A change in the business mix has helped push up operating profit margins.
The last six months have been a difficult time for brokerages. Nevertheless, in a challenging September quarter, Motilal Oswal Financial Services (MOFSL) has posted a sequential increase of 3 per cent in the profit after tax at Rs 27 crore. Year-on-year, however, the PAT has declined by 17 per cent.
The top line was down 2 per cent q-o-q to Rs 138 crore and 10 per cent over the June 2007 quarter. Not surprisingly, the firm’s revenues from the key brokerage segment came off by 6 per cent while the investment banking business saw an 11 per cent sequential fall.
Fund-based businesses such as private equity and portfolio management , however, did better and grew 54 per cent. Also, the firm’s operating profit margins were up 280 basis points sequentially touching 40 per cent (37 per cent in FY08). One reason for the improved profitability is the change in the business mix. What has happened is that the share of fee-based and fund-based businesses that have a lower cost of operation, has increased.
For instance, the brokerage business contributed 69 per cent to the revenues in the September 2008 quarter, far lower than the 80 per cent share that it had in FY08. The firm hopes to launch its asset management company in the next four to six months.
MOFSL’s market share in the brokerage space has dropped to 4.5 per cent in the first half of FY09, from 4.7 per cent in FY08; the management claims this is because they had advised clients to stay away from the market in an uncertain environment as a result of which volumes have been lower.
With the stock market continuing to reel under the impact of the financial crisis in the US, it’s unlikely that investors will return in a hurry. The management, however, believes that while the effects of the credit crisis could linger for a while, the September quarter may have seen the worst and adds that volumes have picked up in October. MOFSL’s initial public offering was made at Rs 165 and the stock hit a peak of Rs 454 in January this year. It currently trades at Rs 78.40, and at around 10.5 times estimated FY09 earnings.