Fee-Based Revenue And Asset Management Will Secure Future Position

Key Takeaways

• Focus on fee-based revenues and market share gains suggests potential for higher earnings and stable revenue streams impacting net margins.
  
• Investments in technology and talent, alongside housing finance and private equity expansions, signal potential growth in profitability and competitive positioning.
  
• The company's profitability is challenged by variable employee costs, weak private wealth performance, and significant, immediate costs from technology investments.

Catalysts

Offers financial services in India.

• The company's focus on increasing its share of fee-based and trail-based revenues, along with significant market share gains across capital market businesses, indicates potential for higher earnings growth due to increased stable revenue streams. This can positively impact revenue and net margins.
  
• The asset management business's strong investment performance and distribution expansion led to a 290% increase in gross flows. This should drive revenue growth from rising assets under management and better market share. Earnings growth could follow due to higher management fees.
  
• The Private Equity business receiving SEBI approval for a new fund aims to raise $900 million, double the previous fund's size. Strong past IRRs suggest potential for enhanced revenue and profitability through asset appreciation and management fees.
  
• Investment in technology, brand, infrastructure, and talent should enhance operational efficiencies and potentially boost net margins and revenue by making the company more competitive and able to capture new business.
  
• Expansion of the Housing Finance business, with a 78% increase in disbursements, indicates potential future revenue growth despite volatile interest margins. The strategic increase in RM headcount is likely to drive further AUM growth and profitability.

Motilal Oswal Financial Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Motilal Oswal Financial Services's revenue will grow by 18.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 35.5% today to 32.1% in 3 years time.
• Analysts expect earnings to reach ₹37.2 billion (and earnings per share of ₹61.55) by about May 2028, up from ₹25.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹42.6 billion in earnings, and the most bearish expecting ₹31.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.4x on those 2028 earnings, up from 15.6x today. This future PE is greater than the current PE for the IN Capital Markets industry at 19.5x.
• Analysts expect the number of shares outstanding to grow by 0.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.3%, as per the Simply Wall St company report.

Motilal Oswal Financial Services Future Earnings Per Share Growth

Risks

• The company’s Wealth Management business, despite growth, shows low cross-sell ratios, which may pose challenges to improving revenue if these opportunities are not effectively tapped. This impacts future revenue potential.
  
• Brokerage revenues experienced a decline in Q4 due to market corrections and new F&O regulations. This volatility could continue to impact both revenues and net margins.
  
• Employee costs have fluctuated, showing a decrease in Q4 due to marginal reversals in variable amounts; such reversals indicate variability that may impact earnings consistency.
  
• Private Wealth management showed weaker performance in Q4 with significant declines in distribution revenue and PAT, suggesting challenges in maintaining consistent revenue from this segment.
  
• Significant investment in technology and leadership, alongside rising technology costs, may not immediately contribute to profitability, impacting net margins in the short term.

Valuation

• The analysts have a consensus price target of ₹929.5 for Motilal Oswal Financial Services based on their expectations of its future earnings growth, profit margins and other risk factors. 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 ₹770.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹115.7 billion, earnings will come to ₹37.2 billion, and it would be trading on a PE ratio of 23.4x, assuming you use a discount rate of 15.3%.
  
• Given the current share price of ₹652.75, the analyst price target of ₹929.5 is 29.8% higher.
  
• 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.