Company Name – Angel One Limited (Angel One) Current Share Price – INR 1,277 (April 17, 2023) Market Cap – INR 10,651 cr |
1. What is interesting about the stock?
The world of stock brokerages has seen a complete transformation in the past decade. Gone are the days when you must have a dedicated human broker assigned to you to be able to conduct stock trading. It was a very opaque manner and along with high brokerage charges, it would also eat into any profit made by the investor or trader. Compared to that, now customers just need to log in to their trading account using a browser or mobile app and conduct trades with ZERO brokerage for stock delivery and a flat fee for intraday trades.
This discount brokerage model was popularised in the USA by Robin Hood and by Zerodha in India. Both these pioneers were focused on keeping lean operations with a focus on technology and accessibility while bringing costs for customers down as much as possible. The core premise for these disruptors has been to keep investing as simple and easy as possible for end-users using technology while keeping costs low to be able to better position themselves against legacy players with their legions of personal brokers. Using the scaling power of the internet, both giants are now the biggest brokerages in their respective countries.
Legacy brokers like HDFC Securities, ICICI Securities, Sharekhan, and others have seen their market share shrink at the same time, and eventually, they also had to bow to the trend and concentrate on the online side of the business, along with slashing charges to be able to compete with discount brokerages.
But there was one small legacy brokerage in India that got on the technology transformation train early and is now among the top 3 in the industry in terms of active client base. That player is Angel Broking who has now been renamed Angel One.
Angel One is a traditional brokerage operating in both the traditional plan and the flat fee models. It pivoted much earlier than the rest of the traditional industry and scaled faster than them. This has seen the company add over 71,000 customers under the traditional plan and 12.2 lakh customers under the flat fee model in Q4FY23.
It is now the 2nd largest brokerage and the largest listed brokerage in India in terms of NSE Active clients at 4.3 million. Angel One also has a 12% share of the total demat accounts in India as of March 2023. Company gained market share in FY23.
The Company now acquires 100% of its direct clients digitally and sees 75%+ orders placed through its mobile app. It has also developed a wide variety of in-house built digital properties and is integrated with various 3rd party products like smallcase, quicko, sensibull, and others.
It also enjoys a good market share across all the major market segments like
22.8% of the overall equity market
22.8% of the F&O segment
12.3% of the cash market
55.2% of the commodity market
Since the start of the pandemic, the company has seen phenomenal growth in its user base of 8x in the last 3 years with the vast majority of new users being acquired from Tier 2 and beyond cities.
Within its revenues, the biggest chunk comes from gross broking which accounted for 70% of its revenues in Q4FY23 and F&O is the biggest earner in the broking revenues with 87% broking revenue share in Q4FY23. Interest income contributed to 16% of revenue.
The Company is now planning to transform into a fintech platform (super-app) with its own set of offerings geared towards investment for retail customers, along with a financial marketplace for all kinds of 3rd party financial products. The biggest signal for this steadfast focus on technology for the company comes from the appointment of Silicon Valley veteran Narayan Gangadhar as CEO in April 2021 and the rebranding of the company into Angel One to appeal to Gen Z and millennial investors. However, Narayan Gangadhar has resigned for personal reasons and he would be with the Company till May 2023.
But the way forward is not going to be easy for Angel One. Seemingly anyone and everyone in the financial services field from traditional banks like HDFC Bank and ICICI to NBFCs like Bajaj Finance, to financial services start-ups like Zerodha and emerging fintech companies like Navi are all gearing up to compete for the massive pie of the retail financial and investment services in India. There are also other VC-backed startups Groww and Paytm who are burning cash to establish themselves in the Indian investment market.
The industry is also said to be highly cyclical with great performances during bull runs and stagnant behavior after the bull runs end.
The decision by the Securities and Exchange Board of India (SEBI) to implement upstreaming of client funds in two phases from July 2023, besides an Application Supported by Blocked Amount or ASBA-like facility for secondary markets, is expected to significantly impact the earning of non-bank brokers like Angel One:
Reduction in interest income (INR 519 cr in FY23 which was ~45% of PBT)
The incremental cost for margin (estimated to be ~ INR 40 cr for 9MFY24)
Will Angel One retain its edge and be able to defend against the large financial resources of its competitors? Will it be able to push away from the high dependence on market cycles by transforming into a fintech marketplace? Only time will tell.
Industry Overview
Stock market investing is still a very underpenetrated market in India. Although the number of demat accounts in India has grown in the last 10 years, the majority of this growth has come in the last 3 years with the overall demat penetration rising from 3.1% in FY20 to 8.1% in FY23.
But even at 8.1% demat penetration, the potential for this industry is vast when compared to China in FY23 which had this at 15%, and the USA which had this number at 65% back in 2018.
The overall fintech industry in India is currently valued at USD 31 billion and is expected to rise to USD 84 billion by 2025. India also has a very high fintech adoption rate of 87% vs the global average of 64%. The rising penetration of smartphones, UPI, and the wide reach of cheap internet in India are considered to be the growth drivers that have made India a prime growth market for the fintech sector.
The major listed direct competitors of Angel One in India are:
ICICI Securities
Motilal Oswal
JM Financial
5Paisa Capital
The Company also has major unlisted rivals in market leader Zerodha & upcoming investment start-up Groww. It is also competing against all big commercial banks and major NBFCs like Bajaj Finance and Paytm, all of whom have their own broking business.
Key strengths
The Company has built its brand strength and long industry presence. Angel One has been present in the broking industry since 1996 and has developed a great brand for itself especially in tier 2 and beyond cities and towns in India which have accounted for over 90% of new client additions for the company since Q4FY20
The demat penetration in India is still at only 8.1%, highlighting good headroom for market expansion in Angel One’s flagship broking business. The Fintech sector in India is also expected to grow a lot which also shows a lot of growth potential for Angel One’s future business lines
The Company has been able to increase its large market share in the major market segments and has also maintained a great operating profile with RoE of ~45% and a PAT margin of ~30% in FY23
The Company’s focus on developing in the fintech space, and its experience in building apps and digital properties over the years should act as a big source of growth for the company in the fintech space.
2. Key Historical Financials
Revenue CAGR in the past 3 years was 59% due to an industry-wide rise after the COVID-19 outbreak. PAT CAGR in the same period was 118%, showcasing a rapid rise in operational efficiency for the Company in the last 3 years. ROCE and ROE look quite high for the competitive industry and may not be sustainable.
3. What is my view on Company valuation?
Angel One was listed in Oct 2020 at INR 275 which increased to ~ INR 1,800 in April 2022 and has fallen to current levels of INR 1,277. Company has vastly outperformed the general market and the financial services sector in India.
The Company trades at a P/E of 12x vs 12x for ICICI Securities, 8.3x for Motilal Oswal, 8.5x for JM Financial & 27x for 5Paisa Capital.
Valuation between Angel One and ICICI Securities, Motilal Oswal & JM Financial has converged over the last year. 5Paisa is also a big discount broker, which is trading at a large valuation vs Angel One mainly due to its position as one of the top pure play discount brokerages in India and its depressed earnings.
Based on the great potential for demat penetration in India, the other opportunities in the non-core businesses like the fintech space, and the increased focus on the technology side, I expect Angel One to have a steady growth momentum going forward.
At the current valuation, the stock appears to be expensive by industry standards, especially with the slowing down of growth in the near term and the regulatory impact from the upstreaming of client funds.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Management churn seems to be high - the CEO has resigned in 2 years
High level of competition in this space. Almost every financial services company including big banks, NBFCs, startups, and others competing in the broking space. Almost all of these players have large pools of capital both through their flagship businesses or VC financing, unlike Angel One which has used primarily used its internal accruals for growth.
Low barriers to entry make maintaining market share entirely dependent on brand strength in the long term, which is difficult in the face of the high competition in the industry.
Under the new flat-fee model prevalent in the industry, almost all of the broking revenues come from active traders and thus brokerages need to keep adding to their active client base to sustain revenue growth. But the addition of active traders is directly dependent on the state of markets with bull runs seeing humongous customer additions which eventually dry up when the bull run ends and can the company can even see a drop in customer count in bear runs. Thus the broking industry tends to be cyclical in tandem with the general financial market up and down cycles.
About the Author
I am a student of the stock market.
Disclosure
I have had no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.