MOTILAL OSWAL FINANCIAL SERVICES: AN IPO IN INDIA

Executive Summary
Motilal Oswal Financial Services Ltd (MOFSL) is one of Indians leading equity brokerage firms engaged in providing
of well diversified financial services and focused on wealth creation for all its customers, which includes institutional
investors, corporate clients, High Net worth Investors and retail customers. Its services and product offerings include
equity broking, commodity broking and VC management. MOFSL is a well-known brand among retail and
institutional investors in India, with a presence in 1,430 business locations spread across 432 cities with the Core
purpose is to be a preferred global financial services organization enabling wealth creation for all its customers and
stakeholders. Values of its core purpose is accompanied by the company’s organizational values such as Integrity:
To honor commitment with highest ethical and business practices. Teamwork: To Attain core objectives
cooperatively and collaboratively. Distinguished performance which need to be differentiated, recognized and
rewarded in a business environment. Passionate Attitude: To be driven by high energy and self-motivation with
entrepreneurial spirit. Distinction in Implementation: To be time bound results within the framework of the company’s
value system.MOFSL comprises of talented pool of employees and executives with proven track records who’re
backed by the belief in MOFSL’s management which possess entrepreneurial spirit, strong technical expertise,
leadership skills and insight into market and offers a competitive edge which helps in the implementation of their
business strategies. Given are MOFSL’s products portfolio and its subsidiary entities.
Products offered through different business streams of MOSL
Business stream Primary products and services
Retail Wealth Management Equity (cash / derivatives) & commodity broking, Portfolio management, Depository services.
Institutional Broking Equity (cash and derivatives) ,Advisory
Investment Banking Capital raising ,Financial advisory and investment banking products and services
Key subsidiaries
Subsidiary company MOFSL shareholding (%)
Motilal Oswal Securities Ltd (MOSL) 100%
Motilal Oswal Commodities Brokers Ltd (MOCB) 98%
Motilal Oswal Venture Capital Advisors Private Ltd (MOVC) 100%
Motilal Oswal Investment Advisors Private Ltd (MOIA) 75%
MOFSL has its presence in over 377 cities and towns in India and through its wide-spread branch networks and
about 1200 business locations out of which 400 locations has been owned by the company itself and balance
through franchises and online models. With an alliance with SBI it has opened its online trading platform for SBI’s
customers its major revenue source is broking business of around 70% of total income. Other sources of revenue
includes commodities broking which covers a relatively smaller unit about less than 2% of the total income. The
company has recently diversified in to other avenues of earning source such as Third party product distribution,
venture capital, and investment banking to de-risk its revenue stream that is fully concentrated on equity (cash and
derivatives) broking.
Venture capital or VC is another type of private equity that is provided by venture capital firms to small or medium
sized and early stage firms those have high growth potential or at least demonstrated it through their past
operations.VC firms invest in those type of companies in consideration for equity ownership thus they took the risk of
financing the start-ups in an expectation that the firms will be successful and they will share its future profits. A VC
funding starts with an initial seed funding round of such as Initial public offering (IPO) or a merger & acquisition
events. Apart from various options available at the VC financers such as angle funding, equity crowd funding or seed
funding, VCs also come in handy for small startups with limited operational history and thus unable to secure other
means of financing. Irrespective their nature of funding VCs usually get significant control over the company
decisions by holding Equity ownership in the company.VCs also often render consultancy services to their clients by
providing strategic advice to the company's management on modification in their business models and Marketing
and operational strategies. Motilal Oswal Financial Services Ltd. (MOFSL) has opted for financing through private
equity to enhance their balance sheet and to make acquisitions and as an initial step towards going public.
Throughout its growing phase during the period 2004 to 2006 MOFSL made several acquisitions of small brokerage
firms to increase its market reach and brand recognition then MOFSL decided to offer 9.5% of its equity at a
premoney valuation of $277 million to famous venture capital firms and the VC firms are expected to play an vital
role in MOFSL’s expansion plans in making a way for its IPO to be announced after a couple of months. The VC

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firms will going to help MOFSL to improve by contributing their broad international knowledge and experience about
brokerage business.
Internal Rate of Return (IRR) is an anualised rate that signifies all the discounted payouts throughout the life of an
investment to reach a value that is equals to the initial investment amount hence PE funds use IRR for calculating
their investment performance .Historically PE industries yield an average of 20% to 30% depending on other
economic conditions .This return is higher than stocks bonds as PE fund investments are much riskier than stocks
and bonds. MOFSL has been sought to be financed from two different Private Equity firms having their unique
holdings in MOFSL, and if it did not go public with in next 5 years and at a stated minimum IRR.The PE funds are
expected the company to be highly leveraged due to the inherent risk factors like economic slowdown or change in
GDP growth rate of India. Hence in the face of a reduced exit valuation The PE Funds sought an IRR that will at
least cover their initial investments and the stated minimum IRR for them would be around 29% (exhibit 10).
Value drivers are anything that can be added to a product or service and increase its value to stakeholders. These
differentiate a product or service from those of a competitor and make them more appealing to consumers. The
greatest benefit of a value driver is that it provides a competitive advantage to a business, giving that business an
upper hand in its industry. Value drivers make a company’s products seem better in comparable to their competitors
due to which the company can enhance its leverage on the market or to influence consumers. It is not necessary a
value driver to be attached directly to a product or service as even a good reputation of the company could be a
good value driver. Identifying and managing value drivers’ helps management focus on activities that have great
impact on shareholders’ value. There are two ways to identify value drivers. First Value drivers need to have
significant value impact on the business operations and second, Value drivers must be controllable i.e.
uncontrollable factors could not be established as value drivers.
Following are the type of key value drivers for brokerage firms like MOFSL
Growth Drivers Investment in value creating growth opportunities
Efficiency Drivers Invest in operational efficiency and divest in value degrading activities.
Reduction of costs, achieve economies of scale, better profitability and shareholders
Financial Drivers
value.
A comprehensive breakup of key value drivers for MOFSL’s business operations.
 Branding & Recurring client base – Ranked as one of the major brokerage firms in India within a short span
of time. Having client base ranging from Institutional firms, corporates to High and medium class retail
customers.
 Revenue growth & Revenue source – high growth rate during the period 2004-06 and anticipated 40% growth
in the forthcoming years. Around 70% commission based and balance revenue includes commodities broking
Third party product distribution, venture capital, and investment banking.
 Clientele & Sophistication and quality of services – customer concentrations, tenure, new customer ratio, and
customer age. High quality of brokerage services and with a motto to provide maximum returns to an investor
 Life stage of company – In its expansion phase with good future prospects.
 Understanding of business model – Well knowledge of the business operations and have the capability to
achieve operational efficiencies with economics of scale.
 Alliances to generate new business – Have concluded merger of few small brokerage firms in north and
south India in an attempt to cover maximum geographical area as well as collaborating with foreign PE fund
for its initial funding requirements prior to IPO.
 Employees – number of employees, tenure, relationship with clients which provides insight into the collective
knowledge, reputation and branding of a company.
Brokerage business in India has been driven by some positive aspects that anticipated for its development of are as
follows: (a) Demand and availability of sophisticated products in the Indian stock exchanges. (b)Recent and
upcoming regulations made by the regulatory body SEBI for Investor protection and safeguarding their investments
helpful in restoring the people’s faith in the stock markets thus persuading them to invest more. (c)The day to day
improvement of technology and infrastructure especially the T+2 concept for clearing in the stock markets will add
great values to investor sentiments. Disappearance of small brokerage firms or an estimated consolidation in the
near future to safe guard the Indian brokerage industry from their foreign counterparts. These changes are expected
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to give new prospects to brokerage industry in India on the other hand also help in formulation of a better risk and
disaster management systm.The share of brokers in the NSE has been increased from 12% to 16% during the FY
04-06.These figures indicate that Indian brokerage industry need to go through a consolidation phase in which big
brokerage firms need to consolidate their operations with the small and medium firms in order to create a barrier for
foreign firms to take advantage of the market and Profitability could be well distributed among the firms. There are
factors which raise concerns about the brokerage business in India such as rapid changing in technology and
infrastructure and competition from foreigners may force Indian broking firms to seek for other revenue sources.
Apart from Motilal Oswal, there is not a single listed broking company where the majority of the revenue derived from
pure broking activity .Even though there are other major broking firms such as Edelweiss, IIFL or India bulls, they
depends upon non broking sources like lending, private equity or investment banking and popularly known as non-
banking financial companies (NBFCs).However the recent upward trend in BSE Sensex and NSE Nifty implies that
Indian markets are reviving along with its above 6% GDP growth trend and thus as long as investor sentiments are
positive relating to Indian financial markets there will always be need o brokerage firms to handle the deal. All they
have to do is keep themselves updated with the changing scenario of global industry trends.
An IPO is always a risky decision to make as it depends on the timing in relation to the markets and company growth
The Company going for public need to have a strong balance sheet and market control. MOFSL's businesses are
highly dependent on the capital market conditions. Hence, any unfavorable development in the markets will obstruct
its growth projections and negative impact its valuations. The company is lagging behind its peers such as ICICI
Securities, India bulls, and India Info line on the online trading segment; currently, only 8% of its customers operate
through its online trading platform .MOFSL’s main source of revenue is Brokerage income and expected to dominate in
the future although it attempted to diversify itself by opening other sources of revenue and it certainly need some
time to have impact on its profitability. Until then MOFSL’s earnings may remain volatile depending on conditions in
equity markets intensified competitions from foreign firms keep on pressurizing its segments and could affect the
expected market share and margins. Moreover the Indian brokerage Industry is experiencing a phase of
consolidation and this may build up competition resulting in dilution of the company’s customer base and market
share. As per the P/E multiple data in the case (Exhibit 8),larger companies with capitalisation above $100 million
trading at a high P/E multiple thus signifies that MOFSL need to strengthen its balance sheet and revenue base
before going for an IPO. As per recently revised DPI guidelines of SEBI FVCIs like Bessemer and New Vernon
would be exempt for the1yr lock up period if they held shares of the company for at-lest a year prior to filing
paperwork for IPO by the company. Thus if MOFSL decide to go public during 2006 its VC investor’s holding will be
locked up in the company for another year. By keeping in view the above circumstances it is advisable for MOFSL to
hold off for couple of months for its IPO.
IPO underpricing is a universal phenomenon. It means that the offer price of the shares issued is lower than the
determined price of the first issue. It is believed that an IPO usually remain underpriced for a certain period of time
as corrective counter measures and the Demand & supply forces of market will eventually push it towards its intrinsic
value. .The various theories suggesting pricing of IPO brings forth several special and firm specific variables that
may be possible reason behind Underpricing of IPOs both in India and elsewhere in world. Following are some
identified important variables affecting the underpricing of IPOs in India such as (a) IPO pricing can be a result of
information disparities. Uninformed investors bid and lose money and due to the losses eventually they leave the
I.P.O. market resulting in reduction in demand for the shares. (b) Management may be the primary cause of the
underpricing. Management creates excess demand for IPO shares so that it can sell off its holdings after a
contractual period. On the other hand management allows underpricing to ensure that there are many purchasers of
the shares.(c) Institutional investors or managers gain from taking advantage of retail shareholders who act
irrationally or otherwise against their economic interests. And that both institutional shareholders and managers
therefore underprice I.P.O.’s to lock in these gains.(d)The difference between industries may resulting in
underpricing or over pricing of IPO of the company belongs to the same industry.
For MOFSL IPO Valuations Refer the Exhibit 10 for the NPV of MOFSL’s future cash flows, Refer Exhibit 12 for
equity value and for Key ratios and variables for MOFSL in INR .The upper end of the offer price US $ value,
MOFSL’s PE is at 27 times during FY07 earnings and 19 times in FY08E earnings compared with 38x FY07 and 21x
FY07 and 14x FY08E earnings for India bulls. from a one-year perspective, it is expected for MOFSL stock, to wide
penetratrate in the financial markets, to establish brand with strong retail franchise and steady institutional business,
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result in incremental growth flowing in from investment banking, venture capital, and distribution businesses.MOFSl
need to focus on its Revenues and a stronger balance sheet hence should hold off its IPO.It is evident from the
valuations that MOFSL IPO will sure go underpriced it the company decides to go public during 2006.rather it should
wait for better valuations with a positive NPV and favorable FCFF in the future. 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
bottom-line will be driven by: (i) Sustained growth in retail and institutional businesses; equity brokerage income to
grow in FY08E.(ii) Ability to pull system to cross-sell and up-sell fee-based products.(iii) Increasing traction in
investment banking on the back of research strength and institutional and corporate relationships and advisory fee to
grow in FY08E.Efficient VC fund management that will offer stable revenues of the company at rge end of the
projected perod.

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