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Digital transformation to continue rerating

Angel Broking (ABL) has successfully transformed into a digital broking platform operating in a flat-fee business model resulting in strong growth in revenues (up 98% in FY21) and active clients (up 171% in FY21) with cost efficiency (EBITDA margin of 48% in FY21 vs 29% in FY20). The successful transformation of the business model underlines execution capability of the franchise in retail broking space.

Appointment of Narayan Gangadhar as its new CEO (strong tech experience with Google, Amazon, Uber and Ola) holds promise as ABL seeks to further build digital capabilities. We estimate PAT to clock 16% CAGR between FY21-FY23E and value the stock at 18x FY23E EPS of Rs50. Initiate with BUY and target price of Rs900.

* Full-scale digital platform and discount brokerage model has transformed the business:

Between FY19 and FY21, total broking turnover increased from Rs2.6bn to Rs5.4bn, active clients rose from 0.4mn to 1.6bn, and NSE-active client market share grew from 5% to 8.3%. This transformation is credited to the digital discount broking business model started by the company in late 2019. Sub-broker driven revenues have increased from Rs988mn in FY20 to Rs1.6bn in FY21 whereas direct flat-fee revenues rose from Rs703mn in FY20 (operational only for a quarter) to Rs3.3bn in FY21. Majority of new clients have been added to the flat-fee plan since Q1FY20, hence the traditional direct business revenues will understandably decline hereon (traditional plan brokerage revenue mix in net brokerage revenues stood at 75% FY20 and declined to 39% FY21). We expect traditional plan mix to decline further to 31% / 29% in FY22E/FY23E.

* MTF lending is a high-margin business.

Net interest revenues from the margin trading facility (MTF) stood at ~Rs1.6bn for ABL in FY21. This is a steadier business stream, but with high margin (NIM at ~9%). The granular nature of the book collateralised by underlying stock portfolio keeps credit costs in check. We expect FY22E/FY23E average MTF book at Rs11bn/Rs12.3bn respectively (Rs11.8bn at FY21-end) in line with growth in cash volumes.

* EBITDA margins have sustained (48% in FY21) despite strong client growth.

FY21 total operating costs grew 39% vs net revenue growth of 89%. Employee costs were up 8% YoY to Rs1.7bn while other income was 68% YoY higher at Rs2.98bn due to robust client addition during the year. Management believes the payback period of the cost of acquisition has reduced dramatically post digital transition.

* Risks:

Brokerage industry is dependent on the capital markets, hence any general economic and market consolidation in India or globally can affect overall revenues. Company is also subject to extensive statutory and regulatory requirements; hence, any non-compliance can have a bearing on operations. The business is highly dependent on IT and any risks / operational failures can lead to loss of revenues.

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