Angel One Ltd – A Worthwhile Long-Term Bet? : Stock Analysis December 2023

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Angel One Ltd is one of India’s leading technology-focused retail stock broking companies. It offers services across equities, derivatives, depository functions, loans against shares, IPO financing etc to over 10 million clients pan-India. Backed by its digitally advanced platforms, Angel One has established a dominant position in the high growth online broking industry. Over the past 5 years, the company has delivered an impressive 31% revenue CAGR and 52% bottomline CAGR. With operating margins of 43%, Angel One enjoys best-in-class profitability. Further, its strong balance sheet, high promoter holding, industry tailwinds make Angel One a good investment bet for the long run. Though valuations seem stretched in the near term, the stock merits buying on market corrections from a 3-5 year lens for healthy returns.

Company Introduction

Angel One Ltd (BSE: 543235), previously known as Angel Broking, is one of the leading retail-focused stockbroking companies in India. Founded in 1987 and headquartered in Mumbai, Angel One offers services like trading, demat accounts, margin funding, and IPO financing to over 10 million clients. The company has a wide presence with over 21,000 authorised persons and dealers spread across 1800+ cities and towns in India.

Angel One has delivered strong growth in recent years – its revenue has grown at a CAGR of 31% over 5 years while profits have expanded by 52% CAGR during the same period. As of March 2023, the company has achieved a market cap of ₹25,008 crores. Angel One has been consistently profitable with 3 years average ROE of 44.1%.

Should We Buy, Sell or Hold?

In my analysis, I would recommend a BUY on Angel One Ltd from a long-term investment perspective. The company exhibits strengths like:

  • Industry-leading profit margins (OPM 43%) indicating operational efficiency
  • Low debt levels with a debt/equity ratio of just 0.6, reflecting a strong balance sheet
  • High promoter shareholding (38%) showing management confidence
  • Impressive growth in bottom line (52% profit CAGR over 5 years) highlighting growth potential

However, the surging stock price has meant steep valuations for Angel One. With a P/E ratio of 24.5, the stock is trading at almost 10 times its book value, higher than the industry average of 17.5. But high growth rates often justify premium valuations.

I believe the long-term growth story remains intact for Angel One. Rising financial savings and digitization trends are tailwinds for the Indian broking sector. With a large client base and popular brand name, Angel One is poised to capitalize on this growth.

The pros seem to outweigh the cons for this stock. Investors with an investment horizon of 3-5 years can consider buying the stock on corrections for a target of 30-40% upside over the next 2-3 years. However, investors should be cautious in the short term given rich valuations and market volatility.

Angel One Ltd - A Worthwhile Long-Term Bet? : Stock Analysis December 2023

Vital Ratios for a Layman

Angel One Ltd levels
Angel One Ltd levels

Here are some key financial ratios that can help a layman assess Angel One Ltd:

  • High Operating Profit Margin (OPM) of 43% indicates the company is very efficient at converting sales into profits.
  • Low Debt to Equity ratio of 0.6 means the company uses very little debt and equity funds most of its operations. This gives it flexibility to tap more growth opportunities.
  • Return on Equity (ROE) of 47% shows that the company generates excellent returns from the capital invested by shareholders.
  • Price to Earnings (P/E) ratio of 24.5 indicates investors are willing to pay Rs 24.5 for every 1 rupee of Angel One’s earnings per share, reflecting high future growth expectations. The industry average P/E ratio is lower at 17.5.
  • EPS (Earnings per Share) of Rs 122 shows the portion of company profit allocated to each outstanding share. Higher EPS typically leads to stock price appreciation.
  • A healthy interest coverage ratio indicates the company earns more than enough profits to pay its interest obligations.
  • Promoter Holding: Promoter holding in Angel One has been decreasing over the past few years from 44.55% in Mar 2021 to 38.48% in Mar 2023. However, it is still at a healthy level reflecting management’s confidence in the business. A 38% holding shows their interests are aligned with minority shareholders.
  • FII/DII Holdings: FII holding has been rising steadily indicating that institutional investors see potential for further upside. FII holding increased from just 5% in Mar 2021 to almost 17% by Sep 2023. On the other hand, DII holding has dropped marginally from 12% to 10% over the same period.
  • Sales & Profit Trends: Angel One has demonstrated stellar growth trends – It’s sales have expanded at 31% CAGR over the past 5 years while net profits have surged by 52% annually over the same period. This consistent growth highlights the strong and sustainable demand for Angel One’s offerings. In the latest quarter, sales rose 41% YoY while profits were up 33%.
  • Debt Trend: Total debt on Angel One’s books has seen some increase from Rs 1,171 cr in Mar 2021 to Rs 1,555 cr in Sep 2023. But most of this is working capital debt taken to fund increased operations. The debt/equity ratio remains a comfortable 0.6x.
    • Margins Trend:
  • Operating margins have witnessed steady expansion over the years, rising from 24% in 2015 to 43% in 2023. This reflects the inherent operating leverage in Angel One’s business leading to higher profitability as volumes pick up.
  • Cash in Hand: Angel One maintains a very healthy cash/cash equivalents balance of Rs 7,640 cr as of Sep 2023. This provides ample liquidity for funding growth plans.
  • Market Cap: Angel One’s market cap of ~Rs 25,000 cr makes it one of the largest standalone brokerages in India. In contrast, the industry median market cap is just Rs 522 cr highlighting the market leadership position of Angel One.

Is This Stock Overvalued or Undervalued?

At the current market price of Rs 2,979 per share, Angel One does seem to be trading at premium valuations compared to its peers and historical levels.

It has a trailing P/E ratio of 24.5x, significantly higher than the industry average P/E of around 17.5x. Typically, high growth stocks can justify higher P/Es but a 70% premium is steep. The company’s P/B ratio is also on the higher side at 9.6x compared to its 5-year average of around 7x.

However, Angel One has demonstrated industry-leading revenue and profit growth over the past 5 years which offers some fundamental reasoning for the high valuations. Topline and bottom line have risen at 31% and 52% CAGR respectively during this period.

The stock price has also nearly doubled in the past 1 year, rising 98% indicating investors are factoring in strong future growth. Structural trends in India’s economy and capital markets are positive for players like Angel One.

Still, valuations appear to have run ahead of fundamentals in the short term. My intrinsic valuation estimate for Angel One stock is Rs 2,565 per share, about 15% below the current market price. This factors in expected earnings growth of 25-30% over the next 2 years and multiple moderation from current elevated levels.

In conclusion, while Angel One does enjoy strong long-term growth levers, the stock seems overvalued at this juncture. Investors would be better off waiting for a 10-15% price correction to accumulate the stock for healthy returns over a 3-5 year horizon.

Should We Buy This Stock and Why?

In my view, Angel One Ltd remains an attractive buy for investors with a 3-5 year investment horizon despite premium valuations in the near term. The positives for investing in the stock are:

  1. Leadership in rapidly growing industry: Angel One is amongst the top few brokerages in India in terms of clients, revenue, and market share. The broking industry itself possesses immense growth opportunities with rising financial savings rate, formalization of the economy, and deeper penetration across Tier 2/3 cities and towns. These structural tailwinds provide a long runway for Angel One’s growth.
  2. Strong competitive advantages: The company has built a powerful suite of competitive advantages that act as entry barriers for newer players. These include strong brand equity, cutting-edge technology backends, a deep distribution network across India, high client stickiness and more. Such advantages help preserve growth momentum and profitability.
  3. Superior financial growth metrics: As seen over the past 5-year period, Angel One has put up stellar growth numbers outpacing its peers and industry by a good margin. Going ahead as well, 25-30% revenue/bottom line growth looks sustainable given the company’s business dynamics and addressable opportunity. Superior growth translates to wealth creation.

However, given the near-term overvaluation, investors should look to buy this stock in a phased manner on 10-15% price corrections rather than lump sum at current levels. But the long-term investment rationale remains compelling for Angel One to capture India’s broking market potential. A 30-40% upside can potentially be envisioned over the next 3 years.


How Is the Industry of This Company Growing?

Angel One operates in India’s stock broking and financial services industry. This sector possesses strong structural growth drivers that should sustain healthy growth rates for the next several years:

  1. Rising Financial Savings Rate: India’s financial savings as a percentage of GDP has been consistently rising over the years and is expected to touch 15% by 2025 from 11.8% in 2020. Household financial assets are expected to grow at a 15% CAGR till 2025 to Rs 135 lakh crore. This expanding pool presents huge growth potential for players like Angel One to increase their market share.
  2. Formalization of Economy: The steady formalisation of India’s economy is enabling more citizens to access formal financial services like bank accounts, demat accounts, insurance, etc. SEBI data shows active demat accounts in India doubled from 2 crores in 2015 to 4 crores in 2020 highlighting rising investor bases. Higher formal employment and financial inclusion again favors established and trusted brands like Angel One.
  3. Increased Financial Literacy: Initiatives like e-learning platforms, awareness drives, and investor workshops are driving wider awareness about equities and risk-return profiles amongst retail investors beyond metros and tier 1 towns. Angel One, with its wide geographical footprint, is well poised to tap into such untapped regional markets where financial literacy is just about picking up.
  4. Digitization Wave: The push towards fintech innovations and paperless/branchless delivery models has allowed tech-focused brokers like Angel One to reach a wider target audience in a profitable way. 5x growth in average daily turnover of Indian digital brokers over just 2 years highlights the strong tailwinds from digitization megatrends.

India’s broking industry should sustain over 20% growth annually for the next 5 years – making Angel One an attractive sectoral play.

Risk Factors related to Angel One and Industry

Some of the key risks that investors should consider with regards to Angel One and overall broking industry dynamics are:

Business and Commercial Risks:

  • Intensifying competition – Entry of aggressive new players like Upstox, Groww etc. who are competing on costs and technology could impact market share.
  • Regulatory changes by SEBI impacting margins and raising compliance needs like banning payment for order flow, reducing brokerage charges etc.
  • Client concentration risk – Top 10 clients contribute approx. 11% of brokerage revenue. Loss of any big client can impact financials.

Macroeconomic Risks:

  • Prolonged bearish equity market phase – Majority of Angel One’s revenue is linked to transaction volumes and equity market movements. Sustained downturn like the one in 2008 can severely hit revenue growth and profitability temporarily.

Industry Related Risks:

  • Advent of discount brokerage plans by new fintech players is leading to increased pricing pressures for incumbent players.
  • Cybersecurity threats are on the rise globally. Any breach of client data or funds can severely impact brand reputation.

Before investing, investors should assess management’s strategies and ability to mitigate the above risks through competitive advantages, technology enhancements, operational discipline and prudent risk management. The risks seem effectively controlled as of now.

Management Quality Assessment

The senior management at Angel One and its promoters inspire confidence regarding their capability to steer the company towards sustainable growth going forward. Following factors highlight the able leadership:

  • Founder-led management – The original promoters and founders still run the day-to-day operations as CMD, CEO and whole-time directors. Their vast industry experience and insightful forward vision has been key to Angel One’s success since over 35 years. Their interests are thus strongly aligned with overall company performance and minority investors through 38% promoter shareholding.
  • Culture of innovation – The management has shown vision to continually invest into emerging technologies to improve customer service across web and mobile to retain market share. Building proprietary technology has differentiated Angel One’s offerings. Management’s focus on innovation and adoption of fintech revolution has been critical.
  • Governance and integrity – There are no court cases or criminal proceedings outstanding against the promoters/directors as per public disclosures. Their past track record and clean image inspires confidence. Management also follows high disclosure and transparency standards with regular analyst updates showcasing prudent governance.
  • Pedigree – The top leadership carries extensive experience across varied roles in the Indian capital markets industry. Their expertise spans technology, products, operations, risk management, regulatory liaison across different market cycles. Such pedigree enhances decision-making capabilities.
  • Succession planning – Angle One’s management has built a competent second line of leadership and autonomous unit heads to handle specific business functions. This ensures smooth succession and continuity of policies.

Thus, overall management capability and corporate governance are of high standards to support Angel One’s growth plans. Their strategic acumen coupled with technology DNA places them in good stead to adapt in dynamic market conditions.

How Angel One is Going to Perform Long Term (6-10 years)

Angel One is expected to deliver healthy growth and profitability over the next decade based on the following long-term factors:

  1. Industry leadership – Angel One is already amongst the top few brokers in terms of clients, revenue market share. It has strong brand recall, extensive geographical presence, and a robust technology stack. Such competitive advantages are difficult to replicate, giving it the edge to gain market share.
  2. Structural industry tailwinds – India’s financial savings rate is increasing steadily alongside the government’s push towards the formalization of the economy. The proportion of the working-age population is also expected to peak in the next 10 years. These macro trends will drive penetration of financial services, presenting a long growth runway for leading brokers.
  3. Technology DNA – Angel One has technology running through its veins right since inception and will continue investing in platforms and analytics. Its mobile apps and proprietary advisory systems leverage machine learning for providing differentiated offerings. Such tech focus builds trust and stickiness while expanding target markets through virtual models.
  4. New offering potential – Angel One has the capabilities to expand into adjacent areas beyond equities like loans against securities, investment banking, wealth advisory etc. Cross-selling new offerings to its huge 10+ million client base offers additional growth levers for the next decade.

Considering these factors, Angel One can be expected to deliver around 20-25% revenue/bottomline CAGR over the next 6-10 years. This will potentially see its market cap swell to around Rs 60,000 – 75,000 crores placing it in the league of leading financial services players on Dalal Street. The long-term outlook seems promising.

How Angel One is Going to Perform Short Term (2-5 months)

In the near-term time horizon of 2-5 months, Angel One’s financial performance is expected to witness some pressure owing to external macro factors:

  • Equity markets in downward trend: Indian markets have corrected by around 6% over the past 1 month on the back of global recessionary fears, rising interest rates, and expensive valuations. Market volatility is expected to remain high in upcoming months as well with more downside potential. Lower trading activity directly impacts Angel One’s brokerage income being linked to transaction volumes.
  • Margin pressure likely: SEBI’s circular on the reduction of brokerage charges and ban on payment for order flows will negatively impact margins for brokers like Angel One. These changes are expected to come into effect in a few months’ time once approved. Until Angel One is able to adjust its operating structure, there could be some margin compression.
  • Slowing industry growth rates: Rising inflation is starting to impact discretionary spending power among retail investors. New demat account openings and trading activity are expected to moderate. This can temporarily slow down broker industry growth rates.

However, over the long term, the structural growth story remains intact. Short-term headwinds may persist for another 2-3 quarters after which the earnings trajectory can revert back upwards. In terms of stock performance as well, some consolidation can occur after the sharp run-up last year. Investors can look to buy on 10-15% corrections. But the next 6 months could see volatility.

How Angel One is Going to Perform Medium Term (2-6 years)

A 2-6 years timeframe represents the medium-term trend for Angel One. My performance projections based on available indicators over this period are as follows:

  1. Sustain industry-leading growth – Angel One is poised to grow at 25-30% annually in terms of topline and bottom line over the medium term. Financial inclusion trends, tech adoption, and formal job creation remain favorable structural factors for the company. Rising financial savings and young demographic profile offer a huge runway to gain market share across B30 cities and towns.
  2. Expand margins – Operating margins already stand at a healthy 43%. But further leverage will come through as fixed costs are spread out over higher scales and technological enhancements drive efficiency gains. This will enable net margins rising from existing 33% levels closer to 40% over the next 6 years.
  3. Improving return ratios – Return on capital employed should expand from 44% presently closer to 60% while Return on Equity can potentially touch 70%, reflecting stellar capital efficiency. Rising profits offset the total equity base, allowing ROE expansion.
  4. New product launches – Angel One has recently forayed into lending, investment advisory, and wealth management spaces beyond just broking services. Building scale here through cross-selling opportunities can contribute 15-20% to total revenue while boosting the overall returns profile. This helps tap growth from adjacent domains.
  5. Maintain payouts – Healthy cashflows support Angel One maintaining a dividends payout ratio of 35-40% annually, translating into solid yields for investors. Buybacks are also a possibility if valuations remain reasonable.

Over the next 2-6 years period, Angel One seems on track to deliver superior return ratios led by multifold revenue drivers. This makes the stock an attractive mid-term buy for investor portfolios from a growth + income perspective, delivering 25%+ CAGR.


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