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Edited Transcript of MOTILALOFS.NSE earnings conference call or presentation 12-May-20 5:30am GMT

Full Year 2020 Motilal Oswal Financial Services Ltd Earnings Call

Mumbai Jun 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Motilal Oswal Financial Services Ltd earnings conference call or presentation Tuesday, May 12, 2020 at 5:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Aashish P. Somaiyaa

Motilal Oswal Financial Services Limited - MD & CEO of Asset Management Business

* Motilal Gopilal Oswal

Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director

* Navin Agarwal

Motilal Oswal Financial Services Limited - MD & Director

* Raamdeo Agrawal

Motilal Oswal Financial Services Limited - Co-Founder & Non-Executive Chairman

* Shalibhadra Shah

Motilal Oswal Financial Services Limited - CFO

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Conference Call Participants

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* Anand Bhavnani

Unifi Capital Pvt. Ltd. - Analyst

* Hitesh Gulati

Haitong International Research Limited - Analyst

* Madhukar Ladha

HDFC Securities Limited, Research Division - Research Analyst

* Nischint Chawathe

Kotak Securities (Institutional Equities) - Associate Director & Senior Analyst

* Prakash Kapadia

Anived Portfolio Managers Pvt. Ltd - Principal Officer

* Saket Kapoor

- Analyst

* Saptarshee Chatterjee

Centrum Portfolio Management Services - Analyst

* Shubhranshu Mishra

BOB Capital Markets Limited, Research Division - Analyst

* Vivek Kumar

- Private Investor

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. I'm Janet, the moderator for this conference. Welcome to the Q4 FY '20 and FY '20 Earnings Conference Call for Motilal Oswal Financial Services Limited.

We have with us today, Mr. Raamdeo Agrawal, Chairman; Mr. Motilal Oswal, Managing Director; Mr. Navin Agarwal, Managing Director; Mr. Aashish Somaiyaa, CEO Motilal Oswal AMC; Mr. Shalibhadra Shah, Chief Financial Officer; and Mr. Rakesh Shinde, Investor Relations.

(Operator Instructions) I would like to now invite Mr. Navin Agarwal to make his opening remarks.

Thank you and over to you, sir.

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Navin Agarwal, Motilal Oswal Financial Services Limited - MD & Director [2]

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Good morning, everybody. It is my pleasure to welcome all of you to the Motilal Oswal Financial Services earnings call for the fourth quarter and the full year ending March 2020.

At the outset, I hope you and all of your families are safe in this pandemic and wish you all the very best to overcome this adversity. I will start with a few highlights of the overall performance of the firm before I dive into each business performance.

Our consolidated operating profit grew by 56% year-on-year to INR 3.98 billion in the financial year ending March 2020. Our operating PAT that I spoke about is excluding the notional mark-to-market impact on the fund-based investments. The reported profit after tax was impacted by mark-to-market on investments of INR 2.9 billion, a bulk of which happened in the fourth quarter due to the big fall in the market. When there was a mark-to-market of INR 3.8 billion in the fourth quarter alone, the operating profit for the fourth quarter was INR 971 million, which is down by 4% year-on-year.

In the fourth quarter, we have made a CSR contribution of INR 60 million in the PM-CARES and the CM-CARES funds. This is in addition to the statutory CSR contributions. Further, we made a special COVID provision of INR 80 million in the housing finance business in the fourth quarter.

Our consolidated net worth at the end of the year was INR 30.8 billion. Our net debt was down to INR 38.7 billion. Excluding Home Finance business, the net debt was at INR 10.4 billion. Our overall debt is down by 11% year-on-year. The total debt equity is lower at 1.5x. Ex- Home Finance business, the debt equity stands at 0.5x, and net of investments, we have a net cash balance sheet.

Our reported ROE for the year, FY '20 is depressed at 7% due to the mark-to-market impact. However, the operating ROE for FY '20 stands at 32%.

In terms of key business highlights, our asset management profit after tax grew by 9% year-on-year as the business of asset management expanded product offerings in active as well as passive categories and also expanded the branch, sales and IFA reach.

In real estate funds business, the average IRR on exited investments from our real estate funds II and III schemes are at 21% and 22%, respectively. And in our IREF IV, we achieved the final close in the month of March at INR 11.5 billion despite the regulatory adverse fundraising conditions particularly for real estate fund.

Our Broking & Distribution business witnessed an accelerated pace of new client additions, which grew by 72% on a year-on-year basis. And market share in the high-yield cash segment is at a multi-quarter high for 4Q FY '20. And we continue to see strong traction in the distribution business. This turnaround aided by the new lease asset insurance distribution business scaled up nicely in the fourth quarter.

Home Finance business normalcy has been restored in our profitability and overall operations in FY '20. Our exit quarter pre-provision profit stood at INR 40 crores and PBT stood at INR 28 crores.

CRISIL has upgraded our rating to AA- stable.

Our NPAs at the end of the year stand at 1.8%. And our 1+ DPD is down to 9%. Our provision coverage ratio has extended to 66% from 55%. The new book underwritten since April '18, has a 1+ DPD of 1.8% and a 90+ DPD of 0.09%. Our incremental cost of funds stand at 9.5% for each business compared to a full year cost of funds of 10.2%. We had provided moratorium to 13% of the customer base in business as of March 2020. And that has gone up to 36% as of April 2020.

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [3]

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Navin, can you speak loudly, if possible?

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Navin Agarwal, Motilal Oswal Financial Services Limited - MD & Director [4]

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Yes. Yes, sure. Our FY '20 performance remained steady in the context of substantial slowdown in [asset] flows, both for the asset management and the wealth management business, a very lackluster ECM market and multiple changes in the regulatory framework for both brokers as well as asset managers that we saw a set of TER cuts for the full year. We have initiated a buyback of up to INR 1.5 billion, excluding taxes. Excluding the buyback, our dividend payout for FY '20 stands at 39%.

I'll now deep dive into individual businesses, starting with the asset and wealth management businesses. Our asset management business across mutual funds, PMS and AIF stood at INR 297 billion. Our revenues were INR 5.56 billion, and PAT was INR 1.6 billion for the year, which is up 9%.

Our equity AUM stands at INR 160 billion, which is 1.9% of industry equity AUM of INR 8.1 trillion. Our share of alternate assets comprising of PMS and AIF stands at 46%, which is the highest among all asset management companies.

Several schemes have ranked in the top decile in performance over a 1-year period and since inception. As a result, our gross sales and net sales have grown in 2Q over 1Q, in 3Q over 2Q and also in fourth quarter over the third quarter. So on a quarter-on-quarter basis, the schemes have shown an improvement in all the 4 quarters.

Our private equity business manages an AUM of INR 65 billion across 3 growth capital PE funds and 4 real estate funds. This business has delivered on profitability and scalability fronts. Strong performance and positioning has also aided new fund raise. We closed IREF IV during the year with an AUM of INR 11.5 billion.

Wealth management business AUM stood at INR 156 billion in FY '20. Our RM count of this business is at 129 as of March '20. Our trail revenues predominantly cover our fixed costs. And investment in strong RM additions have suppressed the reported profitability. Overall, asset and wealth management revenues were at INR 7.6 billion in FY '20 and contributed to 30% of the consolidated revenues. Profits were at INR 1.88 billion and contributed to 46% of consolidated profits.

Turning to capital markets businesses comprising of retail broking, institutional equities and investment banking business, revenues for this segment stood at INR 12.34 billion in FY '20, contributed 48% of our consolidated revenues. Profits were at INR 1.79 billion and accounted for 44% of the consolidated profits. Broking & Distribution profit stood at INR 1.88 billion in FY '20.

Within the retail Broking & Distribution business, our market share in high-yield cash segment rose and our overall market share remained stable at 2.5% ex-prop. Our distribution AUM at INR 90 billion, now has only 16% of the 1.93 million broking clients being tapped for a cross sale. And we expect to see continued increase in the AUM and fee income as number of clients to whom we've cross-sold and the number of products per client cross-sold rises.

In institutional broking business, there was substantial improvement in rankings in Asiamoney 2019 poll with first rank in terms of sales, first rank in sales trading, first rank in corporate access and second rank in terms of best local brokerage. This has been a result of focus-driven differentiated research products with 250-plus companies encompassing 21 sectors.

The investment-banking business was adversely impacted by the headwinds faced in the ECM segment and poor deal closures.

Turning to the Home Finance business, we reported a profit of INR 391 million in FY '20 and INR 176 million in the fourth quarter. The margins in this business have improved to 5.3% in FY '20 on account of improvement in yield and fall in cost of funds. Our loan book stands at INR 36.7 billion. And disbursements for the last year were about INR 1.92 billion. Our new book sourced from April '19 validates the new credit policy with 3 places in NPA out of more than 5,000 loan cases sourced.

Our GNPA at the end of the year is 1.8%, net NPAs at 1.3%, and provision coverage ratio stands at 66%. Our operating expenditure has been trending down to INR 231 million in the fourth quarter, resulting in a cost-to-income ratio of 37%. CRISIL has upgraded the rating during the year. The strong support from parent continues with a total capital inclusion of INR 8.5 billion and our net gearing stands at 3.2x, and Tier 1 capital adequacy stands at 46.4%.

Limited borrowing repayments for the next 1 year, coupled with strong undrawn borrowing lines and ALM places us in a very comfortable liquidity position in this business.

Finally, turning to the funds-based activities, including commitments to our asset management products, during FY '20 we made an additional investment of over INR 1 billion. Total quoted equity investments, including unrealized gains, were at INR 12.2 billion at the end of the year. And the cumulative XIRR on these investments is now at about 9%.

So just to sum up, our Asset & Wealth businesses are now the largest contributor to our profit. Home Finance business legacy issues are behind with incremental focus on profitable growth. We remain positive on the long-term headroom to grow the business and ability to generate free cash flow by each of these businesses.

We're now open for questions and answers. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

We take the first question from the line of Prakash Kapadia from Anived PMS.

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [2]

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A couple of questions. If I read the MTM, mark-to-market loss INR 3.75 billion, so that is on the total AMC and PE AUM, which is around INR 21 billion. Is that right?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [3]

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Shalibhadra?

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [4]

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Yes. Yes. So our total investments stand at INR 21 billion on which this mark-to-market impact has come in the quarter for PMS.

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [5]

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Yes. So it is on the total PE and AMC, right?

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [6]

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That's right. That's right.

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [7]

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So PE is in profit -- PE is in profit. So this is the net number, right?

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [8]

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That's right. Overall mark-to-market on all the PE investments, the mutual fund and equity share.

Just to add that, like INR 21 billion is -- was as of December 2019. And post mark-to-market, it has come down because of this mark-to-market rate.

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [9]

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Okay. Okay. INR 21 billion. So what would that amount be? Because I think in the PPT I saw INR 21 billion.

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [10]

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INR 17 billion, closer to INR 17 billion margin.

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [11]

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INR 17 billion. Okay. Okay. Media reports have been suggesting a notional loss of INR 80 crores on the commodity and crude settlement. So are we continuing with commodity trading? What is the status we've moved to court? Is there some dispute? What is the status? Have you provided that, not provided? Can you give some color?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [12]

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Prakash, Motilal Oswal here. All these transactions happened actually in the April month. So there's no provisioning, although there will be qualification in the balance sheet. Last year, there's no impact. We have filed a recovery suit and arbitration against one of the customer, large customer. We have issued the press release about INR 80 crores, INR 81 crores we have to recover from them.

The party is very, very strong financially, and we are also pursuing them actively. And hopefully, we'll get some collateral or some money. Otherwise, we'll take the call in the next quarter.

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [13]

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Sure. Understood. And lastly, which of our business do we see some tailwinds which can lead to consolidation and market share gains given whatever is currently happening, if you could throw some light? Do we see some headwinds in businesses where given our track record and history, we can grow faster than the market? Market can degrow, but we can still grow if we are sensing some...

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [14]

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Prakash, again, Motilal. I think the largest business in terms of revenue is the broking business, both retail and institution. And the markets have seen all time kind of having high volume and transactions, not only in the market but at our end also.

And as Navin has said in his commentary that we have -- for us, the liquidity segment is the cash segment, where we improved the market share also. And we also see, of course, most of the people we are working from home. And I think 99% of the people we are working from home, series number of client acquisition -- high client -- number of client acquisition has happened. A lot of new employees have joined from the brokerages which kind of, I think, have become weaker in this kind of thing.

So I think broking will be seeing, in my view, the biggest consolidation now, thanks to the capital requirement, technology and the brand. Okay?

As far as the asset management is concerned, I think there also, I would say most of our products' performance really is far, far now better compared to, say, 6 months or a year back. So there also we are quite hopeful that we'll be able to improve our rank there also.

So these are the 2 largest businesses. And the Home Finance business, you've seen the much improved performance. This year, we are back in profit. Despite this year also, we have sold a small point to ARC. So there, at least we are now slowly, slowly rebuilding and restarting the business. And the new book, you've seen the new book quality of underwriting is far, far superior faster. Just out of 5,000 accounts, you have only 3 NPAs.

So these are 3 largest businesses where we see that there's a very good headroom for growth.

Of course, we'll be very, very conservative and careful in this kind of situation. But the confidence will be very, very high. Investment banking business remain quite kind of, I think -- in this kind of market, challenging. But I think really it depends on the market conditions. Yes?

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Operator [15]

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We take the next question from the line of Madhukar Ladha from HDFC Securities.

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Madhukar Ladha, HDFC Securities Limited, Research Division - Research Analyst [16]

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A couple of -- see, on the broking side, I'm seeing increase in costs. And even -- I think interest cost has also increased in the broking segment. So can you explain that a little bit?

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [17]

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Yes. So in the broking side, we have seen increase in the other costs. So one is also on account of a marginal increase in the people cost. Some of the increases in the marketing as well at the start of the quarter 4. And on the finance cost also, there is increase because one is also because we did an IPO funding of SBI. And secondly, also, we actually maintain higher levels of liquidity in Q4 of this year. So we actually maintained about INR 500 crores of higher levels of liquidity in the -- as passed in the exchanges in the form of liquid or FDs. And that is the reason that you see that there is some negative carry coming in because of the interest cost versus interest income.

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Madhukar Ladha, HDFC Securities Limited, Research Division - Research Analyst [18]

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Okay. Okay. Understood. And what will be sort of our running costs? Because quarter-on-quarter, the costs above EBITDA have gone up by roughly around INR 16 crores. So what will be the trend in FY '21?

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [19]

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You're talking about broking business, Ladha?

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Madhukar Ladha, HDFC Securities Limited, Research Division - Research Analyst [20]

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Broking business, yes, yes.

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [21]

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See broking business, we added also about 1,000 employees during this year. Okay? And we feel that is a good opportunity for us to add quality talent available in the market. We opened new branches also. So you need to take some upfront cost also to make sure that you at least are able to get the market share -- much higher market share. So that will be one more point.

And second thing is because of the volatility, interest, kind of, I think, income also has come down because we have reduced the size of the book. Okay? That's another issue.

And of course, because of regulatory changes, our working capital requirement also has gone up. Okay? Because you saw some problems in the market, so regulators have come up with some new regulations, which require a much higher level of working capital.

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Madhukar Ladha, HDFC Securities Limited, Research Division - Research Analyst [22]

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Got it. So just -- but what will be, like, our sort of budgeted costs for FY '21? So if I were to -- should I take quarter 4 as a benchmark because now all the employee additions and branch additions have been done more directly...

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [23]

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So in the last quarter, we also have got about 400 to 500 people added in last quarter. Okay? So the -- I think -- so last quarter in Q4 plus slightly higher amount on the people cost. And we also are adding about 60 to -- Shali? About 60 to 70 new branches also in last quarter we have started, plus we will start in this quarter. So we're also starting 2 new branches, where some capital expenditures already be done and rent and other costs.

So I think cost, we would be quite aggressive. Of course, calibrated aggressive into hiring and putting up new distribution as far as the broking business is concerned.

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Madhukar Ladha, HDFC Securities Limited, Research Division - Research Analyst [24]

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Got it. And sir, the entire last NPS plus T+5 book was roughly, I think, about INR 11 billion at the end 3Q. I just want to get the comparable number correct. Is the comparable number INR 4 billion or--?

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [25]

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Yes. Comparable number is actually INR 8 billion.

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Madhukar Ladha, HDFC Securities Limited, Research Division - Research Analyst [26]

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INR 8 billion. So NPS plus T+5 is INR 4 billion, and another INR 4 billion is LASP.

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [27]

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That's right. That's right.

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Madhukar Ladha, HDFC Securities Limited, Research Division - Research Analyst [28]

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Okay. And -- okay. And on the AMC side, what is the net inflow, outflow in this quarter?

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [29]

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Aashish, you can the number?

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Aashish P. Somaiyaa, Motilal Oswal Financial Services Limited - MD & CEO of Asset Management Business [30]

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Yes. So this -- so the whole year will end at -- the whole year would actually end up being almost flat, like some INR 70 crores net flow. That is how it will shape up, yes. So we were actually -- the fact is that only the first quarter of this financial year we were net negative. After that, slowly, slowly we've actually been clawing back. And that's how the full year has ended net positive.

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [31]

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So just to give you -- just to add to what Aashish is saying, our gross flows were INR 14.76 billion in 2Q. That went up to INR 20 billion in 3Q and was INR 23 billion in 4Q. And the net inflow was INR 0.6 billion in 2Q, went up to INR 0.8 billion in 3Q and further increased to INR 2.8 billion in 4Q. And this includes positive flows across all the 3 segments, which is the MF, PMS as well as the AIF segment.

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Madhukar Ladha, HDFC Securities Limited, Research Division - Research Analyst [32]

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Right. So INR 2.8 billion is a pretty strong number for the fourth quarter, I guess.

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [33]

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Yes.

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Madhukar Ladha, HDFC Securities Limited, Research Division - Research Analyst [34]

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And yes, also, I think the AIF AUM has fallen, but it's a little smaller. And so is the PMS AUM has fallen a little more than the MF AUM?

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [35]

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That will be an impact -- Madhukar, that will be an impact of the cap of the product, in the sense that in PMS, we have decidedly almost literally 50% will be mid and small cap. That is not how it gets reflected in mutual fund. The same applies to the AIF also.

So -- but actually, if you ask me, the AIF, as we speak, in the last quarter also we are amidst a fresh fundraise. And in fact, in the last quarter we have -- in AIF, the numbers don't show up because it comes by way of drawdown. So it might look like tiny numbers moving here and there. But in the AIF fundraise also in the full year basis, like Navin mentioned, we closed on a net positive. Even as we speak, we are amidst fundraise in AIF along with our -- couple of private banking partners. So that's an ongoing activity. It's just that sometimes the mark-to-market vis-a-vis mutual fund will appear a lot more because the mutual fund is, in that sense, like the largest product in Multicap 35, which tends to be -- or Focused 25. And all those products tend to be good balance of large-cap, whereas in PMS and AIF it is decidedly more mid-cap and small-cap.

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Madhukar Ladha, HDFC Securities Limited, Research Division - Research Analyst [36]

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Got it. And so this is -- the other thing on the treasury, so I thought that the INR 3.75 billion is a pretty big number. Have you changed any policy over here? I thought that we were taking equity mark-to-market directly through the balance sheet and not through the P&L. Has there been some change over there, by any chance?

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [37]

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No. So in terms of the mark-to-market, it has to be done on all the equity mutual fund portfolio and the private equity and the real estate fund portfolios. In case of only equity shares investments or PMS investments, we'll do the mark-to-market through balance sheet. Otherwise, all other is through the P&L. So the bulk of our investments are in these products where the mark-to-market impact is in the P&L.

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Madhukar Ladha, HDFC Securities Limited, Research Division - Research Analyst [38]

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Okay. Okay. And can you help me with what is -- as on the balance sheet date, what is the total mark-to-market value of your investments and free cash on the balance sheet?

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [39]

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Yes. So the mark-to-market value of the investment is INR 1,700 crores, and the free cash...

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Madhukar Ladha, HDFC Securities Limited, Research Division - Research Analyst [40]

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Hello? Hello?

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Operator [41]

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Mr. Ladha, we're unable to hear you. As there's no response from the current participant, we move to the next question.

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [42]

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No. I think -- no, hang on. I think Shalibhadra has got disconnected.

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Navin Agarwal, Motilal Oswal Financial Services Limited - MD & Director [43]

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Yes.

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [44]

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I think Madhukar is still there. Shali has got disconnected.

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Operator [45]

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Sure, sir. I -- we proceed to the next question, and I will just reconnect the speaker.

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [46]

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No. I think if -- Madhukar, do you have any other questions?

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Operator [47]

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I would request, sir, to please rejoin the queue for the question as we have many callers waiting. We take the next question from the line of Nischint from Kotak Securities.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Associate Director & Senior Analyst [48]

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Most of the questions are answered. Just if you could give your outlook on the Home Finance business for next year because I think your business has, obviously, stabilized quite well now. But unfortunately, we are entering into a very volatile phase for the market. So how should we really think about it over the next 1 to 2 years?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [49]

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Yes. Motilal here. As you said rightly that market -- the lending side is quite kind of volatile. And especially our segment, which is the affordable segment is going to be impacted definitely for more than, I would say, 1 to 2 quarters. So we'll be very, very careful and cautious. And the segment, really, I think -- mostly, I think we'll go more into kind of having detailed credit analysis and restrict ourselves to good-quality customers. So I think whatever growth plans we had last year, we would definitely review that. And very, very slowly and methodically we'll build that business, yes. Because nobody knows how next 1 or 2 quarters are going to be there, how opening will happen. Very few branches, of course, are open. The whole focus is right now on the collection and with RBI's moratorium also is there till May end.

So I think we need to definitely review this business. We are not going to make it 0 disbursement. We'll definitely do the disbursement. But right now, there's no visibility about the numbers for next year.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Associate Director & Senior Analyst [50]

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So far, have you done any disbursements from April?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [51]

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April? No, no, no. 0. There may be few top-off clients, but you can say practically 0. It was a complete lockdown in the month of April, yes. March also, numbers were very low because the lockdown -- the problem happened post -- within March, and most of the disbursement happen in the month end.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Associate Director & Senior Analyst [52]

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So how many of your customers have opted for a moratorium?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [53]

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I -- we are still watching, I think, by May end, I -- Navin, would you have any number?

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Navin Agarwal, Motilal Oswal Financial Services Limited - MD & Director [54]

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Yes. We've reported that in my opening remarks, Nischint. So we had, as of end of March, 13% of our customers who had opted for moratorium. This number went up to 36% as of now.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Associate Director & Senior Analyst [55]

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Sure. And any sense on how collections has been? I know you mentioned 0 DPD is around -- sorry, 1 DPD is around 9%. But how have collections been for the nonmoratorium portfolio?

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Navin Agarwal, Motilal Oswal Financial Services Limited - MD & Director [56]

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So the entire nonmoratorium portfolio is -- I mean barring that 1+ of 9%, we've received all our installments, both for the month of March as well as for the month of April [intact]. As you know, since only 13% of these customers were in moratorium as of March end. So basically, out of this 36%, 23% of the customers did pay the March EMI and the balance, 23% are the ones who have not paid only the April EMI.

Our interactions with our customers indicate that because of this repeated extension of lockdown, there is an uncertainty among people to part with cash in this segment. So even if our customers have cash, I think they have requested to kind of wait and watch the situation.

Also, education on moratorium has been very helpful to help them understand that if they hold this cash and they're not parting with it because of the fear of how long this will continue, the cost of that is quite enormous for a long-duration loan at 13% or 14%.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Associate Director & Senior Analyst [57]

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Sure. And any specific trend visible or different trend between self-employed or salaried? Or is it like more or less similar?

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Navin Agarwal, Motilal Oswal Financial Services Limited - MD & Director [58]

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No. So the salaried segment is behaving better than the self-employed segment. The self-employed segment proportion of -- I don't have the numbers of whether this 36% would be higher -- how much higher for the self-employed segment. But if you ask me, my guess would be that the number would be much higher for the self-employed segment, which is about 45% of our book, and much lower for the salaried segment, which is 55% of our book.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Associate Director & Senior Analyst [59]

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And just one last thing, if you could. Just help me remind what proportion of book is for stand-alone apartments versus -- sorry, stand-alone houses versus apartments.

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Navin Agarwal, Motilal Oswal Financial Services Limited - MD & Director [60]

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I wouldn't have that number readily. But my guess would be that this number would be -- about 70% would be apartments, is my guess. But we can come back to you. Rakesh will come back to you on the exact number.

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Operator [61]

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We take the next question from the line of Anand Bhavnani from Unifi Capital.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [62]

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With regards to our buyback, I saw that INR 150 crore worth of buyback is approved, and you've already done INR 3.8 crore. Now just wanted to understand, this is like one of the worst markets. And we generally do a lot of proprietary investments as well. So we have chosen to buy our own stock, which even today is much higher than its book value. Isn't it time for us to kind of look for 1:100 kind of opportunities in these markets and use that INR 150 crores to maybe get tenbaggers, fivebaggers? Motilal can itself be a five-tenbagger, but I'm just curious as to what prompts us to buy our own stock either we -- either conserving cash for any downturn or using it to buy other distressed businesses, which can eventually do better?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [63]

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See, we have 6 months to complete, okay? So I think nobody knows really, I think, what's going to happen in the next couple of months. So I think we are just right now, we have just started actually. Last month only we have passed the resolution. It's too early for us to really come to a conclusion that the percentage of buyback is too less. I think we'll keep on reviewing.

And the more important thing is to assess the situation overall from the business perspective, we're just cautious that there's nothing -- I think, of course, the price is very, very attractive, below -- far below what our selling price is. I think we'll keep on watching the situation and keep on executing the way we think is the right thing from liquidity and the pricing perspective.

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Navin Agarwal, Motilal Oswal Financial Services Limited - MD & Director [64]

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If I can add, see, basically also bear in mind that we did not pay the final dividend that we usually pay. And so this amount is higher than what would have paid as final dividend. Given our track record of distribution, this also should be treated as a form of additional distribution over and above the dividend that we are paying out.

So as you may have seen in the opening commentary, we continue to add to our overall investment book even in the current year, including in the second half of the year. We continue to cede all the new funds that we have launched, so that continues irrespective. However, because we find the markets more attractive, we haven't cut back on our payout. So I think you should treat this as only additional distribution, which we have anyways been pursuing at an elevated level.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [65]

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Sure. I mean, that's my question. If you do distribution at -- in a scenario when you don't have opportunities, that is understandable. But this market, because the way we have seen uncertainty small- and mid-caps are terribly hurt. This would be the time for us to kind of look for the next tenbagger, fivebagger and put money there than trying to return cash to the shareholders through a buyback. So that is my question. We are -- because we are known as an equity buyer. We are known as a (inaudible) which buys names, which can over 5-, 10-year period multiply returns. So, just the thought process is what is worrying, that in these markets you're returning cash instead of deploying.

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Navin Agarwal, Motilal Oswal Financial Services Limited - MD & Director [66]

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And so again, over the last 20 years that we've done this, buying low and selling high or timing the market. So buying a lot when they're cheap and selling when they're expensive, that's not really been the source of our value creation. It has been mostly buy and hold. So really we haven't really timed the -- in fact, even at the top of the market, as we got cash flows, we have continued to deploy it. So I think market timing has never been an influence on our capital allocation.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [67]

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Okay. And in terms of housing finance, just want to confirm, how much of our book is for under-construction properties versus already constructed and occupied properties?

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Navin Agarwal, Motilal Oswal Financial Services Limited - MD & Director [68]

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Less than 2% is under construction.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [69]

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Okay. And what would be the book value as of FY '20 year-end for the housing finance book value in actual crores?

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Navin Agarwal, Motilal Oswal Financial Services Limited - MD & Director [70]

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So the net worth is what you're asking, is that right?

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [71]

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Yes, net worth.

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [72]

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Net worth is INR 867 crores, and book value is INR 1.5.

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Operator [73]

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We take the next question from the line of Hitesh Gulati from Haitong Securities.

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Hitesh Gulati, Haitong International Research Limited - Analyst [74]

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I wanted to understand about the PMS business, now that there has been a change on upfront commissions. So what is the outlook? And what can be the challenges in this business in your view?

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Aashish P. Somaiyaa, Motilal Oswal Financial Services Limited - MD & CEO of Asset Management Business [75]

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Yes. So this is Aashish Somaiyaa here. I think -- so a couple of points. I mean upfront will actually -- I mean, it might push back some volumes any which way right now because of this lockdown. Volumes are a challenge because we are doing some account activations electronically, through e-mails and scans and stuff. So account opening is very much on. But as you will appreciate, bulk of the volume is happening in the mutual funds and the AIF drawdowns. But PMS volume is any which way muted right now. That's the first thing to keep in mind as we speak.

And second thing is that once the upfront is eliminated completely, I don't think the core promise of the product will change. But yes, if there are any participants who are -- or intermediaries who are purely in it for the upfronting, they will feel a bit demotivated for some point in time. My conversations with all my partners -- or channel partners, it tells me that slowly but steadily everybody is aligning to an all-trail model. So any impact I see is likely to be quite temporary in nature.

Plus also, keep in mind that upfronting impacts the cash flow proposition. It does not impact the commercial directly. I mean, if a person -- let's say, somebody is going to -- theoretically somebody is going to want 100 basis points, they would still earn 100 basis points. It's just that they need to adjust themselves for the cash flow that we are expecting from the manufacturer.

So right now, my -- right now, if you ask me, I think -- I'm thinking more about the impact of the lockdown, and I'm not thinking so much about the impact of the upfront because I think that is only going to be a very minor or a temporary impact.

Lastly, in the interim the regulator has come with a circular, which puts into abeyance everything related to the last PMS regulation. So instead of May 1, the upfront ban is now going to be July 1, because all regulations which were announced in February have been put into abeyance till 1st of July.

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Operator [76]

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We take the next question from the line of Saptarshee Chatterjee from Centrum PMS.

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Saptarshee Chatterjee, Centrum Portfolio Management Services - Analyst [77]

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My first question is on the [AIF]. Sir, we have seen INR 2.8 billion of net inflow in Q4, which is a very strong number. But if you can guide us like if similar trend is visible in April also, like as you have talked earlier, whenever market is in kind of a dip there is an inflow, but whenever there's a rally, we see a lot rate reductions coming in.

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Aashish P. Somaiyaa, Motilal Oswal Financial Services Limited - MD & CEO of Asset Management Business [78]

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Yes. So Saptarshee, basically, for the -- the first answer is that the April flow is as strong. I mean a very, very encouraging number. The April flow is also triple-digit positive kind of trend. So whatever you saw in the fourth quarter, at least for us it continues in April also. That is the first point.

Second thing you should keep in mind is that when markets go down, you are right that the gross flow in the industry would go down. So depending on whose market share is what and how market shares are moving, for different participants, the gross flows would vary. And I can say that my sense is that our share is currently on a rising trend.

But second thing you should keep in mind is that when markets go down, not only gross flow goes down, even the redemption tends to go down, because people don't want to -- retail investors typically don't book losses. When INR 10 becomes INR 7, people don't have a tendency to withdraw in large numbers.

So when market goes down, it's true that gross flow goes down. But when market goes down, it's equally true that redemption goes down. And whenever we see for any analysis, for all my friends on the call, when we are seeing the AMC business, leave us aside for a moment, when we are looking at the industry numbers, my humble request is that don't look at net flows. Look at gross flow, then look at redemption, then subtract and redemption. Because if you have INR 3,000 crore of net flow, you can get INR 3,000 crore net flow by having INR 40,000 crore gross flow and INR 37,000 crore redemption. And you can also have INR 3,000 crore net flow by having INR 10,000 crores inflow and INR 7,000 crore redemption. The dynamics are very, very different.

So short point is that right now, gross flows are down, but redemptions are also down. And the net is looking pretty okay.

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Saptarshee Chatterjee, Centrum Portfolio Management Services - Analyst [79]

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Okay. Understood. But in near future, if there is any sharp rally, do you see high redemption risk?

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Aashish P. Somaiyaa, Motilal Oswal Financial Services Limited - MD & CEO of Asset Management Business [80]

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Yes. That's a very good question. If we -- if INR 10 becomes INR 7, I don't think you will get too many redemptions. When INR 7 becomes INR 9, INR 9.5, INR 10, INR 10.5 then the redemption will pick up. And that's when actually gross flow also picks up. So the whole dynamics changes then. That's how -- that's what I would look at.

So right now, my top priority would be to see how best I can participate in the gross flow and look at the redemption as a separate exercise.

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Saptarshee Chatterjee, Centrum Portfolio Management Services - Analyst [81]

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Okay. And in the broking business, Aashish, you talked about that you want to increase the number of branches from 35 to 75. I think we have increased some of the branches also. But as these lockdowns are continuing and we see a lot of pressure coming in from the digital acquisition side, so are we seeing that we should build capabilities on digital acquisition more than the branches?

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Navin Agarwal, Motilal Oswal Financial Services Limited - MD & Director [82]

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Hello?

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Saptarshee Chatterjee, Centrum Portfolio Management Services - Analyst [83]

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Yes.

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Navin Agarwal, Motilal Oswal Financial Services Limited - MD & Director [84]

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Sorry, can you hear me?

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Saptarshee Chatterjee, Centrum Portfolio Management Services - Analyst [85]

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Yes.

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Navin Agarwal, Motilal Oswal Financial Services Limited - MD & Director [86]

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Motilal, can you hear me?

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Saptarshee Chatterjee, Centrum Portfolio Management Services - Analyst [87]

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Yes. Yes.

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Navin Agarwal, Motilal Oswal Financial Services Limited - MD & Director [88]

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Yes. So basically, of course, I think, we need -- we have the PHYGITAL model, where the physical branches also are there and the whole digital capabilities are there. And I think this model is fully tested in this lockdown period where we open all-time high accounts working from office also.

But I think our model of the distribution is very different than, I would say, some of the other -- or most of the players, where at least our offering is you got both -- best of both worlds. If you got physical people who want to talk to you, you can visit the physical branches. Some of the customers, they go to -- they, I think, in the old style they feel comfortable sitting in the broker's offices. So we are calibrating on both sides, investing a lot in technology as well as in people. And as I said, that we also have opened our new branches in last quarter as well as this month also.

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [89]

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Just to add to this point, while it may seem paradoxical to be adding people and branches at this stage in these times, one of the key drivers to this also has been that at least 3 out of the top 10 brokers with active clients have seen varying levels of issues and consolidation and shutdown. So there was a question earlier that which businesses do you see consolidation. And this effectively, the expansion of branches and people that you see is effectively -- a part of that is whole consolidation drive because of issues that we've seen in at least 3 out of the top 10 brokerages, retail brokerages in India.

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Saptarshee Chatterjee, Centrum Portfolio Management Services - Analyst [90]

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That's very helpful. And one very last question is on the group trend. Like I'm seeing, we have certain business like AMC, broking, wealth management, which is kind of giving stable revenue and PAT, and other businesses like investment banking and fund-based businesses, which is kind of a volatile in nature and hampering the overall profitability. So is there any thinking in terms of reducing the volatility at group-level earnings?

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Raamdeo Agrawal, Motilal Oswal Financial Services Limited - Co-Founder & Non-Executive Chairman [91]

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Moti, can I take this?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [92]

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Yes. Yes, Raamdeo.

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Raamdeo Agrawal, Motilal Oswal Financial Services Limited - Co-Founder & Non-Executive Chairman [93]

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So this is Raamdeo Agrawal. This is a well thought-out strategy, and this is the test of the time whether this strategy works or not. Because the liquidity -- we are good in investing in equities. And the proof of the pudding is putting your own balance sheet money out there. So -- but that risk we can take only if my rest of the operating businesses are free cash flow businesses.

That's what is the character of the businesses. We are broking AMC, wealth management, high banking. They're all agency businesses, and there is 100% free cash flow from these businesses.

Now what do we do with those businesses? We can have 100% payout through the -- by way of dividend. And second is -- but then what will happen is the balance sheet base will become very small. And for growing the businesses, you want to do broking and all, you need balance sheet support. And balance sheet, so what we did initially between 2004 and 2014 what we did -- we didn't pay out -- we paid out whatever, 20%, 30%. And balance, whatever we kept it, we tried to keep it in some kind of a fixed instrument. That kind of really distorts the fabric of the company, and it didn't allow it to have a natural place of growth in our AUM.

So then in 2014, we decided to deploy money from fixed income to equity, but do it in such a way that businesses are not impacted. They are fully [accounted] for. If you look at your -- all the businesses, they don't need much money, but every business is fully capitalized. And then whatever is surplus left, that only goes into the equity funds, and they're volatile in character.

So that's how -- but then my yield on the -- what is not deployed is, if you look at the long term, it will work out to more like 15%, 17%. If you put in fixed income, post-tax will work out only 5%, 6%. So the choices between putting the idle net worth at 5% or 15%. So we have chosen the second. That's how it has been kind of designed. Let's see how we go along.

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Operator [94]

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We take the next question from the line of Shubhranshu Mishra from BOB Capital.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [95]

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Most of my questions have been answered, except for this AUM mix sourcing. Is this only for AMC? Or this includes AMC and PMS as well?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [96]

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Sorry. Can you repeat the question, please?

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [97]

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There is a chart on AMC sourcing, which says IFAs national distributors. I just want to check if it is for AMC or is it for (inaudible)?

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [98]

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That is for mutual fund. That is for only mutual fund.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [99]

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So in this case, if we have such top-rated funds, why are we not empaneled with any of the banks? And does that limit our growth in MF AUM because banks would be the largest partner in terms of client outreach?

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Aashish P. Somaiyaa, Motilal Oswal Financial Services Limited - MD & CEO of Asset Management Business [100]

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Yes. This is Aashish here. So actually, there are 2 things. One is that actually if you see our portfolio management services offerings as well as our AIFs, they are all partnered with -- like literally there is no private banker or wealth manager who wouldn't have worked with us.

Now coming to the mutual funds, it's only 2019 when our flagship funds and even, let's say, the first fund, which is Focused 25 or Multicap 35 or Midcap 30. All of these funds have finished a 5-year track record predominantly in 2018 and 2019. And in fact, as we speak, I mean last year also we actually have seen our mutual funds getting onboarded.

And in recent times, there was a discussion that, okay, in the last fourth, our quarter net sales picked up, third quarter also, it was on a rising trend. A lot of that traction is coming because the mutual fund sales is actually picking up. So what happens is that when you see that the industry is so big and our AUM is not that great, so whatever you are seeing there is a percentage of the AU and outstanding book. But in incremental flows, the mutual fund sales are picking up because of new empanelments coming through. And a lot of banks, including some of the large retail banks, they have actually onboarded our mutual funds in the last 2 quarters.

So it's a continuing activity. And it's an ongoing effort for us to make sure that we are green-signaled everywhere.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [101]

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Sir, if you could guide us as to what's the bank's contribution would be in terms of the sourcing mix in the next 2-odd years or 3 years, given that they're just starting off.

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Aashish P. Somaiyaa, Motilal Oswal Financial Services Limited - MD & CEO of Asset Management Business [102]

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Mutual funds.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [103]

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For the MF sourcing?

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Aashish P. Somaiyaa, Motilal Oswal Financial Services Limited - MD & CEO of Asset Management Business [104]

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Yes.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [105]

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Because my sense is that banks contribute more than IFAs.

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Aashish P. Somaiyaa, Motilal Oswal Financial Services Limited - MD & CEO of Asset Management Business [106]

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Yes. Yes. So if you see the whole industry, if you see the whole industry banks could be anywhere in the range of 35%, 40%. For us, it would be more private bankers, national family offices, multifamily offices, national distributors and IFAs, and banks would be practically negligible for us.

My sense is we should be in the next, say -- I won't say 1 year, but in the next 2 to 3 years, we should be able to head more towards the -- more industry level kind of mix of mutual fund distribution.

Also, keep in mind is that this is a shifting pie. By shifting pie what I mean is that direct and digital and all those are actually rising. And so you not have the same pie which you have right now, maybe 2 years later, because direct and digital will continue to keep becoming bigger and bigger. So while we have to get on board with the banks, we also have to work hard to make sure that we are very salient in the digital and the direct kind of space. If I have to give a number, I would say that it will be more like 20%, 25% in the next -- in the next 2 to 3 years.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [107]

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Right. Sure. That helps. And in terms of wealth management, I want to know, are we looking at any kind of operating cost rationalization? Or the employee costs going to go up in FY '21 as well?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [108]

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No. There's no plan to rationalize. See, the biggest cost, as you said, is the people cost there. Yes. So right now, I think we are not thinking in terms of rationalizing any employees, of course, unless there are some underperformers, which in any case is an ongoing process.

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Shubhranshu Mishra, BOB Capital Markets Limited, Research Division - Analyst [109]

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Okay. Sure. So it's fair to assume that the operating cost in the wealth management would grow with the normal inflation. Is that a fair assumption? Or it will be higher?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [110]

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Yes. You can assume that with nominal, whatever inflation.

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Operator [111]

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We take the next question from the line of [Saket Kapoor] from [Kapoor & Company].

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Saket Kapoor, - Analyst [112]

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So firstly, regarding this buyback -- so as Mr. Motilal was mentioning that we did not come out with a final dividend. But then also, sir, as explained earlier by you people only that the regime has totally changed for dividend distribution, tax being abolished and now being taxed at the hand of the recipient. So how will -- how will we align ourselves in going ahead with the dividend to the shareholders?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [113]

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See, at the end of the day, the dividend distribution as well as the buyback usually includes the money in the hand of the shareholders, right? So -- and shareholders have to, of course, have to pay a very high amount of tax. Most of the shareholders at least, excluding promoters also; and then, again, promoters have to pay that. But most of the shareholders they have to really, I think, pay the tax at, say, around 36%, which is also very high. So you've got 23% buyback tax. You got 36% dividend -- kind of dividend tax. So I think we have to, I think, now look at this issue in a much more kind of, I think I would say, a combined way.

So the overall distribution was -- we have the policy about the distribution to the shareholders of the profits now. So we will stick to that philosophy, which is anywhere between 30% to 40% of the money to be distributed to shareholders. And of course, we think, right, last year for the first time where we have kind of, I think, cut the dividend. But then at the same time, we announced the buyback also.

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Saket Kapoor, - Analyst [114]

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But sir, is there a pattern change where [the] (inaudible) income (inaudible)?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [115]

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Partly she has accepted -- partly she accepted my request and then she brought to 36%.

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Saket Kapoor, - Analyst [116]

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But will it promote, sir -- will it act as an incentive for you people to come up with the dividend, as has been the case earlier -- but not the case, that is very much clear, because still this is the tax ...

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [117]

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No, as I said, I would look at the overall -- how monthly -- I think of how profit we want to play. I think this should be flat in both the form -- we want to follow.

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Saket Kapoor, - Analyst [118]

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Got it. And sir, we investors and others that are looking for stimulus -- everybody, industrialists are speaking about it. But don't you think that this is also a time when some key changes or reforms should be introduced in the capital market also?

We are at the trends with various old legacies of long-term capital gain tax and which are not relevant today in the realms of things that are prevalent today. So is it not the time that people like you and other should focus -- ?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [119]

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See, of course, I think we all are facing -- kind of having issues. But end of the day, the government also have their own priorities. They have their own resources, mobilization. So I hope that -- I think they start thinking more about the economy. Right now, their whole focus is for the people's health rather than the economic health. Now I think the mindset should change from health to economic health also. So they'll have to balance it. I don't know. I think how the government take it on -- at that side.

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Saket Kapoor, - Analyst [120]

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And the last point, sir , [KB] has invited views on capital market reforms in just -- in their third research group study. So we would request Motilal and people like you to participate (inaudible)

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [121]

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Part of it or not, we keep on selling lot of sales, thanks to them.

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Saket Kapoor, - Analyst [122]

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Okay. So [KB] has invited -- June 1 is the deadline, sir. I will be tweeting the document to you. So just see that your team get the entire -- and make the best of the opportunity, sir.

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Operator [123]

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We take the next question from the line of Anand Bhavnani from Unifi Capital.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [124]

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Sir, can you give us a breakup of mark-to-market INR 315 crores across the 3 vehicles, AIF, proprietary investments and mutual funds and others?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [125]

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Sorry. Can you repeat your question? It's not audible.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [126]

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The mark-to-market of INR 315 crores in Q4, what will be the breakup across real estate, equity investments and AIF?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [127]

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I think the vast majority of this, real estate there'll weak mark-to-market impact. Private equity will be a negligible number. So this entire INR 3.75 billion will be equities.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [128]

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Okay. And sir, our entire equity investments are in the mutual funds, sir. Is that the right assumption?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [129]

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No. Bulk of it is in mutual funds. We have also ceded some of our AIF. See basically, we participate in all our products. Correct? But PMS is legacy. So I mean, these products are already at a certain size when we launched our mutual funds in the first place. As you are aware, our PMS is a vintage of 15, 16 years, whereas mutual funds have a vintage of 5 to 7 years. So the ceding of capital was done more for the mutual funds and a very small part for the AIF. But we do have a little bit small investments in PMS also for those -- particularly those where we have launched some of these products in the later vintage. So as Ari mentioned earlier, we changed our strategy from debt investments to equity in 2014. So the ceding of funds that were launched pre-2014 may not have happened, but all the funds launched from 2014 have happened.

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [130]

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Sure. And to give you the exact numbers, we had a INR 380 crore mark-to-market loss, out of which INR 310 crores pertain to equity mutual funds. INR 50 crores pertain to the private equity fund and INR 20 crores to the alternative funds.

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Anand Bhavnani, Unifi Capital Pvt. Ltd. - Analyst [131]

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Okay. That's very helpful. Just on the broking account openings, in this lockdown, we are doing the power of attorney in those kind of documents also digitally. Is that the case?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [132]

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Yes, absolutely. It's 100% digital.

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Operator [133]

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We take the next question from the line of [Vivek Kumar], individual investor.

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Vivek Kumar, - Private Investor [134]

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My question regarding the AMC team. We have been introducing a lot of passive funds of late. So what is your personal view or a company view on how this mutual fund as an investment would shape out? And why are you doing this the way you're doing? So how do you think your passive will shape out versus your mutual point versus your active PMS and these things, if you can throw more light on what is your view Motilal would want? How do you want to (inaudible)?

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Motilal Gopilal Oswal, Motilal Oswal Financial Services Limited - Co-Founder, CEO, MD & Director [135]

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So Aashish?

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Aashish P. Somaiyaa, Motilal Oswal Financial Services Limited - MD & CEO of Asset Management Business [136]

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Yes. So basically, you need to see the AMC more in terms of the different issues that it operates in. Originally, it was always into PMS. And because of the operational ease and new regulations coming in that PMS got expanded into, say, PMS and AIF. So one has the alternates.

Second is obviously equity mutual funds, where we have differentiated ourselves because we don't launch products like in a flurry like 40, 50 funds. We try to run it with a tight philosophy and appropriate positioning out there.

The third, obviously, is to passives. And I think that all the discussion on passives, they always get waylaid by way of straightaway jumping into a discussion about alpha. I think, frankly, that's a no-brainer because if there is no alpha then everybody will move to index. And if we are outperforming, then of course we will be able to make a mark in the active business. That applies to the whole industry.

So our reason for getting into passives is actually much beyond these alpha-related debates really. And in fact, our first attempts on passives was made way back in 2010 when we launched India's first smart beta ETF. Then we followed up with India sports mid-cap ETF, again followed up with India's first Nasdaq 100, the offshore ETF.

We've revived this effort in the last 1, 1.5 years for 3 reasons. One reason is that in India, the maximum number of new client acquisitions in mutual funds is happening through digital channels. And when people come digitally, they make very, very suboptimal choices because if you are going to buy digitally, but then some 600 different funds are thrown at you, you will not be able to decide which fund to buy. So first is that when there is a huge plethora of new customers which is coming digital first and direct, then obviously, simplicity of products matters a lot. That is first.

Second is that the regulation is moving towards stripping away this distribution with commission versus advisory with fees. That is another reason why intermediaries need to add more value and asset allocation, financial planning, advisory robo, all these things would tend to kind of pick up. So there again, you need to see these index funds more as building blocks or simple products.

So there are very, very different reasons beyond alpha and no alpha, which I think alpha would be one reason. But there are many other reasons which would drive the growth of passives over a period of time.

And the last part is that we are making a genuine effort or a serious effort to be in the passive business, because unlike a lot of activity happening in the industry, we are not doing those ETFs, which are -- frankly, ETFs are difficult for retail investors to participate. And the other thing in India, ETF is everything is just Bharat 22 or CPSE or that EPFO money, which is not actually the retail participation. So we are doing the index funds instead of ETFs because we are keen to participate in the whole digital direct retail kind of space. And my sense is other than alpha, that will be a good driver of passive flows.

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Operator [137]

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And ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Shalibhadra Shah for his closing comments. Over to you.

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Shalibhadra Shah, Motilal Oswal Financial Services Limited - CFO [138]

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On behalf of Motilal Oswal Financial Services, I would like to thank every participant for attending the Q4 FY '20 con call. In case of any further questions, please do get in touch with me or our Investor Relations desk. Thank you. Stay safe, and have a good day. Goodbye.

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Operator [139]

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Thank you. On behalf of Motilal Oswal Financial Services, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.