Motilal Oswal shares: 3 reasons why UBS sees strong upside on MOFSL

UBS in its initiation note on Motilal Oswal Financial Services Ltd (MOFSL) gave three reasons why the stock is a 'Buy'. The foreign brokerage sees MOFSL as structural beneficiary of financialisation-led asset under management (AUM) expansion. UBS sees operating leverage driving non-linear earnings growth for MOFSL. In addition, a product mix shift towards AMC and private wealth businesses underpins potential re-rating, UBS said sending MOFSL shares 5 per cent higher in Friday's trade.
Overall, UBS said, potential recurring revenues, improving mix and higher capital efficiency supports a structural upgrade in business quality towards premium asset management and wealth multiples. 

Following the report, the MOFSL stock climbed 5.94 per cent to hit a high of Rs 880.90 on BSE, still offering 25 per cent upside, as per the UBS target price of Rs 1,100.
 
"MOFSL looks well-positioned to capitalise on India’s structural financialisation, with exposure to high-growth AUM pools from wealth and asset management. We believe industry tailwinds remain robust and forecast mutual funds' AUM to grow at an 18 per cent CAGR by FY30E, with a 20 per cent-plus CAGR (FY30E) for HNI wealth and alternatives. The firm is transitioning to an AUM-led, annuity-driven model, where growth is linked to client assets rather than transaction volumes," UBS siad. 

For FY26-29E, the foreign brokerage is expecting MOFSL AUM to expand at a 21 epr cent CAGR, driving a 19 per cent revenue CAGR. It said the market might be underappreciating MOFSL’s shift to higher quality, recurring wealth and distribution earnings, reducing broking cyclicality and driving a 22 per cent earnings CAGR over FY26-29E. 

"Based on our PEG ratio analysis, we think the stock offers attractive risk-reward, trading at 15x one-year forward PE, slightly above its three-year average. We initiate coverage at Buy," it said.

UBS said MOFSL's historical multiples are of less relevance due to the evolving business model and increasing share of fee-based income. 

"Our valuation is anchored to higher multiples for asset-light businesses (AMC ~28 times, private wealth 25 times and wealth 18 times) and a relatively lower multiple for capital markets (14 times) on FY28E earnings," UBS said.