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Angel One - The Bro-”King”? 🏦

Since we try to break down investing into stocks and themes often, we decided to switch it up and talk about the actual business that enables us to invest in the first place - the broking industry of India. In fact, the trend of trading and investing has been immense, with the number of Demat accounts in the country crossing 10 crore in 2022, a jump of almost 3x since COVID began!

When it comes to actually opening an account, you think of the household name Zerodha - with its no-fuss approach, zero marketing spending, and massive profits. The other conventional option would be full-service brokers like Motilal Oswal, ICICI Securities, and HDFC Securities with established customer bases that struggle to keep up in the digital world.

Yet, amidst it all, is one player in this sea of brokers that often goes unnoticed - Angel One. Despite being under the radar, Angel One boasts best-in-class metrics and a rapidly growing user base, doubling its market share from pre-COVID to now, and it looks like the company is poised for some upswing!

Big Brand

Angel Broking is a brand established over 22 years ago with a pan-India presence and a total client base of around 14 million users. With a market share of 13%, its active users make up 31% of the total client base, a number that surpasses the industry average of 28%.

In fact, its active client base has grown from 4.2 million in 3QFY23 to 4.3 million in 4QFY23, despite the broking industry’s overall active client base declining by 7.4% between the above quarters - apparently, Angel Broking customers are stickier than the rest!

It dominates the commodities segment with a market share of about 55%, as well as a growing F&O segment with around 23% market share. All of this is also reflected in strong quarterly numbers for 4QFY23, where net broking revenue grew by 29% YoY, largely driven by clients who have stuck around even during COVID.

Digital Native

The company has taken the digital world by storm with its remarkable customer acquisition capabilities across diversified digital platforms. What's even more impressive is that a whopping 85% of its clients were acquired digitally in 1QFY21, with 53% coming through their digital marketing methods.

Angel Broking is transitioning from the traditional, dealing-with-a-broker model, to a digital system which enhances the revenue per client that the company makes. Assuming a client stays on the platform and actively trades for 3 years, Angel Broking makes an average of Rs. 86 per client in the second year and Rs. 77 in the third year, as opposed to the traditional model where the broker makes Rs. 47 per client in the second year and Rs. 32 in the third year - a steep upside!

Super App

Unlike other trading-focused brokers, Angel operates on a flat fee model and offers a variety of services that can be tailored to your unique financial goals. The company also has made a major upgrade - a “super app” that allows the user to invest in anything under the sun - from bonds, US stocks & ETFs, to Loan Against Securities, IPOs, Market Research, and Margin Trading Facilities. This has resulted in a significant increase in average daily turnover, skyrocketing to Rs. 18,50,000 crore, almost double on a YoY basis as of 4QFY23.

But that's not all! Angel has big plans for the future, with a focus on expanding its online distribution by adding other wealth management products such as Unsecured Consumer Lending (loans without collateral) and insurance!

This strategic approach will help the company build a more robust online distribution system and enhance the overall customer experience. The company also plans to launch its AMC business and has received in-principal approval to launch its own mutual fund which will be live within 2 years.

Improving Financials

Angel's operating margins have been consistently strong, hovering around 40-45%, and the company is expected to maintain this level as it continues to invest in growth. Despite a 19% YoY increase in total expenses (in 4QFY23), Angel has managed to lower its cost-to-income ratio to 43% in 4QFY23 from 45% in 4QFY22, thanks to its impressive retail derivative average daily turnover.

Unlike some of its competitors, Angel has a relatively low dependence on interest income, which is the interest they earn with funds parked with them by the clients. For Angel One only 8% of its Profit Before Taxes came from interest income in FY22, compared to 29% for Motilal and 22% for Zerodha. This helps Angel weather any potential regulatory changes that could come it's way!

Attractive Valuations

Purely for the purpose of education, if we were to ascertain a value to Angel Broking, we would go about it in the following manner:

  • Our analysis shows that this broking company is a cut above the rest, with impressive growth in clients, activation rates, and market share gains, thereby nudging us to value it at a 12x FY25E EPS

  • Based on our projections (which are purely an educational exercise to ascertain how to value a broking business), we've set a target price of Rs. 1,450 per share, which represents a 20% upside, assuming a healthy Revenue CAGR of 13% and PAT CAGR of 15% over the forecasted period, along with a steady 3% dividend yield

While growth may slow down slightly due to a decrease in client additions and higher costs associated with customer acquisition and borrowing, the company seems to have a propensity to beat its peers!

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. The securities quoted are for illustration only and are not recommendatory. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

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