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Stellar performance amid volatile equity markets

* PAT grew 23% QoQ and 125% YoY to INR1.65b (9% beat) in 3QFY22. The beat on profitability was driven by a) a 2% beat on operating revenue (up 17% QoQ and 105% YoY to INR3.5b) owing to a 5% beat on interest income, whereas net brokerage revenue was in line with our expectation; b) a 4% beat on other income (growth of 5% QoQ and 85% YoY); and c) admin costs coming in 6% below our expectation (growth of 5% QoQ and 103% YoY).

* CIR stood at 49.3% (est. 52.5%). The management has guided for a stable cost-to-income ratio of 49% in the coming quarters.

* The lead conversion ratio for direct clients improved substantially during the quarter, which translated into the activation ratio improving to 39% (from 38% in 2QFY22). The new onboarding journey improved the conversion ratio to 40.5% v/s 30.7%.

* We upgrade our earnings estimates by 8%/7%/7% for FY22E/FY23E/FY24E on the back of a strong margin performance in 3QFY22.

Marginal beat on revenue; F&O share continues to rise

* Operating revenue came in at INR3.5b (2% better than est), indicating strong growth of 17% QoQ and 105% YoY. This was driven by a healthy performance across broking and interest income. Growth in the Broking business was driven by the F&O segment, which saw strong growth of 148% YoY / 24% QoQ to INR3.1b; cash broking revenue grew 124% YoY / 4% QoQ to INR973m. The share of the F&O segment in net broking revenue further increased to 74% in 3QFY22 v/s 69% in 2QFY22. Brokerage as a percentage of broking revenue further declined to 35% (from 37% in the previous quarter) on account of the faster pace of revenue growth from flat fee based plans.

* Although the share of flat fees in the total net income rose 6x to 81% in 3QFY22 (from 14% in 1QFY20), average revenue per client (ARPC) fell 0.3x, demonstrating the robustness of the business.

* Other income came in at INR936m (4% ahead of expectation), growing 5% QoQ / 85% YoY. Growth in other income was led by 13% sequential growth in depository, distribution, and other income.

Lower admin costs drive improvement in CI ratio

* Total opex grew 7% QoQ and 95% YoY to INR2.2b (4% below our estimate). Operating efficiencies have started to play out, with CIR down 49.3% v/s 50.7% a year ago.

* Employee costs stood at INR780m (in line with est), growing 75% YoY and 13% QoQ. During the quarter, the company hired six more members for its digital team, taking the digital talent pool to 609. Employee costs as a percentage of operating revenue remained stable sequentially at 18%.

* Admin costs came in at INR1.4b, up 5% sequentially (6% below our est). This was on account of higher spending on client acquisitions and CSR.

Other highlights

* Trade volumes have improved consistently despite market volatility over the last 15 years – in spite of negative returns from the equity markets in 4 of the past 15 years. The impact on the number of trades has been limited.

* Angel’s average daily order count increased in 13 of 16 instances, where either the Nifty index or Nifty Midcap 150 index have corrected by >5% over the last 33 months.

* The no. of orders increased to 180m in 3QFY22, from 152m in 2QFY22, despite market volatility.

Highlights from management commentary

* In 9MFY22, the total technology costs stood at INR1.06b, of which INR1b was opex and INR60m was capitalized.

* 80% of the clients acquired in 3QFY22 are new to market.

* For the next 3–4 years, the management intends to focus on (1) improving wallet share with existing clients and (2) growing market share in client acquisitions. Thereafter, it would focus on improving margins.

* Despite the continued spending on technology and customer acquisitions, the management has guided for a stable CI ratio.

Valuation and view

Angel is a perfect play on 1) the financialization of savings and 2) digitization. The company demonstrated strong performance across key operating parameters in 3QFY22. As guided, the management continues to invest in technology and strengthen its position. We believe the client addition trajectory for the industry as well as Angel would continue, led by 1) under penetration and 2) the ensuing LIC IPO, which has a separate allocation for policyholders. Furthermore, the cyclicality of revenues is much lower for discount brokers v/s traditional brokers due to the shift towards the flat fee revenue model. We upgrade our PAT estimates by 8.0%/7.3%/6.9% for FY22E/FY23E/FY24E on the back of a better-than-expected CI ratio and the management guidance of the same sustaining. We maintain our BUY rating with revised Target Price of INR1,900 (20x Sep’23E EPS).

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