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Buy 5paisa Capital Ltd For Target Rs. 450

Capital raising to aid business growth ahead…

5Paisa reported a mixed set of Q4FY21 numbers wherein the broking segment showed healthy momentum while non-broking business performance remained flat. Revenue remained sequentially flat at | 49.5 crore, on account of 23% and 4% QoQ fall in allied broking and cross sales income, respectively. Allied broking income declined due to a reduction in annual maintenance charges to nil from | 45/month earlier for holdings up to | 2 lakh while for customer holdings above | 2 lakh will be charged | 25/month.

Broking revenue growth, on the other hand, was healthy at 18% QoQ to | 23.2 crore due to strong sequential customer addition of 2 lakh and 16% QoQ rise in overall ADTO. Cash ADTO increased 9% QoQ to | 2008 crore while ADTO in the derivative segment has increased 16% QoQ to | 49965 crore. Continuous focus on improving operational efficiency has led to a decline in client acquisition cost (CAC), which has reduced in Q4FY21 to | 897 vs. | 1148 earlier. Overall expenses for the quarter fell 6% QoQ to | 41.6 crore, which helped the company post 64% QoQ rise in PAT to | 6.1 crore.

Healthy client addition to aid topline

Customer addition during the quarter was healthy at 8.1% QoQ, 74% YoY as 5Paisa added 2.06 lakh clients. With this, total customer base has risen to 13.5 lakh from 11.5 lakh a quarter ago. Also, 65% of total clients are active, slightly lower than 69% in previous quarter. For 5Paisa, 83% of customers are from tier-II, tier-III cites and 84% are first time investors. Continued focus on technology, marketing is seen keeping client acquisition healthy ahead.

Fund raising to help sustain business momentum

The company announced substantial capital raise of | 250 crore via equity shares and warrants issued at | 500/share. These funds are to be utilised for technology upgradation, increasing pace of customer acquisition, branding, product development and working capital. Focus on web platform, algorithmic trading, tech based traders, should lead to improvement in F&O market share. On earnings front, declining CAC should boost profitability.

Valuation & Outlook

Recent capital raising would aid the company’s plan to revamp existing products suite, increase pace of customer acquisition and improve share of non-broking business like P2P lending, distribution of financial products. However, utilisation & benefit of recent capital addition, impact of regulatory changes, level of customer burnout/leakage need to be monitored.

5Paisa being one of the strong cash players within discount brokers, decline in F&O share did not impact revenue much. However, we believe a focussed approach to raise F&O market share and capital to increase the margin funding book, should aid earnings. We expect earnings to rise at 79% CAGR in FY21-23E to | 55 crore. However, recent capital raise would keep return ratios optically lower at ~12%. We maintain BUY rating on the stock and upgrade our target price to | 450 (earlier TP | 350) valuing at 25x FY23E EPS.

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