India Oswal Financial Banking Motilal Equity Research |Services & Financial Services

IPO Note

MOTILAL OSWAL FIN. SERVICES

Right time, right place

INR 725-825 SUBSCRIBE

August 20, 2007

We recommend investors to SUBSCRIBE to the IPO of Motilal Oswal Financial Services Limited (MOFSL). We believe that MOFSL, with its established brand name and large network spanning 377 cities and towns through 1200 business locations, is wellequipped to leverage the growing penetration in the financial services space. Investment Rationale Strong retail reach MOFSL has a strong retail presence and is expected to actively expand it further by adding 300 branches by FY09E. The companys retail customer base is estimated to grow significantly with better volumes aided by its focus on online trading through strategic alliance with SBI and others. Besides, with its established presence in retail equity business, it can become a strong distribution play. Steady institutional equity business MOFSL has empanelled itself with ~250 clients, including over 165 FIIs. We expect the company to sustain growth in its institutional business, with greater focus on overseas investors by leveraging its research capabilities and increased focus on derivatives business. Diversification into stable fee-based business MOFSL has recently de-risked its business model, earlier dominated by transaction-based broking income, by diversifying into more stable fee-based revenues through investment banking activities, venture capital management, and distribution of third-party products. Margin funding A weak link being addressed Based on its risk-averse approach and lower capital base, the company has pegged its reliance on margin financing with book size of merely INR 880 mn; income from margin financing contributes less than 3% to total revenues. We believe capital raising will help MOFSL increase margin funding exposure by ~INR 1.1 bn. This will boost the companys trading volumes indirectly, shielding it against fierce price wars, going forward. Outlook and valuations At the upper end of the offer price, MOFSL will trade at 27x and 19x FY07 and FY08E earnings respectively. We expect the company to grow its revenues by 40% and net profit by 71% in FY08E. We are positive on the stock, given its established brand, experienced management, strong retail distribution franchise, sustained growth in IE and growing investment banking business.
Financials Year to March
Share Holding Pattern Post IPO (%) Promoter Non-Promoter : : 70.4 29.6 Market Data 52-week range (INR) Post IPO share (mn) M cap (INR bn/USD mn) : : : NA 28.4 23.4 / 563.9 NA Reuters Bloomberg : : NA NA Kunal Shah +91-22-4009 4532 kunal.shah@edelcap.com Vishal Goyal, CFA +91-22-2286 4370 vishal.goyal@edelcap.com

Avg. Daily Vol. BSE/NSE (000) :

FY06

FY07

FY08E

Revenues (INR mn)

2,725 610 217 3.8 8.4 3.4

3,791

5,325

Revenue growth (%)

PAT (INR mn)

39.1
684

40.5
1,172

PAT growth (%)

EPS (INR) P/E (x) P/B (x) Price / Revenues (x)
Valuations at the upper end of the IPO - INR 825

12.2
30 27.2 6.4 5.5

71.2
43 19.1 3.4 4.4

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Motilal Oswal Financial Services

Investment Rationale
Well-equipped to leverage growing penetration in financial services Factors such as Indias macro economic and demographic profile, key role of financial services sector in the countrys growth story, per capital GDP crossing INR 37,000 mark, savings rate inching up, 60% of population aged below 35 years, growing high and upper-middle income group, and structural reforms will lead to broader and deeper penetration of equity and equitylinked products. MOFSL, with its established presence in the domestic broking industry, experienced top management, and large and diversified network, is well-equipped to leverage the growing penetration in the financial services space. Besides, by virtue of its established footing in retail and IE businesses, the company has the potential to become a strong distribution play going forward. Retail-reach amongst the strongest; to focus on online trading MOFSL has one of the largest distribution networks in the retail broking space, spanning 377 cities and towns through 1,200 business locations. Currently, the company has ~240,000 registered customer and over 180,000 DP accounts. It owns and operates in ~33% of its business location, with the rest being operated through business associates on a revenue sharing basis. The company is continuously improving its market share in cash and derivative equity segments, witnessing a rapid growth in average daily trading volumes over the past few years. The company will be active in expanding its retail branch presence by ~300 branches by FY09E and consequently expect its customer base to grow. The company has however lagged behind its peers such as ICICI Securities, Indiabulls, and India Infoline in online trading segment; currently, only ~8% of its customers operate through its online trading platform. We expect the company to aggressively focus on online trading, which will give it significant scale advantage of higher volumes through lower operating cost. Towards this, MOFSL has already entered into a strategic tie-up with SBI, which allows SBIs registered customers to utilise MOFSLs online trading facility. Further, the company has received a letter of intent from another bank to provide similar facilities. Table 1: Key parameters of leading brokers for FY07
Average daily trading volumes Derivatives Cash (INR bn) (INR bn) 6.0 11.1 36.2 30.5 8.5 20.0 4.0 Market share (%) Cash Derivatives 5.2 3.7 9.0 7.5 2.4 4.9 1.0 Branches 1,160 813 400 560 2,240 Customer base 243,000 320,000 150,000 75,000

Motilal Oswal Kotak Securities Indiabulls India Infoline ICICI Securities Reliance Money

Source: Company, Edelweiss research

Stable institutional equity business The company has invested in a well-respected equity research desk and has built up a strong sales team to market its thoroughly researched products. On the institutional side, the company has empanelled itself with over 250 clients, including over 165 FIIs. We expect MOFSL to augment traction in its institutional business with a greater focus on overseas investors, by leveraging its research capabilities and increased focus on derivatives business.
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Motilal Oswal Financial Services

Diversification into fee and fund-based income streams MOFSL has recently de-risked its business model (earlier dominated by transaction-based broking income that is volatile to stock market gyrations) by diversifying into more stable fee and fund-based revenues through investment banking activities and venture capital management. In the first year of its investment banking operations, the company has already closed 14 transactions, generating revenues of INR 267 mn, and has a strong pipeline of 30 mandates on hand. It is also likely to expand its current investment banking team of 18 experienced professionals. Motilal Oswal Venture Capital (MOVC) is planning to close its first fund India Business Excellence Fund this September with a target of raising USD 100 mn. As of January 2007, the fund has received commitment of USD 43 mn. MOVC will act as the investment manager for a defined fee and will have performance-based profit share. Motilal Oswal Securities is also re-orienting itself as a broking-cum-distribution house, acting as a third party distributor for mutual funds, IPOs, and FPOs, and is evaluating an option to distribute insurance and other products. This will serve as a tool for asset retention, customer ownership, and creating one-stop financial services shop. Based on the companys branch network, superior research, established corporate relationships, and strong institutional and retail clientele, we expect it to effectively de-risk its transaction-based business model. Table 2: Contribution of broking and interest income to total income
Revenues (INR mn) Motilal Oswal Kotak Securities Indiabulls# India Infoline ICICI Securities FY06 2,725 6,207 6,132 2,181 713 FY07 3,791 8,339 12,444 4,257 4,379 Net profit (INR mn) Brokerage income / total income (%) FY06 FY07 610 2,155 2,534 492 211 712 2,557 4,434 756 626 81.2 61.1 32.5 54.3 84 Margin funding income / Total income (%) 2.8 15.2 12.3 6.6 -

Source: Company, Edelweiss research

# Revenues includes consumer financing income as well

Margin funding A weak link being addressed Based on its risk-averse approach and lower capital base, MOFSL has pegged its reliance on margin financing to attract clients and increase trading volumes. Compared with its peers, particularly Indiabulls, MOFSL has a relatively lower margin funding book of INR 880 mn; margin funding currently contributes less than 3% to the total revenues. We believe the capital raising will help MOFSL to increase margin funding exposure by ~INR 1.1 bn. This is likely to boost the companys trading volumes indirectly, shielding it against fierce price wars going forward.
Table 3: Margin funding income and book size of leading brokers

Motilal Oswal Kotak Securities Indiabulls India Infoline

Revenues (INR mn) Margin funding income / Total income (%) FY07 3,791 2.8 8,339 15.2 12,444 12.3 4,257 6.6

Margin funding book size (INR mn) 880 ~12000 ~3000

Source: Company, Edelweiss research

Motilal Oswal Financial Services

Table 4: Issue details

At lower band Issue size (# of shares in mn) Post issue number of shares (mn) Dilution (%) Price Band (INR) Proceeds to be raised (INR mn) Market cap (INR bn) Networth (pre issue) (INR mn) Networth (post issues) (INR mn) Revenues FY07 (INR mn) PAT FY07 (INR mn)
Source: Company

725 2,162 20.6 3,332 5,494 3,791 684

At upper band 3.0 28.4 10.5 825 2,461 23.4 3,332 5,792 3,791 684

The current IPO will see the company invest approximately INR 1.1 bn for funding its margin business. Moreover, the company will also focus on increasing its branch network presence by investing INR 350 mn over the next two years and will utilise INR 300 mn for working capital requirement of Motilal Oswal Securities Ltd (MOSL). The remaining amount would be invested in technology and commodity businesses.

Motilal Oswal Financial Services

Business Overview
Businesses Equity broking Current status Derivatives - avg daily trading volume: INR 11 bn; Market Share : 3.7% Cash - avg daily trading volume: INR 6 bn; Market Share : 5.1% Key Features Blended commission rates (cash+derivative) of 0.072% in FY07 Equity broking and related income contributed 81% in FY07 Growth Profile Average commission rates expected to remain steady at current levels supported by its strong research quality, advice and superior execution To derisk its business model by venturing into more stable fee and fund based revenues; lower dependance on volatile stream of broking revenues

25 research analysts covering 221 companies in 26 sectors

- Institutional Segment

Contributing ~30% to equity broking Income:

Empanelled with 251 institutional clients; including 165 FIIs

We expect continued traction in this business with more focus on overseas investors, leveraging on research capability and focusing more on derivatives business

High quality research and experienced sales team

- Retail Segment

238,421 registered retail equity clients (159,091 in March 2006) Constitutes ~70% of equity broking Income: CAGR of ~150% in D P accounts

Largest and diversed distribution network spreaded across 1200 business locations in 377 citiies and towns Approximately 2/3rd of its network is done with business associates Limited online utilisation - ~8% of customers Significant investments made on employee costs. 9 Analysts covering 26 commodities

We expect customer base to grow with increase in branch presence Strategic alliance with SBI to offer online brokerage service to SBI's retail banking client Expand its distribution network further and focus on wealth management solutions Structural changes, growing internationalization and trading in niche products to support exponential growth in commodities trading in India We expect revenues from this segment to grow by ~200%from FY07-FY08E

Commodities

4,718 registered commodity broking clients (1,536 in March 2006) Generated revenues of INR 54 mn; less than 2% of the total income

PMS

Manages INR 5 bn No of Clients : 1541

Ten fold growth in 3 years but has declined from last year Has 4 schemes on profit sharing basis Closed 14 transactions till date Experienced investment banking team comprising 18 professionals

We expect AUM's to grow by ~25% by FY08E

Investment Banking

Commenced operations in May 06

Strong pipeline of 30 mandated in hands Will leverage on its institutional clients and corporate relationship to grow this business Will earn fixed management fee of 2% and variable fee linked to the performance of the fund Huge option value attached in performance fee

Venture capital

Launched India Excellence fund in April 06 Targeting USD 100 mn; Committed by January 07 - USD 42 mn

Expected closure of the fund will be this Sept, 2007 MOVC will manage and advice the fund and its own investment will be capped at 10% of AUM or INR 10 mn Typical investment size of USD 3-7 mn in ~15-20 companies

Margin Financing

Relatively smaller margin funding book size of ~INR 880 mn Contributes ~3% to the total income

Lower capital base and risk averse approach pegged the growth of margin funding

Capital raising to fund INR 1.1 bn and increased client base to support growth in margin funding book Interest income to aid topline and profitability growth Margin funding to boost its trading volume indirectly; and act as a shield against the fierce price war

Third party product distribution

Distribution of third party products particularly mutual funds, IPO and FPO's

Leverage on wide customer base and diversified network to grow this fee based income stream

To diversify product offerings to insurance as well

Source: Company, Edelweiss research

Motilal Oswal Financial Services

Valuations
At the upper end of the offer price, MOFSL will trade at 27x FY07 earnings and 19x FY08E earnings compared with 38x FY07 and 24x FY08E earnings multiple for Indian Infoline and 21x FY07 and 14x FY08E earnings for Indiabulls. We have seen India Infoline and Indiabulls correcting by 23% and 17% respectively in the past one week and MOFSLs listing gains will depend on the prevailing market conditions at the time of listing. However, from a one-year perspective, we are positive on the stock, given its broader penetration in the financial services space, established brand, strong retail franchise steady institutional business, and incremental growth flowing in from investment banking, venture capital, and distribution businesses. We expect MOFSL to grow its revenues 40% in FY08E. With better margins, net profits are also likely to grow 71%. These significant upsides to the topline and bottomline will be driven by: Sustained growth in retail and institutional businesses; equity brokerage income to grow by 29% in FY08E Ability to leverage network to cross-sell and up-sell fee-based products. Increasing traction in investment banking on the back of research strength and institutional and corporate relationships and advisory fee to grow by 75% in FY08E Efficient venture capital fund management that will offer stable revenues of 2% on fund size of USD 100 mn. Table 5: Relative valuation
Market cap Price / earnings (x) Price / revenues (x) Price / book (x) (INR bn) FY07 FY08E FY07 FY08E FY07 FY08E Motilal Oswal (at upper band) 23.4 27.2 19.5 5.5 4.4 4.0 3.4 Indiabulls 103.1 21.2 13.9 6.8 5.1 3.9 2.7 India Infoline 28.8 38.0 24.6 6.7 4.2 8.9 6.6
Source: Company, Edelweiss research *Indiabulls and India Infoline estimates are based on consensus (Bloomberg)

Motilal Oswal Financial Services

Key Risks
MOFSLs businesses are highly dependant on the capital market conditions. Hence, any unfavourable development in the markets may hamper our growth assumptions and consequently impact valuations negatively. Brokerage income will continue to dominate its revenue stream and earnings may remain volatile depending on conditions in equity markets. Intense competitive pressures in any business segment could affect the expected market share and margins.

Motilal Oswal Financial Services

Company Description
Motilal Oswal Financial Services Ltd (MOFSL) is a leading NBFC offering a range of financial products and services to its institutional and retail clients through its four subsidiaries. Since its inception in the mid-90s, the company has focused its service offering in retail wealth management and institutional broking. The company is run by well-experienced top management - Mr. Motilal Oswal and Mr. Raamdeo Agrawal, co-promoters of MOFSL, have been in the financial services industry for over two decades. Over the past one year, the company has diversified itself into stable fee-based investment banking and venture capital management company. Table 6: Products offered through different business streams of MOSL
Business stream Retail Wealth Management Primary products and services Equity (cash and derivatives) and commodity broking Portfolio management services Distribution of third party products Financing Depository services Insitutional Broking Equity (cash and derivatives) Advisory Capital raising Financial advisory Other investment banking products and services Private Equity investment management and advisory

Investment Banking

Venture capital management

Source: Company

Table 7: Key subsidiaries

Subsidiary company Motilal Oswal Securities Ltd (MOSL) Motilal Oswal Commoditieis Brokers Ltd (MOCB) Motilal Oswal Venture Capital Advisors Private Ltd (MOVC) Motilal Oswal Investment Advisors Private Ltd (MOIA)
Source: Company

MOFSL shareholding (%) 100 98 100 75

The company has a well-spread branch network with presence in over 377 cities and towns through its 1200 business locations. The company believes in building successful network through self, franchisee, and online models. Of the 1200 business locations, the company owns ~400. It also has an alliance with SBI, which allows SBIs registered customers to access MOFSLs online trading platform. Commodities broking is a relatively smaller unit of the company, contributing less than 2% of the total income. Third party product distribution, venture capital, and investment banking are among the key areas into which the company has diversified recently to de-risk its revenue stream that was until then concentrated on equity (cash and derivatives) broking. MOFSLs broking revenues from MOSL accounted for above 80% of total income in FY07. The companys adjusted PAT grew 17% for FY07 to INR 712 mn, while total income grew 39% to INR 3.8 bn.

Motilal Oswal Financial Services

Motilal Oswal Securities Ltd Motilal Oswal Securities Ltd (MOSL) is the securities subsidiary arm of MOFSL and offers equity broking through its cash, derivatives, PMS, and depository services for its retail and institutional clients. Its client-base servicing is amongst the largest in India, with more than 0.24 mn clients across 1,200 business locations. MOSLs retail division contributes more than two-thirds to the broking revenues; the remaining broking income comes through provision of cash and derivatives services to institutional clients. The company has empanelled itself with over 251 institutions, of which, more than 165 clients are FIIs. The company has been building a reputation focusing strongly on research desk, covering 26 sectors with 221 companies through a 25-member team. Fig. 1: Business structure of MOSL
MOSL

Retail, 243,139 customers

Institutional

Own branches ~400 branches

Franchisee

Online platform

FII (165 clients)

Domestic (85 clients)

~800 branches

~ 8% of its customer base, alliance with SBI

Source: Company

The company had a marginal market share of 1% in the cash market and 0.5% in the derivatives segment in FY03. Since then, the company has consistently focused in increasing its market share in these segments and currently has market share of 5% in the cash market and 3.7% in the derivatives market. The company has daily trading volumes of ~INR 6 bn in the cash market and ~INR 11 bn in the derivatives segment. Chart 1: Market share in trading volumes of MOSL in the past five years
6 Cash Market Share DerivativesMarket Share 5 4 3 2 1 FY03
Source: Company

FY04

FY05

FY06

FY07

(%)

Motilal Oswal Financial Services

MOSL derives its income mainly from equity brokerage. However, over the past few years, the company is focused on de-risking its revenue mix from equity broking to value-added fee-based portfolio management services. It currently manages INR 5,088 mn under the PMS portfolio with 1,541 clients. We estimate the companys funds managed under PMS to increase at 25% in FY08E. Apart from this, the company generates fee on charges of its depository accounts, research sold to clients, and treasury income. Treasury income contributes less than 5% to MOSLs total income. The company has also started distributing third party products, which includes mutual funds (current AUM mobilised is ~INR 5 bn), IPOs, and FPOs. Going forward, the company plans to add insurance distribution to its product portfolio. Chart 2: Performance of MOSL shows stable margins with increase of net profits
50 40 30 (%) 20 10 FY04 Adjusted PAT (RHS) PBT margin (LHS)
Source: Company

6,000 4,800 3,600 2,400 1,200 FY05 FY06 FY07 Operating margin (LHS) PMS - AUM (RHS) PAT margin (LHS) (INR mn)

Motilal Oswal Commodity Brokers Pvt Ltd. MOFSL conducts commodities brokerage business through its subsidiary Motilal Oswal Commodity Brokers Pvt Ltd.(MOCB). This division contributes less than 2% of total income of the group and reported a marginal loss of INR 0.8 mn in FY07. The company has made investments in the research team in FY07 and currently has 9 members tracking 3 sectors and 26 commodities. The company has over 4,718 registered clients. We expect this division to generate a total income growth of over 200% for FY08 on a lower base and inexpensive proposition to leverage from existing customers.

Motilal Oswal Venture Capital Advisors Pvt. Ltd Motilal Oswal Venture Capital Advisors Pvt. Ltd (MOVC) was incorporated last April to act as an investment manager and advisor to private equity funds. In FY07, MOVC launched, India Business Excellence Fund, a small private equity fund of USD 100 mn, which is expected to close in September 2007. MOVC would invest 10% of the fund size with a maximum investment of USD 10 mn. This fund would invest in approximately 15-20 small and medium enterprises with an average investment of USD 3-7 mn. As of January 2007, the fund has received commitments for USD 43 mn. Entry into this segment of the financial space complements MOSLs strengths and will enable MOVC earn a fixed management fee and variable fee (carry), linked to the performance of the fund.

10

Motilal Oswal Financial Services

Motilal Oswal Investment Advisors Private Ltd Motilal Oswal Investment Advisors Private Ltd (MOIA) is the investment banking subsidiary of MOFSL. It was incorporated in May 2006 with a primary objective of leveraging its research desk and relationship with institutional clients to generate fee-based income. MOFSL has a 75% stake in this company with an option to buyback from the third year in four tranches. It offers financial advisory services in mergers and acquisitions, divestitures, restructuring, and spin-offs. It also offers services in raising capital through equity issues, follow-on issues, and QIPs. The company is focused on building this as a key revenue contributor to overall revenues of MOFSL through its 18 member team. As of March 31, 2007, the company closed 14 issues and has over 30 mandates in hand. The company has generated revenues of INR 266 mn, ~7% of total income in FY07. We believe this unit can scale up significantly in the next few years, given MOSLs strong research capabilities and established relationships with institutional clients. Some of the companys recently concluded deals are as follows: Table 8: Recently concluded deals of MOVC and MOIA
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Company Zylog systems Zylog systems Great Offshore Ltd OM Logistics Ltd Escorts Construction Equipment Ltd Kalindee Rail Nirman (Engineers)Ltd Aurobindo Pharma Ltd SGC Bearings Shree Renuka Sugars Ltd Shree Renuka Sugars Ltd DCB Aban Shri Ramakrishna Mills Ltd Ind-Bharat Power Infra Pvt Ltd Jupiter Bioscience Ltd Sayaji hotels Sayaji hotels Spanco Telesystems Time Technoplast Ltd Total Nature of transaction IPO Pvt . Placement Sponsor financing Acquisition financing Private placement Private placement Acquisition financing Structured financing Private placement Asset financing IPO Acquisition financing Venture capital investment Private placement QIP FCCB Private placement Private placement Venture capital investment INR mn 1,200 400 4,000 600 697 492 410 300 1,000 420 1,860 22,140 400 2,900 1,000 308 103 1,230 195 39,654

Source: Company

USD converted at INR 41/ $

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Motilal Oswal Financial Services

Financials
MOFSL registered a 39% growth in its total revenues, to INR 3.6 bn for FY07, driven by 29% growth in brokerage income, advisory fees of INR 267 mn and margin funding interest of INR 102 mn. Brokerage income continues to dominate its revenues, contributing more than 80% to the revenues. Operating margins were sustained at 36% and PAT grew 17% to INR 712 mn as acquisition cost of INR 42 mn for Mani Stockbrokers Ltd. and Peninsular Capital Markets was booked during FY07. Broking income gaining market share; blended commission rates declined to 7-8bps MOSL contributes more than 90% to MOFSLs total income. In terms of net profit contribution before adjusting for extra-ordinaries, MOSL contributed 81% for FY07. Brokerage income grew significantly at over 70% CAGR, to INR 3.07 bn, over FY04-07. There has however been a decline in average brokerage rates, mainly due to higher competition and higher volumes in the low-margin derivative segment. However, with a blended margin brokerage rate at 7bps, we expect average broking rates for MOSL to stabilise at the current levels with limited downside. We expect the securities broking income to grow ~30% to INR 3.9 bn in FY08E. The commodities broking business is still at a very nascent stage and contributes less than 2% to the total revenues. However, we expect commodities broking income to increase by more than 200% for FY08 to ~INR 160 mn (albeit on a lower base). With the focus on de-risking its business model in favour of more stable fee-based revenues, we see the contribution of transaction-based broking revenue in the companys total revenue mix falling further to 76% next year. Chart 3: Daily trading volumes in cash and derivative segment shows increasing trend
12,000 9,600 7,200 (Mn) 4,800 2,400 FY0303 Cash segment
Source: Company

0.15 0.12 0.09 0.06 0.03 FY04 FY05 FY06 FY07 Avg Brokerage rates (RHS) Derivative segment (%)

Traction in advisory fees; PMS growth to continue The advisory fees from investment banking contributed ~7% to total income, as it closed 14 investment banking transactions since its inception in May 2006. Given the strong visibility of 30 mandates in hand, we should see the fees increase by ~75% to INR 460 mn or 9% of total income. We see the PMS AUM to grow 25% for FY08E to INR 6 bn. The venture capital fund management will also generate fixed asset management fee of 2% of the fund size of USD 100 mn, post closure in September 2007.

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Motilal Oswal Financial Services

Margin funding contribution to scale up with increased volumes Margin funding generated interest income of INR 107 mn for FY07 with an exposure of INR 883 mn. The company intends to increase revenues from this segment with an additional INR 1.1 bn contribution towards margin lending business. We see this business contribution to total income at 4% next year, to INR ~200 mn. Brokerage sharing with associates to increase in line with growth As nearly two-third of MOSLs branches are operated through business associates, where MOSL has a revenue sharing agreement, we see the trend of sharing ~65% of retail brokerage income with associates to continue during the current year. MOSL will add another 300 business locations with the current IPO over the next two years. As per our current estimates, we see MOSL adding more than 50 owned branches and contributing towards investment on franchisees. The current outflow of broking revenues towards franchisees will be in-line with growth estimates of 25% for FY08. Chart 4: Brokerage sharing with business associates
875 Brokerage sharing with intermediaries Sharing as % of income 700 80 100

(INR mn)

525

60 (%)

350

40

175

20

FY03 FY04 FY05 FY06 FY07

Source: Company, Edelweiss research

Employee cost to remain slightly ahead of growth Employee expenditure for MOSL, where the company has deployed most of its human resources has increased at 90% CAGR in the past three years. However, the cost has remained between 23-25% of total income in this period. For FY08E, we expect the cost to grow 76% with an increase in the present employee base of 1,964.

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Motilal Oswal Financial Services

Chart 5: Average salary of MOFSL shows increasing trend

2,500 No. of Employees 2,000 Average salary 0.22 0.25

1,000

0.16

500

0.13

FY04
Source: Company, Edelweiss research

0.10 FY05 FY06 FY07

14

(INR mn)

1,500 (Nos.)

0.19

Motilal Oswal Financial Services

Financial Statements
Income statement Year to March Operating income - Equity broking income - Commodities broking income - Advisory income - Venture capital - Others Total operating income - Direct cost - Employee cost - Administrative and other expenses Total operating expenses Operating profit Interest and other financing charges Depreciation Others PBT (INR mn) FY08E 3,901 158 466 42 758 5,325 1,264 1,521 599 3,384 1,941 43 96 1,803 595 1,208 1,208 36 1,172 43

FY06 2,365 17 343 2,725 788 631 308 1,728 997 32 55 910 300 610 610 0 610 217

FY07 3,030 49 267 446 3,791 948 1,013 463 2,424 1,367 39 110 54 1,164 410 754 42 712 27 684 30

Taxes
PAT Extraordinaries Reported PAT Minority interest PAT after minoirty interest Diluted EPS (INR) Growth ratios (%) Year to March Revenue growth Opex growth Operating profit growth PBT growth PAT growth Operating ratios (%) Year to March Broking income / Total income Direct cost / Total income Employee cost / Total income Other administrative cost / Total income Operating margin PBT margin PAT margin

FY07 39.1 40.3 37.1 27.9 12.2

FY08E 40.5 39.6 42.0 54.8 71.2

FY06 86.8 28.9 23.2 11.3 36.6 33.4 22.4

FY07 79.9 25.0 26.7 12.2 36.1 30.7 18.1

FY08E 73.3 23.7 28.6 11.2 36.5 33.8 22.0

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Motilal Oswal Financial Services

Balance sheet Year to March Liabilities Equity capital Reserves

(INR mn)
FY06 FY07 FY08E

Networth Loan funds and minority interest Total

Assets

56 1,052 1,108 23 1,131 519 79 1,344 1,238 1,214 30 2,611 668 533 1,131

127 3,205 3,332 31 3,362 685 856 2,808 2,165 2,410 81 4,498 1,130 1,821 3,362

142 6,820 6,962 37 6,999 725 1,262 3,743 6,511 1,742 96 5,660 1,420 5,012 6,999

Fixed assets Investments Current assets - Sudry debtors - Cash and bank balances - Loans and advances - Others Current Liabilities - Trade creditors - Provisions Net current assets Total
Valuation metrics (%) Year to March EPS (INR)

FY06

FY07

FY08E

217.1 98.6 3.8 8.4 3.4

EPS growth (%)

Book value per share (INR)

P/E (x) P/B (x) Price / Revenues (x)

30.3 (86.0) 129.9 27.2 6.4 5.5

43.1 42.3 243.8 19.1 3.4 4.4

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Motilal Oswal Financial Services

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai 400 021, Board: (91-22) 2286 4400, Email: research@edelcap.com
Naresh Kothari Vikas Khemani Shriram Iyer Co-Head Institutional Equities Co-Head Institutional Equities Head Research naresh.kothari@edelcap.com vikas.khemani@edelcap.com shriram.iyer@edelcap.com +91 22 2286 4246 +91 22 2286 4206 +91 22 2286 4256

Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services:

Allahabad Bank, Centurion Bank of Punjab, Federal Bank, HDFC Bank, ICICI Bank, IOB, Karnataka Bank, OBC, SBI, UTI Bank, Yes Bank, IDFC, HDFC, LIC Housing Finance, Power Finance Corporation, Reliance Capital and SREI Infrastructure Finance

Recent Research
Date
14-Aug-07 1-Aug-07

Report
BFSI Update HDFC

Title
The regulator, the regulation and the regulated Robust growth; stable margins;

Price (INR)

Recos

1,941

Buy

Result Update
1-Aug-07 1-Aug-07 OBC Federal Bank Lower MTM helps profitability; Result Update Core business on track; Result Update 221 350 Accumulate Buy

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Buy
Rating Distribution* 92

Rating Interpretation
Rating Expected to
appreciate more than 20% over a 12-month period appreciate up to 20% over a 12-month period depreciate up to 10% over a 12-month period depreciate more than 10% over a 12-month period

Accumulate
43

Reduce
24

Sell
6

Total
176

Buy Accumulate

* 8 stocks under review / 3 rating withheld

> 50bn
Market Cap (INR) 75

Between 10bn and 50 bn

66

< 10bn
35

Reduce Sell

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