Recommendation from Finance - Stock Broking

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year 

Angel One Ltd : CASHING IN ON AN UNTAPPED MARKET

HERE IS WHY
✓Strong flat fee player
✓Profitable alliances
✓Huge potential ahead

India’s broker market is growing at a CAGR of 8 per cent. While more than 55 per cent of the population in the US invest in stock markets, the figure for India is at a mere 2 per cent. There is a huge gap which presents tremendous potential for the Indian financial brokerage industry. In this domain a quality and strong business entity is Angel One. Angel One Ltd. is a diversified financial services firm that specialises in stock, commodity and currency brokerage as well as institutional broking, margin trading facility provision, depository services, distribution of mutual funds, lending as a non-bank financial company (NBFC) and corporate agents of insurance companies.

In the Indian capital markets, Angel One is one of the strongest flat fee players on the secular growth story. With its largest and most exclusive network of almost 18,000 authorised persons registered with the NSE, the company has a revenue-sharing arrangement with these individuals for the broking and distribution business earnings created by clients obtained by these individuals. The FY22 payout to these authorised people of ₹550 crore was up 51.6 per cent year-over-year, reflecting the increasing customer base and client activity shown in robust average daily turnover and a very busy IPO market.

The business has formed strategic alliances with and integrated a wide range of third-party software platforms, including Vested, Small Case, Sensibull, Streak, Quicko and Markets Mojo. The company’s revenue has been increasing at a CAGR of 43 per cent during the past three years. The FY22 revenue stands at ₹2,292 crore. A net profit of ₹625 crore was realised by the corporation in FY22. As of now, the business enjoys an operating margin of 40 per cent. In the second quarter of FY23, powered by record-breaking transactions of retail derivatives, Angel One’s top-line grew by 36 per cent to ₹717 crore on a sequential basis. 

Given the management’s dedication to growth and investment in new technical expertise, rising payroll expenditure seems inevitable. Profit after tax increased from ₹134 crore in Q2FY22 to ₹214 crore in Q2FY23 due to sustained client acquisitions, rise in the volume of orders and cost discipline. The average funding book for clients of the company increased 108.3 per cent to ₹1,500 crore in FY22 from ₹720 crore in FY21. Given the relatively low penetration of dematerialisation in Tier III cities, there is still a great deal of space for additions. The return on equity (ROE) for Angel One at the end of FY22 is 46 per cent and return on capital employed (ROCE) is 35.5 per cent.

The stock is currently trading at a price to earnings ratio of 17.7 times. The company generated ₹558 crore in cash from its operations in FY22. As a result of the firm’s solid foundation, it has experienced rapid expansion. The company will soon be launching its android mobile application in late Q3FY22 named ‘Super App’. Going ahead, customer additions are expected to revert downwards, thus impacting broking revenues. Nevertheless, company has enough levers to maintain margins by slowing down its marketing spend in a case of slower customer addition environment. Because of the high growth penetration in the Indian financial sector, low substitution effect for Angel One services, strong fundamentals, attractive valuation and promising future, we advise investors to BUY.