Angel Broking IPO: Profitability can come under pressure due to stiff competition

The IPO of Angel Broking is open for subscription from September 22- 24. At the price band of ₹305-₹306, Angel Broking discounts its FY20 pre-issue earnings by about 26 times (30 times post-issue). The company is valued at nearly ₹2,500 crore at this price.

Angel Broking, which was a traditional full-service broking house has moved towards online-based broking by introducing zero brokerage in equity delivery and low flat charges in derivatives segment. Though the prospects seem sanguine considering the company’s healthy client additions, focus on online client acquisition and growing Internet penetration in India, profitability can come under pressure because of very low brokerage fee and stiff competition from existing players as well as new entrants.

Even before the launch of ultra low brokerage structure, the company has been witnessing a decline in profitability. Operating profit margin declined from 21 per cent in FY18 to 16 per cent in FY20. Going forward, the low brokerage fee can further depress the margins. Adding to the woe is the new SEBI regulations on the upfront margin collection and the new pledging system for margin enhancement. This makes operations complex for the market participants and could possibly bring down volumes. The valuation too looks expensive in comparison with more established listed peers such as ICICI Securities, which trades at about 28.4 times its FY20 earnings.

Investors can avoid subscribing to this offer.

Revenue sources

Broking and interest income are the two major revenue sources. In FY20, 75 per cent of the revenue came from broking business and 21 per cent came from interest income on margin funding. In Q1 FY21, the revenue share of broking increased to 85 per cent.

The company’s share in incremental client addition in the industry is on a rise – from 4.2 per cent by the end of FY18 to 10.5 per cent by the end of FY20. In the corresponding period, total client base grew from 11 lakh to about 18 lakh.

In the June quarter, the company’s share in new client addition in the industry rose to 14.7 per cent and the total client base increased to 22 lakh, out of which 7.7 lakh are active clients. This makes Angel Broking the fourth largest player in terms of active client base in the National Stock Exchange (NSE).

Increase in active client base has sharply pushed up the average daily turnover (cash and derivatives)from ₹12,310 crore in FY18 to ₹41,320 crore in FY20. By the end of Q1 FY21, the average daily turnover increased to ₹61,890 crore.

The sharp rise in active accounts and daily turnover seen in Q1FY21 was witnessed across the industry as the stock market performed well backed by the ample liquidity , low interest rates on fixed income as well as from new investors entering the stock market.

But with the stock market distancing itself from economic reality, volumes witnessed now might not be sustainable and it can hit hard if the market corrects.

Unattractive financials

While the client base translated into higher trading volumes, the overall revenue declined from ₹780 crore in FY18 to about ₹755 crore in FY20. During the same period, profit after tax declined from ₹107 crore to ₹82.4 crore.

Revenue per active client has dropped from ₹21,430 in FY18 to about ₹13,100 in FY20. It stood at ₹3,220 in Q1 FY21.This is not specific to Angel Broking though. The same has been the case with ICICI Securities.

The net profit margin and return on equity (ROE) for FY20 stood at 11 per cent and 15 per cent respectively for Angel ; whereas ICICI Securities recorded net profit margin and ROE of 31 per cent and 48 per cent respectively in FY20.

Fierce competition has pushed all brokers including Angel to offer very low brokerage fees which is dragging the revenue generated per client. Since broking is the major contributor of the revenue for Angel, a drop in trading volume can have significant impact.

The issue size is ₹600 crore out of which ₹300 crore is offer for sale (OFS) The IPO proceeds from the fresh issue will be used to meet working capital requirements and for general corporate purposes.

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