6 questions for Motilal Oswal

By Morningstar |  10-12-19 | 

MOTILAL OSWAL, the chairman and managing director of Motilal Oswal Financial Services Ltd, shared learnings from his long and immensely successful journey at the 2019 Morningstar Investment Conference in Mumbai.

1. How do you deal with disruption in your industry?

When we started in '87, there were very few professionals in the market. It was more of family businesses of traditional Gujarati families. The markets were completely driven by speculators – retail and HNI players, at that point of time. Very few institutional investors existed, UTI and LIC were probably the largest.

SEBI did not exist.

The Bombay Stock Exchange catered to the whole country, although there were around 20 regional exchanges.

The number of shares traded was very, very low.

The AGMs used to have very few members in attendance.

Malpractices were common. Transparency was completely missing. The brokers did not reveal at what price the stock was bought or sold. The price used to be grossed up for brokerage.

We thought that the best way was to be transparent with the clients. We decided to even courier the contract notes. Research advisory was not available at that point in time. We gave real insights about equity research by understanding the balance sheets. Our balance sheet comprehension really helped us in understanding the companies. Those days, even balance sheets were not available. On weekends, Raamdeo used to go to some dealers and auditors to try and obtain them.

We stood out by offering transparency and research advisory and ethics.

Our moat is our research and advisory skills that adds huge amount of value to the customers. The question is; where do you want to create a niche or develop a moat? We chose the path that is based on our research and advisory capabilities.

2. Indians typically don't like to pay for advisory. What’s the future of fee-based advice?

I don't know how much time it will take for the market to migrate from a product-based pricing or the distributor-driven pricing to an advice-based model. My sense is that it's going to take a lot of time in India.

There's no free lunch anywhere. The environment is very, very competitive and hence, we need to make sure that we've got excellent skillset and more importantly, understanding the clients' need and working in a way where we work in the interest of the client.

Ethics are very important.

Knowledge is very important.

Interpersonal and communication skills are very important.

Key to all this is the culture of the organization. Values were very sacrosanct for us in terms of transparency, integrity, ethics, customer centricity and employee friendliness. How you behave with all the stakeholders and employees and clients.

Clients will definitely compensate for the value being added by you. There are doctors who charge Rs 100 and those who charge Rs 5,000. Depends on the track record skill set and expertise. I'm sure clients will be willing to pay for that.

3. How does the dynamic between Raamdeo Agrawal and yourself work?

I met Raamdeo in hostel, when we were both students.

He manages my money. I am his biggest investor. I completely trust his capabilities in managing my money.

We complement each other. He always has been good on the research side, while my whole passion was to build an organization. So, I worked like an entrepreneur, while he acted more like a researcher or an analyst. These complementary skills brought us together and we added value to each other.

To run this partnership, which is now about 32-33 years old, we have to trust each other. Whatever I would do, whether really spending a lot of money, or investing into lot of technology or whatever, he had blind faith in me. And I in him and his capabilities. So, the partnership still goes well. It's equal 50-50 ownership even in the company today.

From day one, we agreed on two things on our account; we would not speculate, and we would not leverage. Whatever surplus we generated was put into the same stocks which we recommended to our customers. Till today, our own money is into the same funds we manage.

4. You started something very recently about employees – you actually contribute to a SIP when they make a SIP. Was that a means of employee retention? 

The investing habit has got to be inculcated early.  Of course, it would help in employee retention. But once you have skin in the game, you know your products, and the potential of the market, you get more interested and invested. We wanted to impart learnings on how market dynamics work. And the best way to do that was by jumping into the water. '

So, we thought that at least let the employees also start investing into the market through an SIP, which is I would say very good and friendly product for the employees. We contribute the same amount of money up to certain limits. We call it "ek pe ek free."

5. When you launched the asset management company, the first thrust was towards ETFs. Then actively managed funds. Now, you've gone and launched ETFs. What are your thoughts on this?

Entrepreneurship is all about building the business.

You experiment. If it clicks, very well, otherwise you try something else.

We started with PMS as a product, which was a more active product. When we applied for the mutual fund license, we thought at least let's try to create something different through ETFs, because ETFs globally is a big asset class and a very simple product. So, we thought that active is on the PMS side, let's do passive through mutual funds.

But given the size of the opportunity, the market was very slow to respond to the ETF segment. So, we thought that since we have great strength on the PMS side with active investing, let's build up the practice by offering active funds.

The positioning of our AMC, our group actually, is Think Equity. Think Motilal Oswal. So, whatever products and services are in equities, we are basically providing that - equity broking, investment banking, private equity, wealth management, asset management. The focus of the brand is on equities. So, whatever has to do with equities, we will do that, whether it's passive, active, ETF, index products.

6. The last entrant into your business was the HFC. It didn't initially pan out the way you wanted it to and then you restructured parts of it. What were your learnings?

It's not going to be very easy for every business. You go through a learning curve.

The balance sheet had a huge amount of liquidity and cash available. So we considered creating one more business. Every three to five years we kept on building or adding one vertical to the business. This is a business where we can deploy our own capital and create a lot of long-term value. Housing finance is a business, a very simple business, scalable business, and the ROE also can be very high from the shareholders' perspective.

When you want to build the business, you get people with the best of your capabilities. Our management team has tremendous experience; four to five of them had 20 to 25 years of experience. But somewhere in the urge to grow the book, we compromised on quality.

It happens in a high growth phase, as we see it in the NBFC sector.

So, the same thing happened in our housing finance business. We created a book of Rs 4,000-5,000 crores worth of liabilities, about Rs 850 crores of owned capital.

Lesson learned is that one must create a very strong foundation in terms of processes, technology, customer interface, and offer the best experience to the customers. It doesn't happen overnight. It takes time. Patience and perseverance is what is required to really build the business which can be scaled up.

The opportunity is exciting and now I think that the problem is behind us and now we are working back to the growth mode from I would say the repair mode or consolidation phase.

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