of shares outstanding to grow by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.56%, as per the Simply Wall St company report.

Motilal Oswal Financial Services Future Earnings Per Share Growth

Risks

• Motilal Oswal Financial Services has demonstrated consistent market share gains, diversified fee-based revenue streams, and industry-best compounded operating profit growth of 31 percent over the last decade, which could drive sustained revenue and earnings growth going forward.
  
• The company's strategic investments in technology, digital platforms, and leadership talent-supported by a robust IT team and increasing technology spend-enhance its operational efficiency and competitive positioning, potentially boosting net margins and future profitability.
  
• Long-term secular trends such as rising financialization of household savings in India, increasing allocation to equities and alternatives, and deepening capital markets create persistent tailwinds that could significantly aid the company's assets under management, recurring revenue, and overall earnings trajectory.
  
• Motilal Oswal's strong performance in asset management, private equity, and alternatives-underscored by multi-year fund IRRs, regulatory approvals for larger funds, and an expanding footprint in SIPs and private wealth-suggest resilience and growth potential across multiple segments, positively impacting both revenue and profitability.
  
• The company's prudent capital management, high compounded growth in net worth (24 percent over the decade) without raising external capital, and a 25 percent return on equity, together with a consistent dividend payout policy, indicate robust financial health that may support higher share valuations and shareholder returns in the long-term.

Valuation

• The assumed bearish price target for Motilal Oswal Financial Services is ₹763.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Motilal Oswal Financial Services's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1150.0, and the most bearish reporting a price target of just ₹763.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹115.4 billion, earnings will come to ₹32.7 billion, and it would be trading on a PE ratio of 21.8x, assuming you use a discount rate of 15.6%.
• Given the current share price of ₹931.25, the bearish analyst price target of ₹763.0 is 22.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.