Motilal Oswal Financial Services Ltd reported strong results for the June quarter, riding piggyback on the sharp rise in trading volumes in the equity market.
Average daily turnover in the equity cash and derivatives markets rose by 65.5% to Rs91,711 crore in the three months to June, compared with Rs55,405 crore the March quarter.
Motilal’s broking and related revenues jumped by 83% quarter-on-quarter to Rs122 crore.
Profit before interest and tax of this segment rose by as much as 263% to Rs39.22 crore thanks to economies of scale.
But although broking revenues account for about 82% of total turnover, the entire company’s profit didn’t grow at a similar rate.
Motilal’s profit before interest and tax rose by 84% to Rs56.49 crore, on the back of a 64% rise in revenues.
The company’s margin funding business is relatively small in terms of revenues but still accounts for about a fourth of the company’s profit.
After last year’s bad experience when some over-leveraged clients defaulted, brokerages have been going slow on this business. Revenues of Motilal’s financing business were flat and profit fell marginally. The relatively new investment banking and asset management business recorded a drop in profit.
All this partly offset the steep rise in profit of the core broking business. Still, an 84% rise in core profit before interest and tax is a strong enough reason to justify the sharp rise in Motilal’s shares in the past four months.
At current levels of Rs142, the stock has risen by 162% from its lows in March. Compared with the highs it had reached last January, the stock is trading about 67% lower.
It’s interesting that Motilal’s shares have dropped at about double the rate at which the broad markets have fallen, even though average traded volumes have now come back to the levels seen during the peak of the market last year.
The reason for this, of course, is that valuations of brokerages had risen way beyond fundamentals last year and even after the sharp correction, the Motilal stock trades at not-so-cheap 15 times annualized earnings for the June quarter.
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