Rating Rationale

Strengths:
* Expectation of strong support from parent
MOHFL is the housing finance arm of MOFSL. The Motilal Oswal group holds 96.6% stake in the company through MOFSL and its subsidiaries. The parent is one of India's leading providers of capital market-related services and, along with its subsidiaries, is engaged in retail and institutional broking, asset management, wealth management, loans against shares, margin financing, private equity, and investment banking. At a consolidated level, MOFSL has healthy capitalisation with a large absolute networth of Rs 3,123 crore and robust gearing of 1.5 times as on March 31, 2020.

CRISIL believes MOHFL is strategically important to MOFSL because parent has entered the housing finance segment in order to diversify revenue profile and mitigate the cyclicality inherent in capital-market-related businesses. Furthermore, given that most of parent's businesses are fee-based and have limited requirement for incremental capital, the housing finance business provides an avenue to deploy capital for long-term returns. CRISIL believes that MOHFL, being strategically important to MOFSL, will receive strong support from its parent. The Motilal Oswal group has infused Rs 850 crore in MOHFL to date and is expected to continue to support the company's growth plans. The promoters of MOFSL are on the board of directors of MOHFL and the latter is introduced as a Motilal Oswal group company in all its correspondence and collateral. CRISIL believes that this increases MOFSL's moral obligation to support MOHFL.

* Adequate resource profile
MOHFL benefits from its association with MOFSL for raising resources. As on March 31, 2020, outstanding borrowing was Rs 2955 crore. Of this, 48% comprised of term loans and cash credit facilities, while the rest is non-convertible debentures. The company's weighted average cost of borrowing was at 10.2% was in line with that of peers.

* Adequate capitalisation
With Tier-I capital adequacy ratio (CAR) and overall CAR of 46.0% and 48.0%, respectively, as on March 31, 2020 (27.5% and 29.3%, respectively, as on March 31, 2019), the company is adequately capitalised. Since inception, the Motilal Oswal group has infused Rs 850 crore as equity, which also includes Rs 200 crore infused in fiscal 2019. Absolute networth and gearing stood at Rs 867 crore and 3.4 times, respectively, as on March 31, 2020 (Rs 827 crore and 4.3 times, respectively, as on March 31, 2019). Gearing is expected to remain below 7-8 times on a steady state basis. MOHFL plans to maintain its capital adequacy well above the norms prescribed by the regulator. Parent is likely to provide required capital to support its subsidiary's growth and also cover for asset side risks over the medium term.

Weakness:
* Weak asset quality, nevertheless, corrective measures being taken
In fiscal 2018 and 2019, the company faced asset quality challenges due to seasoning of the book, impact of external shocks on the economy, and lack of adequate collection and recovery processes and bandwidth within the company. Its gross non-performing assets (GNPAs) increased to 9.3% as on March 31, 2019 from 4.5% as on March 31 2018 and 0.6% as on March 31, 2017.

However, in the last 24-30 months, MOHFL took several corrective measures, including increase in management depth and experience, strengthening up of collections and recovery apparatus, and enhancing credit appraisal and risk monitoring systems. As a part of its strategy to clean up the book, it sold GNPAs worth ~Rs 595 crore in the fiscal 2020 to an asset reconstruction company, which brought down GNPAs to 1.8% as on March 31, 2020.

MOHFL had several senior personnel hires over the past couple of years, adding to depth of management and supporting execution of long term growth strategy. The company is also increasingly focusing on expanding its credit and risk and collections processes and systems to address its asset quality issues. Additionally, MOHFL has made significant investment in technologies, processes and people to fill the critical gaps at operations levels to support and enhance business scale up. These measures have reduced slippages to Rs 52 crore for fiscal 2020 from Rs 601 crore in the previous fiscal. Also, recoveries have picked up in last fiscal following concerted efforts.

In fiscal 2020, loan book declined by 17% to Rs 3,628 crore as on March 31, 2020, from Rs 4,360 crore as on March 31, 2019, because of shift in focus towards collections and sale of assets to an ARC. The company intends to grow its loan book prudently over the medium term, while increasing geographical presence.

Nevertheless, given the current challenging macro-economic environment, the ability of the management to improve asset quality will remain a key monitorable. The company also needs to scale up operations in a profitable manner, managing not only credit costs but also borrowing costs and operating expenses.