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Business traction remains strong; sustainability fears well factored in valuations

Angel One (Angel) has reported consistent client additions, growth in number of orders and cost discipline, which is reflected in PAT increasing from Rs1.34bn in Q2FY22 to Rs2.14bn in Q2FY23. While the number of orders and MTF book will likely have bearings from market movement, the high number of gross clients (1.2mn in Q2FY23), gradual increase in systemic steady investors (Refer our note “Indian exchanges: 'Steady investors' have risen despite 'buyer's remorse' – takeaways from NSE study”) and attractive valuations (Angel One is trading at 17.7x times FY23E PAT) make us positive on the stock. Risks include: 1) Sharp drop in market volumes and 2) any regulatory action to curb volume growth (especially in equity options). We factor in 16% earnings CAGR over FY22-24E and expect PAT of Rs8.5bn in FY24E. Maintain BUY with target price of Rs1,980 (earlier: Rs1,830) based on 20x FY24 EPS of Rs99.

* Q2FY23 operating highlights: 1) Gross client addition declined 7% QoQ to 1.2mn in Q2FY23 from 1.3m in Q1FY23; (2) less than 2-year-old clients contributed 69% of brokerage revenue in Q2FY23 as against 72% in Q1FY23; 3) number of orders grew 11% QoQ, 4) median age of clients acquired remained low at 29 years and 5) digital focused talent pool stood at 633 as of Q2FY23 vs 630 in Q1FY23, 6) app installs stood at 28.6mn in Q2FY23 vs 25.4mn in Q1FY23. However, employee count declined to 3,120 in Q2FY23 vs 3,223 in Q1FY23.

* Q2FY23 PAT of Rs2.14bn was above our estimate driven by other income; cost performance remains impressive: Q2FY23 ARPU stood at Rs430, down 5% QoQ (vs 12% decline in Q1FY23). Decline in ARPU was due to an increase in the number of clients (>88% in Q2FY23) who were new to market. Overall revenue (net) grew 8% QoQ driven by 11% QoQ growth in net brokerage revenue and 25% growth in other operating revenue (mostly other income). This was partially offset by 20% decline in net interest income (largely in line with 17.5% dip in average MTF book). Total operating cost remained flat QoQ driven by 3% QoQ dip in other expenses (might be on account of lower client acquisition) and increase of 8% QoQ in employee costs. EBITDA margin improved 400bps QoQ to 52.4% in Q2FY23.

* Maintain BUY. We expect order per day to remain resilient in medium term due to client additions although it may dip in near term, in line with market sentiment. We expect FY23 orders at 918mn (437mn in H1FY23) and 10% growth in FY24 over FY23. We expect MTF book to dip in line with correction seen in cash ADTO. Employee cost and other expenses are expected to remain elevated on account of new hirings and investments towards marketing cost in order to expand the market share. Accordingly, we expect FY23E/24E EBITDA margin at 49%/50.7% resulting in PAT of Rs7.5/8.5bn, respectively. Growth optionalities remain in terms of distribution / AMC business under the umbrella brand Ängel One.

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