Angel One: Metamorphosis into a Fintech? (Previously Angel Broking)

[praveen_potnuru]

IMO angel one is fairly valued for a broking business growing at 20% cagr in revenues. Near term triggers include final approval for AMC by SEBI.
Recently zerodha was granted final AMC license in Aug 2023 i.e. nearly 10 months after the in principal approval.

Considering Angel One got their in principal approval in Feb-2023, the final approval may come towards the End of the CY23 or in Q4 FY24, if we take Zerodha AMC as the reference.

Anyways this is just a approximation and may or may not play out as is. I look forward to this near term trigger. This would add new stream of revenues to the co. Recent trends in retail suggest that people to go for MFs with higher historical returns and it didn’t take AMCs like Quant MF to grab market share faster. I believe in the execution of Angel One management and confident of them grabbing market share with innovative products. Still the perofrmance of the MFs would still be a key moniterable for me and so is the execution in scaling up this business

Disc: Invested and biased

[Nikit_Shah]

Tracking this stock right from IPO. Made some money from 1200 to ~1800 journey. Thought of buying again when it corrected to 1000 during market correction and lull period, but never bought it. I will wait and watch to add this stock during downturn. Have one basic question on valuations of broking company? some one in the post mentioned 5x to 20x PE range as well. Is it fully priced at current market price? Any thoughts.

[praveen_potnuru]

Pe of 5 is too pessimistic as per me, as it means the co would trade like a non growth PSU. But going by history 30x PE is also too much. So, IMO considering the execution track record (gaining market share, robust Super app) and growth rates combined with capital allocation strategy, I believe the co would be too cheap if it trades at single digit PE. Personally would be a buy in huge qty if the co comes to 11-13x PE and wouldn’t sell at 17-18x PE. I may sell if goes to 23-25x PE.
One also needs to consider that the co already started investing in people and tech for AMC, which makes the Profit margins appear lower.

The Profit margins and return ratios will improve as the clientele matures (as the Customer Acquistion cost is only for the first year) or the proportion of revenue from clients with more than 1 year goes up .

Anti thesis:

• Any factors leading to loss in market share (seems not a problem at the moment)
• Not getting AMC license (very low probability)
• Any glitches in app/ platform desrupting the customer experience
• Regulatory changes

[Nimit]

A business growing at 20%+ deserves a higher PE but there is a huge regulatory hang. Sooner or later the government/SEBI will do something stupid and maim the entire F&O business.
SEBI recently did mandate brokers to negatively advertise their most profitable division by showing a warning message each time a user logs in. I found it very funny to think that all brokers had to put their engineers to build something which will harm their cashcow!
If they find that it didn’t work then they are sure to make even more discouraging move like capping F&O turnover of a individual based on their historical ITR etc.

Just look at the GST norms on casino, online gaming. One shot and the whole industry is jeopardized.
At say 30 PE owning a stock with such a risk (and other risks) may not justify the reward.

disc: invested

[piyush_narang]

Couple of questions after Q2FY24 results-

1. with funding book of 1,950 Cr, how are they generating 181Cr. quarterly?
2. Gross client addition is ?
3. Diff between assisted business and direct channel?
4. Diff between gross broking and net broking revenue?

Please clarify, would be helpful

[praveen_potnuru]

1. the 181 cr is not all from the client funding. The Co keeps some deposits with Exchanges and earns interst on it

[piyush_narang]

oh yeah!!! that skipped my mind… any input on other pointers

[Tejas1]

AngelOne Q2 Concall Highlights

Highest ever Revenue & PAT
Total Income up 41 % YoY at 1049 Cr v/s 746 Cr
PAT up 43 % YoY at 304.5 Cr v/s 221 Cr
Dividend to be paid 12.7/ share

Total client Base at 17.1 Mn, up 48 % YoY and 13.3 % QoQ
Gross Client Acquisition Highest at 2.1 Mn up 80% YoY and 60% QoQ

Share in Active NSE client at 14.6%
Market share gains for the company in all the segments
Client Funding Book at 1946 Cr v/s 1193 Cr QoQ
Saw a good recovery
Net worth at 2612 Cr
Cash Segment saw a good recovery in ATDO & No.of Orders
For F&O and Commodity segment there is secular growth every Quarter in the ATDO and No. of Orders

-New Business Verticals Update
1)Lending 2)AMC 3)Wealth Managment

The main focus of AngelOne is to expand the addressable market and product offerings.
It wants to scale up its existing broking business and diversify into a comprehensive fintech model.
It aims to leverage the benefit of its wide distribution, tech capabilities,and its existing user base.

Timeline of New Business Verticals:

1. AMC - To commence from Q4/Early Q1 FY25
   The final approval was filed in August,business and tech infrastructure are in progress
   Finally, it will be approved by SEBI through an onsite inspection, taking two quarters for approval.

2. Lending Vertical - Going live by Q4

3. Wealth Management - More details will be shared in the next quarters; it’s currently in the concept stage

More Details on New Verticals

1. Consumer Lending Products: AngelOne wants to become a distributor of consumer lending products (Unsecured Personal Loans) by partnering with NBFCs and Banks, with the balance sheet risk not being with AngelOne
   It doesn’t aim to be just a vanilla distribution company but wants to utilize tech capabilities and AI/ML models using customer data to create customer profiles
   It aims to assist with underwriting and collection processes, increasing commissions for AngelOne. There is tremendous potential in the retail credit business

2. AMC: The AMC will be based on Passive Managed Funds, Angel to benefit from the extensive distribution network

3. Wealth Management Solutions: AngelOne is also trying to enter the wealth management business, focusing on clients with a ticket size above 50 L/1 Cr or beyond.
   They aim to use their technological capabilities to provide high-quality products and cater to HNI/Ultra HNI clients

Cross-selling to the existing customer base presents a significant opportunity without the need to spend on acquiring customers for verticals like distribution and lending businesses

Client Acquisition Ramp Up Due to:
1.Rolling out of New features
2.Product Improvement
3.Multiple Expiries
4.Buoyant Markets

New Features Introduced to Elevate the User Experience:
1.Launched TradeBuddy, vernacular educational videos.
2.BSE derivatives were launched for its users.
3.Sensibull was made free for all AngelOne users to compete with Zerodha

Some New Developments in the Pipeline:
Open Interest Analytics & Global Indices in the Super App.
More features to help clients with stock discovery

Unique SIPs Registered Trend in the last three quarters:
1st Quarter: 108,000
2nd Quarter: 431,000
Latest Quarter: 725,000
This trend helps in better client retention and engagement in the Super App
These users can be the future potential customers of various products

The top 5 digital brokers constitute 63% of the NSE total active base
This share remains at the highest level, and discount brokers continue to gain market share, with AngelOne leading

While the industry shrunk,AngelOne expanded its market share

Multi-Year Revenue Visibility from Clients Making This an Annuity-Based Model

Revenue has Stabilized from the 3rd Year.
Digital Transformation is Increasing Client Revenue.
There is strong revenue visibility of acquired cohorts for multiple years

The 4th-year revenue contribution has stabilized at 63% compared to 26% in the pre-digital era

Contribution Margin Expansion for Acquired Clients:
Year 1: 56%
Year 2: 92.6%
Year 3: 92%

Enhancement in the Lifetime Value:

1. Acquired clients are profitable from Year 1
2. From Year 2 onwards, contribution margin is 90%+.
3. 3-Year Revenue/Cost of Acquisition is robust at 7.9x

Revenue/CoA will expand further as clients contribute revenue in subsequent years

Gross Client Acquisition at 2.1 million, the highest in the last quarters
90% of the Gross Clients are from Tier 2-3 cities

Rising Share of Revenue from Longer-acquired Clients:
2-3 Years: 7% to 22%
3-5 Years: 9% to 14%

Disc Biased and Invested

[ashishraj]

Already 9X from the bottom to top. Multiple expiries, BSE F&O, 3 new business launches this year and the valuations - it can still continue to give good returns! Dividend yield is like icing on the cake.

The new Business launches look like a nearly risk free bets, or am I missing something?

[nparida]

There is considerable potential for expansion in this company. During its IPO, the process of opening an account involved sending physical documents, which deterred me from applying initially. I had been trading with Angel Broking since 2014, but I refrained from investing due to the company’s less tech-savvy approach compared to other brokers. However, I later recognized my error. When the stock price dropped to around 1000 levels, I seized the opportunity and accumulated shares

[StonePitbull]

Kudos! I opened by first demat account with Angel Broking back in 2018 but ended up closing it because of high brokerage and other little inconveniences. Moved to Zerodha.
5 years down the line, they’ve shaked up things for the better and are #3 now. I missed the bus big time.

[sagaxstream]

[Mayank_Jham]

Hey @praveen_potnuru
Have u exited the stock as it has already reached the range of 23-25x PE.
What do u not want to hold till 34-36x PE at the valuation it waas listed and then get out of it.
Pls share your thoughts

[praveen_potnuru]

Hi Mayank

I’ve shared my thoughts here Link here

Shortly then stock pealed out at 26x P/E in Apr 2022 and I see signs of exhaustion in momentum.
Partially sold. May exit fully in near future.

Some positives for next 3 years:
Co is diversifying into wealth management, PMS, lending (by partners), distribution of MFs, launching own mutual fund etc. This may more than double the profits in next 3 years, if they can maintain growth of 20% in broking business.

More importantly, with diversification, the multiples will rerate (just broking business is not valued hughly by the market) as the portion of wealth management increases. Look how 360WAM, Nuwama and Anand Rathi are trading at >30x P/E.

Although the current valuations looks attractive for the growth. Historical valuations compels me to sell. May enter if the stock price corrects or time corrects

Disc: No reco to buy or sell

[Maheshcm]

Its a bit dated news but thought might be worth exploring. Narayan Gangadhar had sounded very motivated when he joined Angel and had planned a journey of 5-10 years, he quit in 2 years, was it just to pursue better opportunities or had any issues with the promoters?
I dont think anything has significantly affected to Angel, the trajectory has been pretty good however his departure came in the middle of exploding growth /transformation which was surprising.

[rishitdedhia13]

He’s now associated with 5paisa

[Maheshcm]

This is AngelOne’s market share in FNO in India, about 26%

Now if we multiple the FNO ADTO of AngelOne by 4 times, we get a ballpark avg daily of Indian market,

so this no comes to be around USD 16Billion , if we compare it to US Daily avg of options turnover, its around USD 25Billion.
So the FNO trading turnover in India looks pretty high for me, can it continue to grow?
And most of us know , success rate and making money in Trading is difficult.
Just trying to make sense of whats the runway here

[Mayank_Jham]

FnO will not have a very large room for growth for all the broking businesses not just angel one but the trading volumes will defenietly continue to grow (margins may get impacted)

The new triggers are the PMS services and wealth managment services they are foraying into

SIP tailwind for them will also be there as of now because the markets are at ATH and people are diversifying their investments.

[praveen_potnuru]

Angelo One Q3 results are released yesterday. There is good revenue growth QOQ and YoY.

But the PBT is lower QoQ due to other expenses which were higher QoQ by 16%. Look at snapshot below from investor presentations

While this is ignored by some investors as the expenses are related to business growth, not every investor (short, medium and longterm) may look at it the same way. My thoughts below

1. While some of these expenses are a one time hit, it is not same for all expenses
2. The cost coming from headcount addition would be recurring. It most probably would go up in future as the employee salary and onboarding expenses increases
3. Some of tech expenses could be there for few quarters as the co keeps on investing in starting/ setting up adjacent busineses
4. Launch and promoting the AMC businesses (and all other businesses) would need front ended costs which the co would spend in next 2 years (just my estimate)
5. The AMC business could be loss making for first few quarters until the ramp up happens
6. There are better chances for the co to exhibit good revenue growth aided by new businesses. But as these new businesses would be loss making for few quarters, this may negate the profit growth in Broking business
7. The co would face some challenges in showing good profits (unless one does SOTP) for upcoming quarters (I’d say 2 years)

The above mentioined points may lead to Time correction (may be price correction as well) in near future.

Disc: Just sharing my thought. Not a recommendation to buy or sell. Please do you own due diligence. Exited in personal PF but holdings in family PF

[Biru]

Thanks for great research.
I started my investment journey in September.
The stock doubled in 4 months.
I made huge mistake not allocating high amount.
Learning from mistakes