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Strong earnings growth continues; benefiting from increasing retail footprint on capital markets

Angel One (Angel) successfully maintained its business momentum in Q3FY22 with 110%/23% YoY/QoQ PAT growth. We estimate PAT to clock 37% CAGR between FY21-FY24E and we value the stock at 22x FY23E EPS of Rs86.5 (earlier: Rs74). Maintain BUY with a revised target price of Rs1,900 (earlier: Rs1,630).

* Incrementally noteworthy business parameters include: 1) gross client addition was at 1.3mn in Q3FY22 and 3.8mn in 9MFY22 with 94% of the adds from tiers-3/4 cities; (2) client vintage remains new with less than 2-year-old clients contributing 75% of brokerage revenue in Q3FY22; 3) continued growth in the number of orders (18% QoQ and 117% YoY) and app installs (18.3mn in Q3FY22 vs 12.6mn / 15.4mn in Q1 / Q2FY22); 4) low median age of clients acquired (29 years); and 5) the digitalfocused talent pool stands at 609 as of Q3FY22 (18% of total employee count) vs 450 in Q3FY21.

* Updates on technology, product and business efficiency: Company has disclosed key initiatives undertaken to increase reliability, and improve and optimise client experience. Backend services, hardware and select systems have been worked upon to provide better error handling, better availability, build a more balanced trading ecosystem and provide shareable charts. New machine learnings based forecasting and propensity models have been used to improve client acquisition and activation, which has manifested in higher activation ratio (active to gross clients) and higher lead conversion ratio (number of direct clients who saw ‘thank you’ page / total users who entered mobile number). This has been helped also through upgraded KYC. The app journey too has been redefined through a refreshed ‘Discover’ tab, which improves discoverability of features within.

* Upgrade FY22E/FY23E earnings; maintain BUY: We find comfort in: 1) strong traction in brokerage revenue as seen from monthly trends (average monthly brokerage in Q1FY22/Q2FY22/Q3FY22 was Rs651mn/771mn/915mn); 2) strong client acquisition momentum (gross clients added in Q3FY22 were 1.34mn vs 1.2mn / 1.3mn in Q1/Q2FY22; NSE active clients stood at 3.1mn in Q3FY22 vs 2.5mn in Q2FY22 and 2mn in Q1FY22); (3) significantly higher valuation multiples for capital market players like CAMS, CDSL, AMCs; and (4) available optionalities in terms of distribution / AMC business under the umbrella brand Ängel One. We increase FY22E/FY23E earnings by 22%/17% to Rs6.2bn/7.1bn.

* Increased retail footprint in capital markets provides enough lever for countering apparent cyclicality in retail volumes. This can make the earnings trajectory of capital market plays less sensitive to market volatility, which could imply possible increase in valuation multiples. Please see our sector thematic on the same.

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