COMPANY INSIGHT MOFS IN EQUITY April 17, 2015 The …reports.ambitcapital.com/reports/Ambit_MotilalOswal... · 2015-04-23 · strength in its target segment, ... Motilal Oswal BUY

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The party has just begun…

With retail broking getting a further boost from savings moving away from physical assets towards equities; and MOFS’s new businesses like asset management and housing finance scaling up, we expect MOFS to deliver 52% earnings growth over FY15-17E with ROE of 20% in FY17. Whilst the share price has tripled over the last 18 months, robust earnings growth could further re-rate the stock. We retain our BUY stance on the stock with a revised SOTP-based target price of `373/share, implying a reasonable 16x FY17E P/E.

Competitive position: STRONG Changes to this position: POSITIVE

Retail broking not yet in full throttle Retail participation should improve, as the following macro tailwinds bite: (i) Black money moving away from physical savings; (ii) Economic recovery leading to higher returns in equities; (iii) Regulatory activism ensuring a level-playing field for retail investors; and (iv) Increasing financial literacy pulling in more investors. MOFS would be a key beneficiary of such trends due to its: (i) Continued investments in distribution and brand even in the downturn; and (ii) Consolidation amongst smaller retail brokers. We expect 29% brokerage revenue CAGR over FY15-17E.

Asset management fees would provide an uptick Our bottom-up analysis indicates that MOFS could earn carry fees of ~`1.1bn over FY16/17, as its India Business Excellence Fund winds down with an IRR of ~15% vs the hurdle of 10%. However, in the long term, we expect the current loss-making AMC business to contribute meaningfully to profitability, as its AUM scales up and the accounting effect of up-fronting of distribution fees wanes. We estimate 55% revenue CAGR in asset management fees over FY15-17E. ‘Aspire’ing to build a housing finance franchise Whilst MOFS’s housing finance venture, Aspire, might not enjoy any competitive strength in its target segment, we take comfort from the fact that: (i) an experienced CEO has been hired to run the business with a free hand; and (ii) the Aspire management is highly focused on cost management and fee income. Aspire could become a 17% RoE franchise, in line with is peers, as it could scale up to `30bn AUM by FY18E.

Valuations: Still some juice left Given that MOFS’s emerging businesses have markedly different cash flows and growth trajectories, we now ascribe an SOTP approach to value MOFS at `373/share. For the agency-based business, based on our FCFF valuation, we arrive at a valuation of `326/share, implying 17x FY17E EPS. For the capital-based business, Aspire Home Finance, based on our excess return valuation, we arrive at a valuation of `36/share, implying 1.4x FY17E P/B. Although the stock is trading at a ~50% premium to its cross-cycle P/E, we expect 21% upside.

COMPANY INSIGHT MOFS IN EQUITY April 17, 2015

Motilal OswalBUY

BFSI

Recommendation Mcap (bn): `43/US$0.7 3M ADV (mn): `54/US$0.9 CMP: `308 TP (12 mths): `373 Previous TP `270 Upside (%): 21

Flags Accounting: GREEN Predictability: AMBER Earnings Momentum: GREEN

Catalysts

Strong performance in asset

management and housing finance

business over FY16-FY17.

Increased retail participation in

equities over FY16-17.

Stock price performance

Source: Bloomberg, Ambit Capital research

Analyst Details

Aadesh Mehta, CFA +91 22 3043 3239 aadeshmehtaambitcapital.com

Pankaj Agarwal, CFA +91 22 3043 3206 [email protected]

Ravi Singh +91 22 3043 3181 [email protected]

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MOFS IN SENSEX

Summary financials

FY13 FY14 FY15E FY16E FY17E

Total Revenues (` mn) 4,681 4,654 7,190 9,568 11,977

Operating Profits (` mn) 1,696 1,394 2,334 3,475 4,687

Net Profits (` mn) 1,091 401 1,374 2,137 2,947

Diluted EPS (`) 7.6 3.0 9.9 16.0 23.0

RoA (%) 9.1 3.3 11.1 15.5 18.6

RoE (%) 9.2 3.4 11.2 16.3 20.4

P/E (x) 40.6 104.1 30.9 19.2 13.4

Source: Ambit Capital research

Motilal Oswal

April 17, 2015 Ambit Capital Pvt. Ltd. Page 2

Broking business yet to peak FY15 retail cash stockbroking volumes in India are still ~20% lower than their FY10 peak despite demat accounts and the Sensex growing by 30% and 60% respectively since then. Retail participation in broking volumes therefore still has room to grow. Retail participation should also improve, as the following macro tailwinds bite: (i) Black money moves away from physical savings to financial savings; (ii) Economic recovery leads to higher returns in equities; (iii) Regulatory activism ensures level-playing field for retail investors; and (iv) Increasing financial literacy draws more investors to stocks. MOFS would be a key beneficiary of such trends, given: (i) its continued investments in distribution and brand even in the downturn; and (ii) consolidation amongst the smaller retail brokers. We anticipate brokerage revenue CAGR of 25% over FY15-17E for MOFS.

Retail broking demonstrates robust performance With a pick-up in capital market activities, MOFS’s revenues have grown 52% YoY in 9MFY15. With operating leverage kicking in, operating profits have grown at a much faster pace of 64% YoY in 9MFY15. Stockbroking revenue growth of 65% YoY was the primary driver of a pick-up in MOFS’s profitability. We believe that the retail segment has driven MOFS’s growth in 9MFY15, given MOFS’s strong presence in retail broking and retail being the fastest-growing segment in the market recovery.

Exhibit 1: MOFS’s operating profit growth is driven by growth in brokerage…

` mn 9MFY14 9MFY15 Growth (%)

Total Revenues 3,413 5,178 52%

- Brokerage 2,141 3,533 65%

- Others 1,272 1,645 29%

Op. expense 2,419 3,550 47%

- Employee exp. 955 1,265 32%

- Operating cost 739 1,339 81%

- Admin exp. 725 946 30%

Operating profit 994 1,628 64%

Source: Company, Ambit Capital research

Exhibit 2: …driven primarily by system-wide growth in retail volumes

Source: BSE, NSE, Ambit Capital research

Going forward, we expect revenue CAGR of 25% over FY15-17E in stockbroking for MOFS due to more retail participation in equities; MOFS would leverage on this opportunity due to its strong distribution and branding.

Retail participation still much lower than historical levels Despite the sharp pick in the retail broking segment in FY15, data suggests that the retail participation in equity broking is still ~20% lower than its peak in FY10 despite:

i) The count of demat accounts going up by 31% over FY10-15: Retail ADVs per demat account currently at `8,000/account is still ~40% lower than the peak of `12,000/account in FY10.

ii) Sensex has grown 60% in value over FY10-15: Trading velocity of retail segment in the cash equities is still 50% off its peak in FY10. At 12bps currently, it is lower than the historical highs of 26bps in FY10.

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Retail Prop FII DII

YoY growth in cash ADVs (%) - 9M15 vs FY14

Motilal Oswal


Exhibit 3: Trading velocity in both the delivery segment and cash retail is much lower than the historical highs

Source: NSE, BSE, Ambit Capital research

Exhibit 4: Retail participation has been muted

Source: NSE, BSE, NSDL, Ambit Capital research; Note: *Only NSDL ACs have been considered to avoid double counting with CDSL

Drivers of retail participation in place Over the last 5-6 years, Indians have invested more of their savings in physical assets such as gold and real estate rather than in financial assets such as deposits, bonds and equities, which has resulted in financial savings as a percentage of domestic savings being at a decadal low.

Exhibit 5: Financial savings are at a decadal lows

Source: CEIC, Ambit Capital research

Muted returns and higher volatility in equities vs other asset classes during FY08-14 were one of the primary reasons behind Indians putting a lower amount of their savings into equities.

However, with fading returns in physical assets (gold and real estate) and equity markets rallying 24% in FY15, retail participation in equities increased significantly in FY15. We believe that more retail savings could move away from physical assets to financial savings like equities going forward due to the following long-term and medium-term underlying drivers:

(1) Black money moving away from physical assets Real estate has been one of the major asset classes where Indians have parked their savings over the last 5-6 years. With a lot of black money moving in the sector over this period, this asset class gave 18% annualised returns over FY10-14. Now with increased disincentives to operate with black money (owing to the passage of legislations by the Central Government to penalise the same in the FY16 Union

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Financial Savings as a percentage of domestic savings

Financial Savings as a % of domestic savings

Motilal Oswal


Budget) and the reduction in the size of the black economy (as the Modi-led administration breaks down the crony capitalist model in India), the preference for land as an asset class will decline significantly, thereby lowering real estate prices in India. Besides, continued outperformance of equity as compared to other asset classes would also result in higher allocation to equity.

Exhibit 6: Equities has outperformed various asset classes over FY14-15

Annual returns FY10 FY11 FY12 FY13 FY14 FY15

Real-estate 15% 18% 26% 20% 11% 11%

Gold 8% 26% 33% 7% -3% -7%

SBI FD-1yr 6% 8% 9% 9% 9% 9%

BSE Sensex 40% 10% -10% 8% 19% 24%


(2) Economic recovery leading to returns in equities Equities was one of the weakest-performing asset classes over FY08-14, as corporate earnings remained muted during this period of weak economic growth. Whilst the policy stance taken by the new Government might lead to some disturbances in the markets in the near term, our Strategy team believes that such measures are positive for the long-term growth of the economy and hence for corporate earnings (click here to read our 23rd March thematic, “Modi hits the ‘reset’ button”). Thus, the odds seem to be in favour of equities as an asset class outperforming real estate in the medium term. Data suggests that historically during periods of outperformance of equities, growth in retail participation has been very robust.

Exhibit 7: Equities outperformance has been preceded by a surge in retail participation

Particulars FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

BSE Sensex – YoY growth 25% -42% 40% 10% -10% 8% 19% 24%

Retail volumes – cash – YoY growth 81% -27% 54% -19% -30% -12% -3% 69%

Demat A/Cs – YoY growth

19% 4% 9% 9% 4% 5% 3% 7%

Trading Velocity - Retail cash (bps)

25 23 26 16 12 10 9 12


(3) Regulatory activism would encourage sustainable retail participation The capital market regulator, SEBI, has been very active recently in ensuring a level-playing field for retail investors vis-à-vis insiders and institutional investors. We believe such moves by the regulator should ensure a more sustainable participation by the retail investors in the long term, as the credibility of the stockmarket improves.

Exhibit 8: Regulatory activism has led to new regulations by the SEBI Measures by SEBI Impact on the retail investors

Recent regulatory developments

Companies Act 2013 Related party disclosures strengthening, enhanced disclosure requirements in terms of director report, annual report, resolution filings etc., provision of compulsory e-voting, more powers to RoC

Revision in Listing agreement Revised clause 49 i.e. corporate governance norms to provide enhanced disclosures and transparency, website disclosures

SEBI (Prohibition of Insider Trading) Regulations More disclosures, strengthening of regulatory provisions to govern people dealing with inside information and management of listed entity

SEBI (Research Analysts) regulations Regulations to govern people providing market analysis, stock idea, research including public appearances

SEBI (Investment Advisors) Regulations 2013 Governing people providing unregulated advisory services

SEBI (Procedure for Search & Seizure) regulations 2014 More investigative powers to SEBI

Security Law (Amendment) Act, 2014 SEBI was provided equal powers as required for any criminal proceedings

Proposed regulations

Discussion Paper on "Revisiting Capital raising process”. e-IPO process to use secondary market platform for public issue, fast track FPOs

Listing Obligations & Disclosures Regulations Revised disclosure requirements and obligations for listed entities to ensure information reaches the masses at the right time

Some other Financial sector reforms in budget Merger of SEBI and FMC, leading to one regulatory regime; this will have the measures like common KYC (Aadhar-based KYC).

Source: SEBI, Ambit Capital research

http://webambit.ambit.co/reports/Ambit_Economy&Strategy_Thematic_Resetbutton_23Mar2015.pdf

Motilal Oswal


Exhibit 9: Recently, the SEBI has initiated higher enforcements

Source: SEBI; Ambit Capital research; Note: Actions taken by SEBI include cancellation, suspension, warnings issued, prohibitive directions and adjudication orders passed.

(4) Increasing financial literacy results in greater retail participation With only around 2% of the population having demat accounts, the participation of Indian retail investors is the lowest amongst large economies. However, the number of demat accounts has been increasing driven by higher financial literacy initiatives by SEBI, NSE, BSE and stock-brokers. In fact, demat accounts were growing by ~4% YoY even when the markets were down and demat penetration has grown in India from 0.4% in FY04 to 1.8% in FY15. We believe that a pick-up in the IPO market in a big way would further increase penetration, as a robust IPO market serves as an entry point for many first-time retail investors.

Exhibit 10: Lower retail participation in the Indian stockmarkets

Demat accounts

(mn) Population

(mn) Demat/Population

(in %)

India 23.3 1,282 ~1.8%

China 125 1,330 9.4%

Russia 3 139 2.2%

South Korea 3.55 48 7.4%

UK 10 61 16.4%

USA 14.54 310 4.7%

Source: Nielsen India Investors Survey-2010, Ambit Capital research

Exhibit 11: Demat account penetration has grown over the past decade

Source: NSDL, Ambit Capital research

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Motilal Oswal


MOFS to be a key beneficiary of higher retail participation We reiterate that MOFS would be a key beneficiary of the improvement in retail participation in the equities segment driven by: (i) continued investments in distribution and brand even in the downturn; and (ii) consolidation amongst smaller retail brokers.

1) Continued investments in distribution and brand in the downturn

MOFS is the only major branch-driven broker that has broadly avoided downsizing its distribution channels during a period when its competitors were downsizing. Further, a lot of branding initiatives like the “Man from Motilal Oswal” and “Buy right, Sit tight” have established a high recall amongst the existing/prospective retail customer base, which should help it grow its client acquisition. All this has resulted in MOFS retaining its client market share over a difficult FY12-15, making it adequately positioned for the next spurt in retail participation.

Exhibit 12: MOFS has avoided downsizing its distribution channel…

Business locations FY12 9MFY15 CAGR

Indian Infoline* 3,000 2,700 -10%

MOFS 1,579 1,657 2%

Religare 2,006 1,520 -13%

Kotak Sec* 1,365 1,160 -15%

ICICI Sec* 1,120 1,100 -2%

Edelweiss 223 236 3%

HDFC Sec 184 200 4%

Emkay* 400 300 -13%

Source: Company, Ambit Capital research; Note: * Branch count is for FY14

Exhibit 13: … enabling it to expand its client market share

Source: Company, NSDL, Ambit Capital research; Note: *Only NSDL ACs have been considered to avoid double counting with CDSL

2) Consolidation amongst the smaller retail brokers

Indian retail broking has been witnessing consolidation over the last decade and we expect this trend to continue going forward due to the following reasons:

a) Scale is needed to be profitable: Falling commission rates (100bps a decade ago to ~5bps currently) and increasing client needs (research, margin funding and wealth management products etc) mean that scale is very important to run a successful retail broking business.

b) High capital requirements: Brokers are required to put up ~20% of trade value as margin with exchanges and they are required to fund these trades until they receive money from their clients. Thus, brokers need capital to expand their business. These capital requirements are likely to lead to consolidation.

c) “Execution only” traders moving online: Only a handful of brokers in India offer research-based servicing to their clients. Consequently, small retail brokers have focused only on the “execution only” category of customers without advisory-based relationships. However, the advent of online discount/flat-fee brokerages like RKSV and Zerodha amongst others has led to the “execution only” category of customers migrating away from brokers who do not have discount/flat-fee structure.

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MOFS's client market share

Volume market share of top stock brokers is increasing

Source: NSE

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Top 25 Brokers Others

Motilal Oswal


Diversifying revenue streams Historically, MOFS focused primarily on its brokerage business. However, this has resulted in volatility in the earnings profile historically (RoEs ranging from ~3% to ~30%).

Exhibit 14: Volatile RoEs and EPS growth for MOFS


With a liquidity of ~`7bn on its balance sheet and an aim to to optimise networth allocation of long term high ROE opportunities, the company is now trying to diversify to other related businesses. In this regard, the company is now focusing on its housing finance and asset management business.

Housing Finance: In FY15, the company started its housing finance subsidiary ‘Aspire’ with capital infusion of ~`1bn and hired top management team from a rival housing finance company.

Asset Management: The company has combined sponsorships of ~`6bn in its mutual fund products and private equity fund. The company is now focusing on new distribution channels to grow this business.

In the following sections of this note we have analysed how these two businesses are going to add to the bottom-line of MOFS.

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RoE EPS Growth (RHS)

Motilal Oswal


Asset management fees can provide uptick MOFS could earn carry fees of ~`1bn over FY16/17E, as its India Business Excellence Fund (IBEF) winds down with an IRR of ~15% vs the hurdle of 10%. Moreover, in the medium term, we expect the current loss-making AMC business to contribute meaningfully to profitability, as its AUM scales up and the accounting effect of up-fronting of distribution fees wanes. MOFS should be successful in scaling up its operations, as its AUM would grow due to: (i) strong distribution support; (ii) establishment of a strong track record; (iii) PMS gaining popularity as an asset class; and (iv) its immunity to the 1% cap on distribution fees. We estimate 55% revenue CAGR in this business over FY15-17E.

Carry fees on PE funds could be ~`1bn MOFS has `21.3bn of AUM under four different private equity schemes. Our bottom-up analysis reveals that MOFS could earn a significant carry fee on the closure of its `5.5bn India Business Excellence Fund. This is because we expect the fund to deliver an IRR of ~14-15% vs the fund hurdle rate of 10%. Our expectation of ~14-15% IRR is based on the estimated valuations of the PE’s portfolio companies based on various deals and media reports. We estimate that a ~15% IRR against a hurdle rate of 10% would result in an excess carry fee of ~`1.1bn, which could accrue in FY16/17.

Exhibit 15: MOFS’s private equity snapshot

Fund Vintage Capital raised

Capital returned

Current Balance

Current IRR Number of portfolio

companies

India Business Excellence Fund 2007 US$125mn

(`5.5bn) ~60%

US$75mn (`2.4bn)

~15% 13^

India Realty Excellence Fund 2009 `2.0bn ~78% `0.4bn ~10% 7#

India Business Excellence Fund-II 2012 `9.5bn 0.0% `9.5bn NA 4

India Realty Excellence Fund II 2013 `4.3bn* 0.0% `4.2bn* NA 2

Source: Company, Ambit Capital research; Note: ^ has partially exited 2 companies till 3QFY15; # has made full/partial exists from six investments; *Still in capital-raising mode

Exhibit 16: MOFS’s India Business Excellence Fund could earn ~14-15% IRR on its exits

Company Current Valuation

(` bn)* PE stake

Value of the stake (` bn)

AU Financiers (India) Private Ltd 20.0 32.0% 6.4

Parag Milk Foods Private Ltd 24.0 15%-20% 3.8

Mrs Bector Foods Specialities Ltd 8.0 20.0% 1.3

Minda Industries 8.9 8.6% 1.4

Time Technoplast 10.0 3.1% 0.3

Power Mech Projects 3.1 19.0% 0.7

IMP Powers 0.7 6.7% 0.0

Resurgere Mines & Minerals India 0.3 1.1% 0.0

InTarvo Technologies NA NA NA

Effort BPO NA NA NA

Dixon Technologies (India) Private Ltd. NA NA NA

GR Infra Projects NA NA NA

Electromech NA NA NA

Total 14.0

IRR (2008-2015) ~14-15%

Source: Ambit Capital research,* Media reports on valuation of deals in these companies and/or Ambit Estimates based on published financials of the companies.

Motilal Oswal


Exhibit 17: IRR of ~15% could result in `1bn of fees over FY16/17

Particulars ` mn

Aggregate value of portfolio companies over FY16/17 18,042

Hurdle return 12,365

Excess return 5,677

Carry Fee 1,135


Scaling up of AMC would drive long-term upside Up to FY14, MOFS’s asset management franchise was focusing primarily on ETFs and was struggling with profitability (loss in FY14 of `6mn). However, over FY15, MOFS’s mutual fund and PMS business has attracted strong inflows, with its inflow market share increasing from ~1% to ~1.8% over FY14-15. This is due to: (i) its change in focus towards actively managed funds; and (ii) focus on generating inflows from third party distributors like independent financial advisors and banks.

Exhibit 18: MOFS is increasing its market share in equity fund inflows…

Source: AMFI, Ambit Capital research; Note: * Adjusting for promoters’ contribution

Exhibit 19: … which has enabled MOFS to become among the top-15 equity asset managers in India

Rank AMC Company ` bn (Dec’14) 1 HDFC Mutual Fund 632 2 Reliance Mutual Fund 410 3 ICICI Prudential Mutual Fund 394 4 UTI Mutual Fund 320 5 Birla Sun Life Mutual Fund 224 6 Franklin Templeton Mutual Fund 207 7 SBI Mutual Fund 195 8 DSP BlackRock Mutual Fund 144 9 IDFC Mutual Fund 116

10 Sundaram Mutual Fund 82 11 L&T Mutual Fund 74 12 Kotak Mahindra Mutual Fund 69 13 Axis Mutual Fund 67 14 Tata Mutual Fund 59 15 Motilal Oswal (MF+ PMS) 46 16 Canara Robeco Mutual Fund 26 17 Principal Mutual Fund 19 18 HSBC Mutual Fund 19 19 Religare Invesco Mutual Fund 16 20 Mirae Asset Mutual Fund 15

Source: AMFI, Company, Ambit Capital research

Nevertheless, despite having higher margins than its peers due to its exclusive focus on equity, MOFS’s AMC business remains a loss-making franchise (losses in 9MFY15 at ~`49mn). This is primarily due to: i) Small scale of operations: Given that commissions of mutual funds are capped at

~2%, out of which ~1% would be expended on distributors, a mutual fund is a low spread business. Hence, scale is of primary importance to build revenue pools to such an extent that it is within budgets to attract and retain talent. MOFS AMC still has a modest AUM given the size of its distribution network.

ii) Up-fronting of distribution fees: In the AMC business, distribution costs are up-fronted in contrast to revenues, which are accrued only over the period of holding. Consequently, in a period wherein the inflows are large relative to the existing AUM, up-fronting of distribution fees could impact profitability by ~15% in certain years.

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MOFS market share (%)

Motilal Oswal


Exhibit 20: Scale is important in AMC business, as ‘Higher AUM = Higher margins’


Exhibit 21: Up-fronting of expenses could erode 15% of profitability in initial years

FY16E FY17E FY18E FY19E FY20E

AUM (`) 166 295 376 455 551

Average AUM (`) 143 255 350 435 526

Inflow (`) 40 66 59 75 91

Redemption (`) 2 5 12 38 46

PAT (as a % of AUM)

Up-front expensing 0.52% 0.58% 0.58% 0.55% 0.55%

Amortised expensing 0.61% 0.61% 0.57% 0.56% 0.56%

Difference -0.09% -0.03% 0.01% -0.01% -0.01%

PAT difference -15% -6% 1% -2% -2%

Source: Ambit Capital research; Note: Assumptions are as follows - Asset Management Fees at 1.8%; Admin costs at 0.4%; Upfront commission at 1%; Average trailing commission at 0.5%

As shown in the exhibit above, MOFS’s AMC is suffering from losses despite having higher margins than larger peers given the current small scale of operations. The importance of scale of operations can be validated by the fact that AMCs with higher AUMs have higher operating margin than those with lower AUMs. If the AUM of MOFS’s AMC increases meaningfully in the near future, this could lead to significant value creation in MOFS’s asset management franchise.

Why we expect MOFS’s AMC business to scale up?

MOFS’s AUM would increase as the market share of its equity inflows continues to increase from 1.8% currently to ~2.5% over FY17E, driven by: 1) Strong distribution support due to its differentiation in terms of fund

management philosophy, high spends on branding and high promoter backing through sponsorship of the mutual fund.

2) Establishment of a strong track record over time: Even though MOFS MF is just in the first year of its existence, it has outperformed benchmarks substantially. We believe as its performance matures in the long term (3-5 years), it would attract more investors.

3) PMS gains popularity as an asset class: At an AUM of `28bn, MOFS is one of the biggest portfolio management service (PMS) providers in India. As the popularity of the product grows through consistent outperformance vs benchmarks, establishment of a strong track record and consolidation amongst the smaller retail brokers, MOFS will become a key beneficiary. It would be pertinent to note that MOFS PMS consistently outperformed the benchmark across market cycles over a ten-year period.

4) MOFS will remain unaffected by the 1% cap on distribution fees: MOFS is already following the trailing model for distribution of its MF products. Moreover, the said cap applies only to its MF products and not to its PMS products.

We expect MOFS to deliver 55% revenue growth over FY15-17E in asset management fees driven by: (i) increase in asset management income from the MF and PMS businesses due to a 34% CAGR in AUM; and (ii) ~`1bn carry fees from the private equity business.

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Segment Fee Structure

Mutual Fund ~1-2.5% Fixed

PMS

Two options - Fixed fees are 2.5%; OR Variable fees with a 1-10 structure, hurdle rate of ~10%

Private equity 2-20 structure; Hurdle rate of ~10%


Motilal Oswal


‘Aspire’ing to build a housing finance franchise MOFS has infused ~`1bn of capital in its affordable housing finance venture, Aspire. Whilst we do not see it enjoying any competitive strength in its target segment, we are comforted by the fact that: (i) an experienced CEO has been hired to run the business with free hand; and (ii) the Aspire management is highly focused on cost and fee income. Aspire could become a 17% RoE franchise, in line with its peers, as we expect it to reach an AUM of up to `30bn by FY18E.

Targeting affordable housing… Motilal Oswal has 99.95% economic interest in its housing finance subsidiary, Aspire Home Finance, which primarily focuses on the affordable housing space. Aspires’ area of operations is primarily the satellite towns surrounding major cities. With a lower average ticket size of ~`1mn, the book yields ~13.4%. Aspire is run by Mr. Anil Sachidanand (ex-CEO of Dewan Housing Finance), who has over 25 years of experience in the space.

Exhibit 22: Aspire Home Finance – A brief synopsis

Particulars

Market positioning Affordable Housing

Occupational profile of customers ~34% are self-employed; and 66% are salaried

Geographic segmentation of customers ~100% of customers in metros/urban areas

Home loans / LAP breakup 100:0

Average ticket size `1.05mn

Yields ~13.4%

Cost of funds ~10.5%

Gross NPAs Currently ~0%

Loan book `1.36bn


Expecting AUM to clock in at ~`30bn by FY18 Whilst we expect real estate prices to come down meaningfully due to the Government cracking the whip on black money, we are optimistic about MOFS’s HFC loan book growth to `30bn by FY18 from around `3bn currently. This is because of the following reasons:

(1) Affordable houses should see lower price correction than others: Our channel checks suggest that real estate investors have typically focused on properties of ticket sizes between `2.5mn and `10mn, and the ticket sizes below `2.5mn see more participation from end-buyers. Consequently, we expect lower price correction in the less than `2.5mn ticket-size categories, due to demand remaining robust from the end-buyers even as investment demand for real estate shrinks.

(2) Underlying demand for affordable housing should remain robust: As per the report of the Technical Group on Urban Housing Shortage, there is likely to be a shortage of ~18mn houses in the low income group (LIG) and economically weaker sections (EWS) segment. As the Modi Government, pushes its pet agenda of housing for all by 2022, we expect demand to be met by supply of such units.

Motilal Oswal


Exhibit 23: High shortage in housing in the EWS and LIG category

Income category Annual income

(` mn) Housing ticket size

(` mn) Housing shortage

(mn)

EWS (Economic weaker sections) 0.1 0.5-0.7 10.6

LIG (Lower income group) 0.2 1.5-2.0 7.4

MIG (Middle income group) & above >0.2 2.0 + 0.8

Total

18.8

Source: The report of Technical Group on Urban Housing Shortage, 2012, Ambit Capital research

(3) Banks and large HFCs have avoided this segment: Whilst the home loans segment has seen aggressive competition; it has typically focused on the higher ticket and salaried customers. Consequently, we have seen banks staying away from this lending segment due to difficulties in credit appraisal and collections of borrowers. This is primarily because their mode of operations does not support the low income self-employed segment. Therefore, we expect small fleet-footed HFCs like Aspire to do well in the segment. In fact, our rough-cut estimates indicate that they just need to increase their customer count to ~30,000 (from the current 3,000) to clock in such a loan growth even if their ticket size does not increase, which we believe is fairly achievable.

Exhibit 24: Banks have avoided small-ticket housing loans

Housing loan ticket size Customer count CAGR (FY08-13)

< `0.5mn -1%

`0.5-1mn 10%

> `1mn 22%

Total 5%

Source: The RBI, Ambit Capital research.

HFC to be a ~17% RoE franchise by FY18 We believe that Aspire would become a 17% RoE franchise as it scales up, in line with its most immediate comparable peer, Dewan Housing. We envisage the AUM to touch `33bn by FY18 based on our expectation of `1.7bn of additional capital infusion by MOFS and internal accruals of `1.4bn. Note that we find Aspire’s yields at 13.4% to moderate, as the AUM grows to revert to those of Dewan Housing Finance, given their identical ticket sizes and geographies.

Exhibit 25: Aspire vs peers – RoE comparison synopsis (for FY14)

RoA – Tree HDFC LICHF IBULLS GRUH REPCO DEWAN Shriram Housing

Can Fin Homes

Sundaram HF

Aspire (FY15)

Aspire (FY18)

Net interest income 3.1% 2.3% 6.4% 4.4% 4.6% 2.9% 14.3% 3.1% 4.8% 6.2% 3.1%

Interest income 11.0% 11.0% 16.3% 13.2% 12.4% 12.3% 14.4% 11.6% 13.2% 13.4% 12.8%

Interest expense 7.9% 8.7% 9.9% 8.8% 7.8% 9.4% 0.1% 8.5% 8.4% 7.3% 9.7%

Other Income 0.2% 0.3% 1.6% 0.5% 0.5% 0.0% 2.4% 0.0% 0.0% 0.0% 0.5%

Total Income 3.4% 2.6% 8.1% 4.9% 5.0% 2.9% 16.7% 3.1% 4.8% 6.2% 3.6%

Operating Expenses 0.3% 0.4% 1.2% 0.9% 0.9% 0.9% 9.8% 0.9% 1.0% 5.5% 1.0%

Operating Profit 3.1% 2.2% 6.8% 4.0% 4.1% 2.0% 6.9% 2.2% 3.9% 0.7% 2.6%

Provisions 0.0% 0.0% 0.9% 0.0% 0.5% 0.2% 0.6% 0.1% 0.7% 0.0% 0.2%

PBT 3.1% 2.2% 6.0% 3.9% 3.6% 1.8% 6.3% 2.1% 3.2% 0.7% 2.4%

Taxes 1.0% 0.6% 1.2% 1.1% 0.9% 0.5% 0.6% 0.6% 1.0% 0.2% 0.7%

ROA 2.1% 1.6% 4.7% 2.9% 2.6% 1.3% 5.7% 1.5% 2.2% 0.5% 1.7%

Leverage 11.4 11.8 6.1 11.3 6.1 11.9 1.0 11.8 11.1 3.0 9.5

ROE 24.2% 18.8% 28.7% 32.2% 16.0% 15.5% 5.9% 17.9% 24.9% 1.4% 16.5%

Home loans (% of AUM 72% NA 76% 92% 81% 77% 100% 92% 67% 100% NA

Salaried customers (% of AUM)

NA 89% NA 62% 45% 67% NA 88% 50% 62% NA


Motilal Oswal


Key estimates and forecasts Exhibit 26: Key assumptions and estimates (` mn unless specified)

FY15E FY16E FY17E Comments

Assumptions

Brokerage revenues

4,849

6,118 7,610

We expect 28% CAGR in revenues driven by 20% CAGR in market volumes and ~4bps improvement in broking yields.

Asset management fees

1,063

2,186 2,549

We expect 55% CAGR in asset management fees over FY15-17 driven by AUM CAGR of 22% and PE carry fees of `1.1bn.

Housing finance AUM (` bn) 3.0 11.4 22.2 We expect 172% CAGR in housing finance loan book from a small base.

Operating margins (% of total income)

32% 36% 39% We expect slight operating leverage in FY17E due to increase in brokerage revenues after years of investments.

Key output

Total revenues (` mn) 7,190 9,568 11,977 FY15-17 CAGR of 29% vs FY13-15 CAGR of 24%.

EBITDA (` mn) 2,334 3,475 4,687 FY15-17 CAGR of 42% vs FY13-15 CAGR of 17%.

Consolidated PAT (` mn) 1,374 2,209 3,176 FY15-17 CAGR of 52% vs FY13-15 CAGR of 12%.

Consolidated Diluted EPS (`) 9.9 16.0 23.0 FY15-17 CAGR of 52% vs FY13-15 CAGR of 15%.


We downgrade our FY16 PAT estimates primarily to factor in the lower than earlier anticipated brokerage revenues. However, we increase our FY17 earnings estimates by 4% to factor in impact of profits coming from housing finance business.

Exhibit 27: Change in estimates (` mn unless specified)

Estimates - `mn Old New %change

FY16E FY17E FY16E FY17E FY16E FY17E

Total revenues 10,666 13,421 9,568 11,977 -10% -11%

EBITDA 3,794 4,889 3,475 4,687 -8% -4%

Con. PAT 2,335 3,042 2,209 3,176 -5% 4%

Con. Dil.EPS (`) 16.90 22.02 16.0 23.0 -5% 4%


Motilal Oswal


The case for SOTP-based valuation MOFS was hitherto the only large stock-broker in India, which had resisted venturing into capital-intensive businesses. However, the management’s pursuit to deliver 20% RoE on a sustainable basis has led to a strategic shift to its capital allocation; besides brokerage, MOFS will also focus on sponsorship commitments to its asset management and housing finance businesses. Given that these businesses have meaningfully different cash flows and growth trajectories, we now ascribe an SOTP approach for valuing MOFS: (a) Agency-based business – This includes the value of the brokerage, asset management and investment banking franchise of MOFS. Based on our free cash flow to firm (FCFF) valuation, we arrive at a valuation of `326/share, implying 17x FY17E EPS; (b) Capital-based business (Aspire Home Finance) – Based on our excess return valuation, we arrive at a valuation of `36/share, implying 1.4x FY17E P/B. We assume a cost of equity of 15%.

Exhibit 28: SOTP valuation at `373/share

SOTP Value per share Basis of valuation Implied value

Agency based business 326 FCFF 17x FY17 PE

Housing Finance 36 Excess return model 1.4x FY17 PB

Unrealised gain on investments

8 We estimate unrecognised gains (post tax) on its

MF and PE investments at `1.2bn.

Total value/share 373


Strong agency-based franchise commands `326/share Our FCFF model values the agency-based franchise (broking + asset management) of MOFS at `326/share (implied valuation of 17x FY17E P/E and 2.7x FY17E P/B). The distinct phases for each of its business in our FCFF model have been mentioned below.

Exhibit 29: Assumptions underlying DCF for agency business

Particulars FY15-17E FY17-23E FY23-30E

Industry Broking volumes 20% 15% 12%

MOFS volume market share 1.5% 1.5% 1.5%

MOFS broking volumes 20% 15% 12%

MOFS Broking yield 4.1 4.4 4.4

AUM 22% 16% 13%

Consol Revenues 29% 14% 12%

Broking and others 24% 15% 12%

AMC 55% 12% 13%

Consol PAT 46% 14% 12%

Broking and others 37% 14% 12%

AMC 288% 16% 13%

Consol Cash flows NA 20% 13%

Brokerage and others NA 21% 13%

AUM business 288% 16% 13%


Exhibit 30: DCF fair valuation at `326/share

Particulars ` mn

PV of the forecasting period up to FY30 17,231

Terminal value 13,285

Enterprise value 30,516

Less: Net Debt 4,464

Add: Net Cash 13,163

Implied equity value 39,215

No of equity shares 138

Equity value (`/share) 284

Mar’ 16 Valuation 326

FY17 P/E 17x


Motilal Oswal


Ascribing `36/share to ‘Aspire’ We value MOFS’s housing finance venture, Aspire, using the excess return to equity model. Our excess return to equity model values Aspire at `36/share, implying 1.4x FY17E P/B for an HFC clocking 9% RoEs by FY17E. Note that Aspire would need another `1.7bn of capital over FY15-17E for its growth.

Exhibit 31: Excess return model values Aspire at `36/share

Particulars ` mn

PV of excess returns 3,282

Current net-worth 1,000

MOFS Stake at 99.95% 4,280

No of shares 138

Fair Value per share 31

Mar'16 valuation 36

Valuation – FY17 PB – Post capital infusion 1.4x

Source: Ambit Capital Research

Justified premium to its peers We observe that MOFS trades at a premium to its peers primarily due to its capital-light balance sheet, given its hitherto, agency-based business model. As MOFS scales up its capital-heavy HFC business, we expect the premium valuations relative to its peers to come off, even as its earnings growth trajectory improves over the longer term.

Exhibit 32: MOFS trades at a premium to its peers

Company Mkt Cap

(` bn) P/B P/E RoA (%) RoE (%)

FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E

Motilal Oswal 44 3.0 2.6 19.4 13.5 12.6 17.2 13.3 19.0

India Infoline Ltd 55 1.8 1.6 10.1 8.4 2.6 2.6 19.3 19.9

Edelweiss Capital 55 1.7 NA 13.7 NA NA NA 11.4 NA

JM Financial 41 1.2 NA 10.6 NA NA NA 11.8 NA

Average

1.9 2.1 14.6 11.7 7.6 9.9 13.9 19.5

Source: Bloomberg; Ambit Capital research

Cross-cycle valuations to sustain at premium levels MOFS’s stock price has quadrupled over the past one year, due to expectations of a sustainable recovery in cash market volumes. The stock is currently trading at 19x one-year forward P/E and 2.9x one-year forward P/B. This has led to the stock trading at a ~50% premium to its cross-cycle P/E and at a ~80% premium to its cross-cycle P/B. This could be primarily due to expectations of MOFS’s new businesses like AMC and HFC contributing to the profitability of the entity. Increased recovery in cash market volumes, improvement of profitability from the AMC business and PAT from the HFC business going forward would result in PAT CAGR of 52% over FY15-17E, and thus, the valuations would likely sustain at such premium levels.

Motilal Oswal


Exhibit 33: MOFS is trading at a ~50% premium to its cross-cycle forward P/E


Exhibit 34: MOFS is trading at a ~31% premium to its cross-cycle forward P/B


Key catalysts (1) Pickup in IPO market: We believe that a robust IPO market could be a key catalyst for the next leg of retail participation in the stockmarkets, either through increased opening of accounts or higher-ticket investments or trading. Holistically, a robust IPO market would drive MOFS’s revenues from: Retail brokerage (given that many retail investors tend to sell the shares on the

listing day itself);

IPO funding (given that current funds need to be locked in for ~12 days before allotment);

Investment banking (as MOFS would be a strong contender for being a co-banker to the issue given a mandatory earmarked retail participation of 10% of the issue by SEBI); and

Private equity (exit of private equity investments at healthy multiples from its India Business Excellence Fund will enable MOFS to earn carry fees of an estimated ~`1bn).

(2) Strong performance in AMC and housing finance businesses: This will be the key for the market to realise the value of the relevant profit centres of the firm, and thus upgrade the numbers on a consolidated basis.

Key risks to our investment thesis (1) Weak stockmarkets: Stockmarkets remaining weak due to a slower-than expected recovery or due to weak sentiment could lead to a lower-than-anticipated growth/decline in cash market volumes. This could lead to lower revenue and profit growth for the company vs our estimates from multiple business segments such as broking as well as asset management. In such a scenario, we expect ~21% downside from current market price.

5

9

13

17

21

Sep-07

Jun-08

Mar-0

9

Dec-09

Sep-10

Jun-11

Mar-1

2

Dec-12

Sep-13

Jun-14

Mar-1

5

PE Avg. PE (+/-) 1SD

15x

8.6x

0

1

2

3

4

Sep-07

Jun-08

Mar-0

9

Dec-09

Sep-10

Jun-11

Mar-1

2

Dec-12

Sep-13

Jun-14

Mar-1

5

PB Avg. PB (+/-) 1SD

2.3x

0.9x

Motilal Oswal


Exhibit 35: Scenario analysis of MOFS

Base Case Bear Case

Inputs

Brokerage business

FY15-17E MOFS Volumes CAGR 20% 7%

FY15-17E Avg Brokerage yield 4.1 4.0

FY15-17E AUM growth 55% 44%

Operating margins 36% 33%

Outputs

FY15-17E Revenue CAGR 29% 16%

FY15-17E PAT CAGR 52% 24%

FY17 EPS 23.0 15.2

Cross-cycle multiple 16

Target price 373 243

Upside/(Downside) 20% -21%

Current FY17 P/E 13 20


(2) Slower profitability in AMC and HFC business: The management going slow in its execution in these businesses could pose a key risk to the valuations of the AMC and HFC business.

Forensic accounting scores Exhibit 36: Explanation for our forensic accounting scores

Segment Score Comments

Accounting GREEN We have not come across anything suspicious in the accounts of the company. With the company providing for its entire exposure to NSEL, we believe that the reported financials of the company represent the true financial health of the company.

Predictability AMBER Given the highly unpredictable nature of the business, the earnings of the company are highly volatile.

Earnings momentum GREEN Increased cash volumes should result in an increase in revenues from the FY14 levels which have been the lowest in the past seven years.


Motilal Oswal


Income statement (` mn) FY13 FY14 FY15E FY16E FY17E

Total Income 4,681 4,654 7,190 9,568 11,977

Brokerage Income 2,980 2,884 4,849 6,118 7,610

Net Interest Income 949 829 801 699 898

Other Income 752 941 1,540 2,751 3,469

Operating expenses 2,985 3,261 4,856 6,092 7,290

Direct Costs 1,106 1,053 1,940 2,447 3,044

Employee Costs 1,080 1,273 1,655 2,069 2,276

Admin Expenses 799 934 1,261 1,576 1,970

Operating Profit 1,696 1,394 2,334 3,475 4,687

Depreciation 259 243 279 293 308

Exceptional items 181 -550 0 0 0

Profit before tax 1,618 601 2,055 3,183 4,379

Less:Tax 518 179 658 1,018 1,401

PAT 1,100 422 1,398 2,164 2,978

Extraordinary items & MI (9) (21) (24) (27) (31)

Net Profit (ex-HFC) 1,091 401 1,374 2,137 2,947

HFC PAT - - 20 72 229

Consol PAT 1,091 401 1,374 2,209 3,176


Balance sheet (` mn)


Networth 12,179 11,703 12,734 14,390 16,772

Minority Interest 30 51 59 67 78

Borrowings - 1 5,593 5,393 5,609

Net Deferred taxes 179 117 135 155 178

Total Sources of funds 12,388 11,872 18,520 20,005 22,636

Cash 2,144 1,678 2,014 2,316 2,663

Investments 1,481 2,930 3,370 3,875 4,456

Fixed Assets 3,111 3,072 3,226 3,387 3,556

Loan book 4,300 4,100 4,920 5,658 6,507

Net working capital 1,352 92 4,991 4,770 5,454

Total Application of funds 12,388 11,872 18,520 20,005 22,636


Ratio analysis


Broking Market share (%) 1.5 1.6 1.5 1.5 1.5

Brokerage Yield (bps) 4.7 3.7 3.9 4.1 4.3

Operating Cost/Income 63.8 70.1 67.5 63.7 60.9

Debt to Equity (%) - 0.0 0.4 0.4 0.3

Revenue Growth 0.1 (0.6) 54.5 33.1 25.2

PAT Growth 4.9 (63.2) 242.6 60.7 43.8


Valuation parameters FY13 FY14 FY15E FY16E FY17E

BVPS (`) 85.2 84.7 92.1 104.1 121.4

Dil. EPS (`) 7.6 3.0 9.9 16.0 23.0

ROA (%) 9.1 3.3 11.1 15.5 18.6

ROE (%) 9.2 3.4 11.2 16.3 20.4

P/E 40.6 104.1 30.9 19.2 13.4

P/BV 3.6 3.6 3.3 2.9 2.5

Dividend yield (%) 0.7 0.7 0.8 1.3 1.9


Motilal Oswal


Institutional Equities Team Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 [email protected]

Research

Analysts Industry Sectors Desk-Phone E-mail

Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 [email protected]

Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 [email protected]

Achint Bhagat Cement / Infrastructure (022) 30433178 [email protected]

Aditya Bagul Consumer (022) 30433264 [email protected]

Aditya Khemka Healthcare (022) 30433272 [email protected]

Ashvin Shetty, CFA Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 [email protected]

Deepesh Agarwal Power Utilities / Capital Goods (022) 30433275 [email protected] Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 [email protected]

Karan Khanna Strategy (022) 30433251 [email protected]

Krishnan ASV Real Estate (022) 30433205 [email protected]

Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 [email protected]

Paresh Dave, CFA Healthcare (022) 30433212 [email protected]

Parita Ashar Metals & Mining / Oil & Gas (022) 30433223 [email protected]

Prashant Mittal, CFA Derivatives (022) 30433218 [email protected]

Rakshit Ranjan, CFA Consumer / Retail (022) 30433201 [email protected]

Ravi Singh Banking / Financial Services (022) 30433181 [email protected]

Ritesh Gupta, CFA Midcaps – Chemical / Retail (022) 30433242 [email protected]

Ritesh Vaidya Consumer (022) 30433246 [email protected] Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected]

Ritu Modi Automobile (022) 30433292 [email protected]

Sagar Rastogi Technology (022) 30433291 [email protected]

Sumit Shekhar Economy / Strategy (022) 30433229 [email protected]

Sandeep Gupta Media / Midcaps (022) 30433211 [email protected]

Tanuj Mukhija, CFA E&C / Infra / Industrials (022) 30433203 [email protected]

Utsav Mehta, CFA Technology (022) 30433209 [email protected]

Sales

Name Regions Desk-Phone E-mail

Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / USA (022) 30433053 [email protected]

Hitakshi Mehra India (022) 30433204 [email protected]

Krishnan V India / Asia (022) 30433295 [email protected]

Nityam Shah, CFA USA / Europe (022) 30433259 [email protected]

Parees Purohit, CFA UK / USA (022) 30433169 [email protected]

Praveena Pattabiraman India / Asia (022) 30433268 [email protected]

Shaleen Silori India (022) 30433256 [email protected]

USA / Canada

Ravilochan Pola - CEO Americas +1(646) 361 3107 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Sharoz G Hussain Production (022) 30433183 [email protected]

Joel Pereira Editor (022) 30433284 [email protected]

Nikhil Pillai Database (022) 30433265 [email protected]

E&C = Engineering & Construction

Motilal Oswal


Motilal Oswal Financial Serv (MOFS IN, BUY) - Stock price performance


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MOTILAL OSWAL FINANCIAL SERV

Motilal Oswal


Explanation of Investment Rating

Investment Rating Expected return (over 12-month)

BUY >10%

SELL <10%

NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock

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15. This report is prepared, approved, published and distributed by the Ambit Capital located outside of the United States (a non-US Group Company”). This report is distributed in the U.S.by Enclave Capital LLC, a U.S. registered broker dealer, on behalf of Ambit Capital only to major U.S. institutional investors (as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to the exemption in Rule 15a-6 and any transaction effected by a U.S. customer in the securities described in this report must be effected through Enclave Capital LLC (19 West 44th Street, suite 1700, New York, NY 10036).

16. As of the publication of this report Enclave Capital LLC, does not make a market in the subject securities. 17. This document does not constitute an offer of, or an invitation by or on behalf of Ambit Capital or its affiliates or any other company to any person, to buy or sell any security. The information

contained herein has been obtained from published information and other sources, which Ambit Capital or its Affiliates consider to be reliable. None of Ambit Capital accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more established markets. In particular, the political and economic environment, company practices and market prices and volumes may be subject to significant variations. The ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the foregoing provisions.

Additional Disclaimer for Canadian Persons

18. AMBIT Capital is not registered in the Province of Ontario and /or Province of Québec to trade in securities and/or to provide advice with respect to securities. 19. AMBIT Capital's head office or principal place of business is located in India. 20. All or substantially all of AMBIT Capital's assets may be situated outside of Canada. 21. It may be difficult for enforcing legal rights against AMBIT Capital because of the above. 22. Name and address of AMBIT Capital's agent for service of process in the Province of Ontario is: Torys LLP, 79 Wellington St. W., 30th Floor, Box 270, TD South Tower, Toronto, Ontario M5K 1N2

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Disclosure 24. NIL

Analyst Certification Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyses, that (1) the views expressed in this report reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this report. © Copyright 2015 AMBIT Capital Private Limited. All rights reserved.

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