Equity Research INDIA May 26, 2021 BSE Sensex: 50638 BUY ICICI Securities Limited is the author and distributor of this report Digital transformation to continue rerating Rs715 Angel Broking (ABL) has successfully transformed into a digital broking platform operating in a flat-fee business model resulting in strong growth in revenues (up Initiating coverage 98% in FY21) and active clients (up 171% in FY21) with cost efficiency (EBITDA margin of 48% in FY21 vs 29% in FY20). The successful transformation of the business model underlines execution capability of the franchise in retail broking space. Appointment of Narayan Gangadhar as its new CEO (strong tech experience with Google, Amazon, Uber and Ola) holds promise as ABL seeks to further build digital capabilities. We estimate PAT to clock 16% CAGR between FY21-FY23E and Target price Rs900 value the stock at 18x FY23E EPS of Rs50. Initiate with BUY and target price of Rs900. Shareholding pattern  Full-scale digital platform and discount brokerage model has transformed the Sep Dec Mar business: Between FY19 and FY21, total broking turnover increased from Rs2.6bn to '20 '20 '21 Promoters 44.6 44.6 44.6 Rs5.4bn, active clients rose from 0.4mn to 1.6bn, and NSE-active client market share Institutional grew from 5% to 8.3%. This transformation is credited to the digital discount broking investors 13.0 17.1 17.0 MFs and others 7.0 11.6 11.9 business model started by the company in late 2019. Sub- driven revenues have 0.6 0.1 0.1 increased from Rs988mn in FY20 to Rs1.6bn in FY21 whereas direct flat-fee revenues FIIs 5.4 5.4 5.0 Others 42.4 38.3 38.4 rose from Rs703mn in FY20 (operational only for a quarter) to Rs3.3bn in FY21.

Source: CMIE Majority of new clients have been added to the flat-fee plan since Q1FY20, hence the traditional direct business revenues will understandably decline hereon (traditional plan brokerage revenue mix in net brokerage revenues stood at 75% FY20 and declined to Price chart 39% FY21). We expect traditional plan mix to decline further to 31% / 29% in 800 FY22E/FY23E. 700  MTF lending is a high-margin business. Net interest revenues from the margin 600 trading facility (MTF) stood at ~Rs1.6bn for ABL in FY21. This is a steadier business 500 stream, but with high margin (NIM at ~9%). The granular nature of the book (Rs) 400 300 collateralised by underlying stock portfolio keeps credit costs in check. We expect 200 FY22E/FY23E average MTF book at Rs11bn/Rs12.3bn respectively (Rs11.8bn at

100 FY21-end) in line with growth in cash volumes. 5-Oct

6-Mar  EBITDA margins have sustained (48% in FY21) despite strong client growth. 20-Dec 21-May FY21 total operating costs grew 39% vs net revenue growth of 89%. Employee costs were up 8% YoY to Rs1.7bn while other income was 68% YoY higher at Rs2.98bn due to robust client addition during the year. Management believes the payback period of the cost of acquisition has reduced dramatically post digital transition.

 Risks: Brokerage industry is dependent on the capital markets, hence any general economic and market consolidation in India or globally can affect overall revenues. Company is also subject to extensive statutory and regulatory requirements; hence, any non-compliance can have a bearing on operations. The business is highly

dependent on IT and any risks / operational failures can lead to loss of revenues.

Market Cap Rs58.3bn/US$801mn Year to Mar FY20 FY21 FY22E FY23E

Bloomberg ANGELBRK IN Revenue (Rs mn) 4,753 8,971 9,855 11,030 Shares Outstanding (mn) 81.9 Net Income (Rs mn) 867 3,066 3,504 4,090 52-week Range (Rs) 752/225 EPS (Rs) 12.1 37.5 42.8 50.0 Free Float (%) 55.4 % Chg YoY -15% 254% 14% 17% Research Analysts: FII (%) 5.0 CEPS (Rs) 15.0 39.7 45.3 52.7 Daily Volume (US$'000) 3,062 EBITDA Margin (%) 29.4 47.9 49.4 51.4 Ansuman Deb Absolute Return 3m (%) 117.5 P/E 59.2 19.1 16.7 14.3 [email protected] +91 22 6637 7312 Absolute Return 12m (%) NA Dividend Yield 0.0 1.8 2.1 2.4 Ravin Kurwa Sensex Return 3m (%) (0.7) RoCE (%) 11.0 17.9 17.3 17.2 [email protected] Sensex Return 12m (%) 66.9 RoE (%) 15.2 35.6 28.1 27.4 +91 22 2277 7653 Please refer to important disclosures at the end of this report

Angel Broking, May 26, 2021 ICICI Securities

TABLE OF CONTENT

Industry overview ...... 3 Exchange turnover has clocked 30% CAGR between FY11-21 ...... 3 Expect growth to continue due to systemic under penetration ...... 4 Rising financial savings and digitalisation remain long-term growth levers ...... 6 Imminent consolidation is an advantage for well-entrenched incumbents ...... 8 Player wise service offering ...... 9 Brokerage industry aggregate statistics ...... 10 Retail participation holds fort until now despite upfront margin norms...... 10 Case study on evolution of digital in the US market ...... 12 Angel Broking---Revenue deep dive ...... 14 Net brokerage clocked 25% CAGR between FY16-FY21 ...... 14 Brokerage modelling ...... 16 Modelling income from Margin Trading Facility ...... 18 New segments, other services hold option values ...... 20 Fixed nature of expenses offers operating leverage ...... 23 Investment thesis ...... 25 Market share in retail segment continues to improve… ...... 25 … led by robust client acquisition strategy … ...... 26 … which in turn has also aided increase in NSE-active client base ...... 27 Digital capabilities will ensure operating leverage benefits ...... 28 New CEO’s illustrative background holds promise ...... 30 Additional business opportunity offer option value ...... 30 FY21 result review: Flagship year with Rs3bn profit ...... 31 Financials and Valuation ...... 32 Risks ...... 33 Financial summary ...... 34 Index of Tables and Charts ...... 36

*BSE Sensex and CMP are as on May 25, 2021

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Industry overview

Exchange turnover has clocked 30% CAGR between FY11-21

Indian exchanges have witnessed strong growth of across segments led by derivatives. Between FY11-FY20, cash segment turnover grew at 16%, equity derivatives 44%, and currency derivatives 9%, but derivatives declined by 2% -- all in CAGR terms.

Chart 1: Total cash turnover in NSE and BSE has Chart 2: …so has turnover in equity futures across seen strong growth… FY01-FY21.

180.0 Cash 300 Equity Futures 160.0 250 140.0 120.0 200 100.0

150 (Rs trn) (Rs (Rs trn) (Rs 80.0 60.0 100 40.0 50 20.0

0.0 -

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY12 Source: NSE, BSE, I-Sec research Source: NSE, BSE, I-Sec research

Chart 3: There has also been strong growth in Chart 4: …while MCX turnover equity options too… dipped due to introduction of CTT in FY12 and latest year growth was hit due to sharp decline in crude oil volumes.

7,000 Equity options 156 6,000 149

5,000 98 86 4,000 84 80

(Rs trn) (Rs 66 (Rs trn) (Rs 64 3,000 56 59 54 46 52 31 2,000 23 10 2 1,000

-

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY01 Source: NSE, BSE, I-Sec research Source: MCX, I-Sec research

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Angel Broking, May 26, 2021 ICICI Securities

Expect growth to continue due to systemic under penetration

Falling interest rate cycle, coupled with low returns from traditional investment instruments such as gold and real estate, has led to shift in retail investor interest to the capital markets.

Chart 5: Depository accounts have seen a huge rise in FY21, indicating rising equity culture at individual levels

60.0 55.1 56.9

50.0 40.9 40.0 35.9 31.9 27.9 30.0 25.4 21.8 23.3 (in mn) (in 20.0 21.0 20.0

10.0

-

Apr-21

Mar-20 Mar-21

Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-12 Source: NSE India, I-Sec research

Penetration levels of number of people investing in stock market remains extremely low vis-à-vis US and China While investing in stock markets has become more popular in India in recent times, overall penetration remains low – only 55mn Indians (based on number of demat accounts as on Apr’21) invest in the stock markets, which is around 4% of the country’s population. In comparison, over 50% of Americans own stocks. Even in neighboring China, the percentage of population that invests in the stock markets is 7%. India’s figure of 4% indicates plenty of headroom for India’s stock market penetration to grow

Chart 6: Percentage of Americans who invest in stock market 70

60 65 62 62 62 62 60 60 61 61 58 57 56 50 54 54 55 54 55 55 55 53 52 52 40

(%) 30

20

10

0

1999 2000 2004 2005 2006 2007 2008 2011 2012 2013 2014 2015 2019 2020 2002 2003 2009 2010 2016 2017 2018 2001 Source: Statista (Link)

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Angel Broking, May 26, 2021 ICICI Securities

Understanding the potential size of investor-base. As seen from the global examples stated in the foregoing, retail participation in India stock market has been very low. If we assume at least 25% of PAN holders as target audience for estimating a number for direct equity investors, then the possible size can be ~125mn, which is >2x the current size.

Chart 7: Estimating potential size of Investor base in India

India Population (1300 mn)

Bank Accounts (1000 mn) (including ~400mn Jan Dhan a/cs)

Pan card holders (~500mn)

Tax returns filed (59.5mn)

Demat accounts (55mn)

NSE Active clients (19m)

Source: I-Sec research

Chart 8: Individual investor mix in NSE’s cash and derivatives turnover

Cash segment Derivatives segment (RHS)

65

55 45 45 39 39 39 36 33 35 29 27 29 28 29 23 25

15

5 FY16 FY17 FY18 FY19 FY20 FY21

Source: Nifty Pulse, I-Sec Research

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Angel Broking, May 26, 2021 ICICI Securities

Rising financial savings and digitalisation remain long-term growth levers

The gradual pickup in economic growth, benign inflation and low interest rates are expected to increase household financial savings in India.

Chart 9: Financial saving

Financial savings % of GDP Gross financial savings % of GDS (RHS) 9.0% 38% 8.1% 8.0% 7.4% 7.4% 7.6% 7.1% 7.1% 37% 6.6% 7.0% 6.3% 36% 6.0% 35% 5.0% 34% 4.0% 33% 3.0% 2.0% 32% 1.0% 31%

0.0% 30%

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY13 Source: RBI, I-Sec Research

Mix of Shares and debentures in financial savings has increased from 1.6% in FY13 to 2% in Q2FY21, while MFs has seen a sharp improvement from 0.8% in FY13 to 5.3% in Q2FY21.

Table 1: Financial savings mix % mix FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Q2FY21 Currency 10.5 8.4 10.6 13.4 -22.0 25.2 13.0 13.2 15.1 Deposits 57.0 56.0 48.7 43.1 67.3 28.6 38.0 34.0 33.2 Shares and debentures 1.6 1.6 1.6 1.9 3.1 3.4 1.0 3.8 2.0 Mutual funds 0.8 1.3 1.2 1.3 1.4 1.3 2.7 1.9 5.3 Insurance funds 16.9 17.2 23.8 17.7 24.6 18.7 16.8 16.0 17.9 Provident and pension funds 14.7 14.9 15.2 19.4 22.6 19.7 18.7 20.8 16.2 Small saving schemes 0.0 0.0 0.0 0.0 0.0 0.0 9.6 12.3 10.2 Others 0.7 1.9 0.1 4.5 4.4 4.4 0.2 -1.9 0.1 Source: RBI, I-Sec Research Note: For FY13 - FY18 - National Account Statistics 2019, MOSPI, RBI For FY19 and FY20 we have take data from RBI. (https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/01AR_1006202001368127AE8346649F72CFB7D85294F3.PDF)

India’s young population is typically more technology-savvy and, with increasing using of wireless broadband internet, internet and mobile trading should get a boost. Fintech companies have played a significant role in the growth of brokerage market, which was backed by low cost and high speed internet. Digitalisation drive has enabled shift of client acquisition, operations and client servicing to digital platforms enabling scale and, in turn, operating leverage.

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Mobile and internet penetration. Higher mobile penetration, improved connectivity and faster and cheaper data speed, supported by and bank account penetration have led India to shift from being a cash-dominated economy to a digital one

Chart 10: Data-savvy and younger users to drive adoption of smartphones Smartphone Installed base Feature phone installed base 100% 90% 80% 46 52 70% 62 58 75 70 60% 81 89 50% 40% 30% 54 48 20% 38 42 25 30 10% 19 11 0% FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY22P

Source: CRISIL Research

Chart 11: Proportion of data subscribers in overall subscribers to increase dramatically over next five years

80

70 76 72 74 67 60 59 61 50 53 40 40 30 34 29 31 20 26 17 10 13 0 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25

Source: CRISIL Research

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Angel Broking, May 26, 2021 ICICI Securities

Imminent consolidation is an advantage for well-entrenched incumbents

The Indian broking industry has become more concentrated over the years, with smaller players ceding market share to the bigger peers due to the latter’s superiority on the below counts.

 On both BSE and NSE cash equity markets, the top-10 brokers commanded ~41% and ~40% market share in turnover, respectively, in FY20. This has risen to 49% for BSE and 43.5% in FY21-TD (data up to Feb’21).  The share of the top-5 players in NSE’s cash equity turnover increased from 15% in FY15 to 26% in FY20 and 30.4% in FY21-TD.  A similar trend is also there in derivatives. The top-25 brokers account for 53% and 63% of trading volumes on NSE’s futures and options markets, respectively, during FY18, up from 42% in futures volume and 52% in options volume in FY12.  Similar trends in terms of active clients handled by top brokers. The share of top-5 players in terms of active clients on NSE stood at 52% as at Mar’21. The share of the same top-5 broking houses in terms of clients added in the FY18 / 19 / 20 / 21 stood at 33% / 37% / 41% / 52% suggesting they have been able to garner higher market share in recent years.

Table 2: Contribution of top 5 / 10 / 25 / 50 brokers to BSE and NSE cash turnover BSE NSE

Top 5 Top 10 Top 25 Top 50 Remaining Top 5 Top 10 Top 25 Top 50 Remaining FY15 18% 29% 48% 65% 36% 15% 26% 46% 64% 36% FY16 21% 31% 50% 66% 34% 18% 29% 50% 67% 32% FY17 19% 29% 49% 66% 34% 18% 28% 50% 67% 32% FY18 21% 33% 55% 70% 29% 20% 31% 52% 69% 32% FY19 24% 39% 60% 73% 27% 22% 34% 55% 73% 28% FY20 27% 41% 65% 77% 24% 26% 40% 61% 77% 24%

Apr-20 32.9 49.9 71.4 82.7 91.2 30.7 44.9 65.5 80.7 90.9 May-20 42.9 56.4 76.3 85.0 91.9 30.7 44.2 64.6 80.2 90.7 Jun-20 45.8 60.7 77.4 85.5 92.1 30.7 45.3 64.8 78.9 89.5 Jul-20 40.4 55.9 71.6 80.8 88.9 32.2 45.3 64.3 77.6 88.5 Aug-20 32.9 46.4 68.2 79.8 88.9 31.6 44.3 63.2 77.4 88.4 Sep-20 35.7 50.0 70.9 81.9 90.2 31.7 45.8 65.9 79.7 89.9 Oct-20 39.7 53.6 71.1 80.4 88.9 31.2 45.2 65.0 79.9 90.4 Nov-20 39.7 55.6 72.1 82.1 89.9 29.1 41.8 64.6 80.4 90.7 Dec-20 34.7 50.3 71.3 82.8 90.4 30.5 43.8 63.5 78.3 89.4 Jan-21 38.4 54.5 75.8 86.5 92.8 30.4 44.3 64.6 79.2 90.0 Feb-21 50.1 64.7 78.9 86.6 92.3 31.0 45.0 63.5 79.1 90.0 Source: SEBI monthly statitics, I-Sec Research

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Angel Broking, May 26, 2021 ICICI Securities

Chart 12: Proportion of NSE active clients handled by top-5 brokers (based on active clients)

60%

50% 52%

40% 41% 37% 30% 33% 32% 31% 33%

20%

10%

0% FY15 FY16 FY17 FY18 FY19 FY20 FY21

Source: NSE India, I-Sec Research

Chart 13: Top-5 brokers acquired 67% of the total incremental clients in FY21

Remainiing, 33

Top 5, 67

Source: NSE India, I-Sec Research Player wise service offering

Angel 5 HDFC Kotak Axis Motilal Broking RKSV Paisa Securities Securities Securities Oswal Zero Account opening fee Yes No No Yes Yes No No No No Complementary In- house Yes No No Yes Yes Yes Yes Yes Yes Research / Advisory Margin trading facility Yes No Yes Yes Yes Yes Yes Yes Yes Securities as collateral Yes No Yes Yes Yes Yes Yes Yes Yes Paid services (Smallcase/ No Yes No Yes No Yes Yes No No Sensibull/ Streak etc.) Knowledge center/ Education Yes Yes Yes Yes Yes Yes Yes Yes Yes Zero fund transfer charges Yes No No No Yes Yes Yes Yes Yes Instant fund payout Yes No No No Yes Yes Yes No No Source: RHP, I-Sec Research

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Angel Broking, May 26, 2021 ICICI Securities

Brokerage industry aggregate statistics

Indian brokerage industry posted a record performance in FY21 driven by steady increase in trading volumes and increasing in retail participations. Increasing share of retail participation can be seen from the robust growth in demat account opening and steady cash volumes.

As per ICRA, brokerage industry has recorded Rs275bn-Rs285bn revenue in FY21, up 30-35% YoY from Rs210bn in FY20. Growing retail share along with increase in interest and other fee will support profitability.

As per ICRA analysis of margin trading book of 10 companies, showed that MTF book grew from Rs46bn in Mar’20 to Rs61bn in Jun’20 and Rs75bn as on Sept’20. ICRA expects margin-trading book is expected to pick further with brokerage companies actively looking to scale up the margin-funding business to shore up the profitability

Retail participation holds fort until now despite upfront margin norms.

With effect from December 1, 2020 SEBI mandated collection of upfront margin from clients which can be peak margin / EOD margin whichever is higher in intraday as well as delivery. From 1st December 2020, brokers moved away from using the end of the day position to calculate margin requirement to using intraday peak margins.

Anecdotal evidence suggests that maximum number of trades undertaken in the system are largely intraday in nature, and with regulation kicking in there was an expectation that it impact overall volumes traded on the exchanges (both cash and derivatives segment).

Timeline of implementation of peak margin regulation.

 Phase 1 - 25% of the upfront margin to be available before the trade is being executed from Dec 1 2020 to Feb 28 2021.  Phase 2 - 50% of the upfront margin to be available before the trade is being executed from Mar 1 2021 to May 31 2021.  Phase 3 - 75% of the upfront margin to be available before the trade is being executed from June 1 2021 to Aug 31 2021.  Phase 4 - 100% of the upfront margin to be available before the trade is being executed from Sep 1 2021 Based on NSE data, participation of retail investors in the capital markets has been inching higher. Despite upfront margin norms, we have not seen a meaningful drop in retail turnover.

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Angel Broking, May 26, 2021 ICICI Securities

Cash volumes have remained steady … Average NSE cash ADTV between Sep’20 and Feb’21 was Rs652bn, which includes the sharp surge seen in Jan’21 (Rs725bn) and Feb’21 (Rs825bn). NSE cash ADTV for Mar’21 / Apr’21 stood at Rs666bn / Rs700bn indicating that the impact of increased margin regulation on cash volumes has been marginal. Further, within the cash segment, retail ADTV has not seen a sharp decline (Rs284bn in Dec’20 to Rs278bn in Mar’21), and retail mix in total cash turnover has remained steady at 41.8%. NSE intraday cash ADTV has remained steady at ~Rs610bn (intraday cash ADTV is based on the value of shares traded).

…while equity derivatives continue to witness strong growth NSE’s segment witnessed robust growth between Dec’20 and Mar’21 driven by strong growth in options. Derivatives’ ADTV has risen from Rs30.6trn in Dec’20 to Rs44.4trn in Mar’21 and Rs46.6trn in Apr’21. Though the retail mix in overall derivatives has been declining, retail derivatives’ ADTV has increased from Rs8.9trn in Dec’20 to Rs11.8trn in Mar’21

Chart 14: NSE cash delivery ADTV has improved, Chart 15: Retail ADTV has improved and retail mix and though intraday ADTV has moderated from in cash volumes has remained steady, however Feb’21 highs, it remains largely above its average impact due to higher upfront margin requirement levels needs to be seen.

ADTV of Intraday ADTV of Delivery (RHS) Retail turnover Retail mix (RHS) 750 160 400 50 700 150 44.6 45.4 44.9 350 43.5 650 140 44.9 45 300 41.4 41.8 600 130 550 250 40 120

500 200

(%)

(Rs bn) (Rs bn) (Rs

110 bn) (Rs 450 150 35 100 400 100 30 90 350 50 248 235 277 284 325 354 278 300 80

- 25

Oct-20

Jan-21

Feb-21 Mar-21

Sep-20 Nov-20 Dec-20

Oct-20

Jan-21

Feb-21 Mar-21

Sep-20 Nov-20 Dec-20

Source: NSE India, I-Sec research Source: NSE India, I-Sec research Note: ADTV is calculated based on total value of shares traded.

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Chart 16: Overall cash ADTV has remained steady Chart 17: NSE derivatives have witnessed strong growth while retail mix has seen a marginal dip

NSE cash ADTV (Rsbn) Retail eq derivatives ADTV Retail mix 900 814 800 14,000 35 725 700 31 669 666 31 30 700 29 28 625 12,000 27 27 30 600 556 523 10,000 25 500 8,000 400 20 6,000 (%) 300 bn) (Rs 15 200 4,000 100 2,000 10

- - 5

Apr-21 Oct-20

Jan-21

Mar-21

Feb-21

Oct-20

Nov-20 Dec-20

Sep-20

Jan-21

Mar-21

Feb-21

Nov-20 Dec-20 Sep-20

Source: NSE India, I-Sec research Source: NSE India, I-Sec research

Case study on evolution of digital brokers in the US market

In the US market, full service firms with traditional models, which provided consolidated services such as advisory and asset gathering, allocation and distribution, have consolidated in the past 20 years to a handful now. Post consolidation, digital platforms and mobile-based models were launched that allowed customers to do the transactions on their own without broker assistance.

The sophisticated digital interfaces provided by the brokers can somewhat replicate the services of advisors. With emerging technology, the cost of providing technology-based solutions is not very high as these include light features such as to-the-point suggestions and one-click trade implementation instead of a detailed analysis of possible trade decisions. Customer receptiveness to such models has been increasing as the customers’ interest and knowledge in trading has increased and they do not want to depend on advisors and wealth managers for trade decisions. This has helped fixed- price online players expand their direct reach and get more clients.

Since last year, major US brokers have been focusing on bolstering clients’ assets and their business growth has shifted to zero trading fee model for stocks, ETFs and options. The aim is to increase their client base to generate higher income from additional fee- based services. And, brokers have reported a considerable increase in the number of client accounts and managed assets they handle.

For example, Charles Schwab has consistently lowered commissions over the past years from US$29.95 in 1999 to US$12.95 in 2009 to US$4.95 in 2019, post which it eliminated commissions for all US and Canada-listed stocks, ETFs and options online and mobile trades in Oct’19. Company saw 31% MoM increase in new brokerage and investment accounts in Oct’19. Its market capitalisation increased to US$61.15bn in Dec’19 from US$54.77bn in Dec’18. Company also witnessed EPS growth of 9% YoY and RoE of 19% in 2019.

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Chart 18: Headline commission rate for Charles schwab

Source: NSE India, I-Sec research

Table 3: Revenue and profit trend of global brokers Market Commission as a % of Revenue (US$ mn) Net Income (US$ mn) Capitalization revenue (US$ bn) 2019 2018 2017 2019 2018 2017 2019 2018 2017 2019 Group Inc. 1,937 1,903 1,702 36% 41% 38% 161 169 76 19.37 Charles Schwab Corp 10,721 10,132 8,618 5% 7% 7% 3,704 3,507 2,354 61.15 TD Ameritrade Holding Corp* 6,016 5,452 3,676 33% 36% 38% 2,208 1,473 872 26.89 E Trade Financial Corp 2,886 2,873 2,366 15% 17% 19% 955 1,052 614 10.1 Total 41,419 40,107 37,945 9% 10% 11% 9,237 8,887 6,235 Morgan Institutional securities 20,386 20,582 18,813 12% 13% 13% 4,599 4,906 3,536 81.48 Stanley^ 17,737 17,242 16,836 10% 10% 10% 3,728 3,472 2,325 and Company^ 85,063 86,408 88,389 11% 11% 11% 19,549 22,393 22,183 222.43 Citi Group 74,286 72,854 72,444 4% 4% 4% 19,401 18,045 (6,798) 168.9 Source: NSE India, I-Sec research

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Angel Broking, May 26, 2021 ICICI Securities

Angel Broking---Revenue deep dive

Angel Broking (ABL) is one of the largest independent full-service retail broking houses in India. It provides a wide range of financial services to its clients. ABL is a member of BSE, NSE, MSEI, MCX and NCDEX and provides broking services across equity (cash- delivery, intraday, futures and options), commodity and currency segments, along with debt products.

Chart 19: Net revenue bridge of ABL between FY20 and FY21

12,000

2,697 10,000 634 8,971 549 338 8,000

6,000 4,753 Rs mn Rs

4,000

2,000

- FY20 Net brokerage Distribution and Net interest Others Total DP income

Source: Company, I-Sec research

Net brokerage clocked 25% CAGR between FY16-FY21

Company currently offers brokerage plans in three categories: 1) flat brokerage plan (new plan), 2) brokerage based on value traded, and 3) sub-brokerage model wherein ABL shares 30% of the brokerage income earned by sub-brokers. Flat brokerage plan is catching up aggressively. Company also sources its clients through DRAs and brokerage is shared with them accordingly.

Chart 20: ABL’s Brokerage model

B2B sub-broker model. Charges are based on value traded and ABL shares 70% of the brokerage charged with sub brokers Traditional plan (28% of net brokerage based on Q4FY21)

B2C (old plan): Charge is based on value traded Brokerage model

New Plan (72% of net B2C (new plan) brokerage based on Q4FY21 ) Charge is flat fee per order

Source: Company, I-Sec research

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Chart 21: Overall brokerage revenues have seen Chart 22: …led by robust growth in flat-fee plan. strong growth… Net Brokerage revenue Flat Fee 2,000 1400 1,800 1200 1,600 1000 1286 1,400 1,784 1,200 800

1,000 851 1,328 1,328

1,306 1,306 600

(Rs mn) (Rs 712 (Rs mn) (Rs 800

600 1,011 400

480

750 750 705 705

400 645

631 631 200

317

45 206 200 135 0

-

Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21

Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21

Source: Company, I-Sec research Source: Company, I-Sec research

Chart 23: While traditional plan revenues have Chart 24: … of which B2B plan saw strong growth remained steady… in Q4FY21 Traditional plans 700 500 Net brokerage of B2B Segment 450 600

400

456 456 594 594

500 586 350

394 394

531 531

377 377

510 510 499 499

400 498 300

477 477 328 328

433 433 250

300 (Rs mn) (Rs

200 269

244 244

240 240 234 234 200 mn) (Rs 150 100 100 50

- -

Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21

Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21

Source: Company, I-Sec research Source: Company, I-Sec research

Chart 25: Gross broking revenue split F&O Cash Commodity Currency 100% 1 1 1 2 1 1 1 1 8 10 8 6 90% 13 16 15 14 80% 33 35 70% 44 44 39 50 60% 43 43 50% 40%

30% 56 60 20% 42 44 41 41 41 45 10% 0% Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21

Source: Company, I-Sec research

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Angel Broking, May 26, 2021 ICICI Securities

Chart 26: Net brokerage contribution from direct clients and B2B plan (AP)

Direct clients AP Proportion of brokerage income from AP 38% 2000 37% 36% 36% 40% 1800 30% 31% 35% 1600 29% 494 30% 1400 28% 1200 25% 401 392 1000 20% 307 800 15% 600 274 1294 240 251 240 902 937 10% 400 709 200 393 407 449 481 5% 0 0% Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21

Source: Company, I-Sec research

Brokerage modelling

Chart 27: Segment wise bridge of gross brokerage revenue between FY20 and FY21

12,000 2,563 1,457 10,000 ( 23 ) 25 9,059

8,000

6,000 5,036

4,000

2,000

-

F&O

Cash

Currency

brokerage brokerage

Commodity FY20 gross FY20 FY21 gross FY21 Source: Company, I-Sec research

ABL derives brokerage revenues of Rs9bn (net: Rs5.4bn), which is derived from three sources 1) flat-fee Rs3.3bn, 2) B2B (sub-broker model) Rs1.6bn (net), and 3) B2C Old Rs0.5bn

Flat-fee: Number of orders data is not publicly disclosed; hence, we have estimated a rate of Rs18 per order and 185mn orders in FY21. ABL charges Rs20/per order irrespective of the order value except for cash delivery (which is free). We have estimated 15% growth in between FY22E-FY25E and kept Rs18 per order constant. Accordingly, we estimate Rs3.8bn and 4.2bn in FY22E and FY23E respectively.

Sub-broker model: Sub-broker model is based on charging fees based on turnover. ABL retains 30% of the brokerages earned by the sub-brokers. We have estimated 10% growth in the traditional sub-broker model and estimated the yields at 0.01% in FY22E

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Angel Broking, May 26, 2021 ICICI Securities

and 0.009% in FY23E. This estimation is based on derived FY21 numbers considering the sub broker payouts are almost 70% of the total broking revenue from this stream. Accordingly, gross and net brokerage is estimated to be Rs5.5bn and Rs5.8bn and Rs1.7bn and Rs1.74bn respectively in FY22E/FY23E.

B2C model: We expect the contribution from this segment to drop sharply (revenues have already halved from Rs1bn to 0.54bn in FY21). We expect Rs91mn and Rs46mn from this segment in FY22E and FY23 respectively.

Table 4: Brokerage estimation sheet Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 FY21 FY22E FY23E FY24E FY25E Brokerage revenue (net) 631 645 705 750 1,011 1,306 1,328 1,784 5,429 5,584 5,997 6,684 7,490

Flat Fee (Rs mn) (A) 45 135 206 317 480 712 851 1286 3329 3,828 4,211 4,843 5,569 Number of Orders 2.50 7.50 11.44 17.61 26.67 39.56 47.28 71.44 184.94 213 234 269 309 estimated rate per trade 18 18 18 18 18 18 18 18 18 18 18 18 18

B2B ADTO (Assumed 80% for B2B for Q1-Q4) 154 155 144 126 134 164 307 210 204 225 247 272 299 Growth 10% 10% 10% 10% Number of days 60 62 61 64 59 66 63 61 249 255 255 255 255 Turnover (Rs mn) 9,229 9,589 8,784 8,046 7,889 10,822 19,372 12,820 50,903 57,342 63,077 69,384 76,323 Yields 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.010% 0.009% 0.009% 0.008% Gross brokerage 801 780 815 896 1,093 1,313 1,258 1,521 5,186 5,550 5,799 6,060 6,333 Less subbroker payouts (Assumed at 70%) 561 546 570 627 765 919 881 1,065 3,630 3,885 4,060 4,242 4,433 Net brokerage (B) 240 234 244 269 328 394 377 456 1,556 1,665 1,740 1,818 1,900

B2C old ADTO 38 39 36 31 33 41 77 53 51 36 18 9 8 Growth -30% -50% -50% -10% Number of days 60 62 61 64 59 66 63 61 249 255 255 255 255 Turnover 2,307 2,397 2,196 2,011 1,972 2,705 4,843 3,205 12,726 9,123 4,561 2,281 2,053 Yields 0.015% 0.012% 0.012% 0.008% 0.010% 0.007% 0.002% 0.001% 0.004% 0.001% 0.001% 0.001% 0.001% Brokerage B2C old ( C ) 345 276 255 164 203 200 100 41 544 91 46 23 21 Source: Company, I-Sec research

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Angel Broking, May 26, 2021 ICICI Securities

Modelling income from Margin Trading Facility

Company provides margin-trading facility to its clients for leveraging their eligible collaterals by funding their requirements on the cash delivery segment of equities. Such funding is subject to exposure against margins (VaR + ELM) that are mandated by the stock exchanges, with the securities forming a part of the collateral for such funding.

 VaR: Value at Risk margin is a measure of risk. It is used to estimate the probability of loss of value of a share or a portfolio, based on the statistical analysis of historical price trends and volatilities. A stock with 20% VaR margin indicate that there may be a potential loss of 20% in one day.  Extreme loss margin (ELM): The Extreme Loss Margin for any security is higher of 5%, or 1.5 times the standard deviation of daily logarithmic returns of the security price in the last six months.  Key determinants for exposure of MTF book: At any point of time, the MTF Book shall not exceed 5 times of its net worth. The funding of MTF book should not exceed the borrowed funds and 50% of net worth (Net worth must be calculated based on Dr. LC Gupta Committee recommended method for calculating liquid net worth) Net Interest income on MTF has clocked 24% CAGR between FY16-21. How we have calculated ABL’s interest income? Total interest income earned by ABL in FY21 stood at Rs2bn (net Rs1.62bn). Reported interest income includes two components: a) interest earned on client funding book, and 2) interest earned on financial assets. Based on available information, ABL’s average MTF book stood at Rs7.2bn in FY21. In order to segregate interest income, we have estimated a net yield of 9% (ABL charges ~18% and cost of funds is in the range of 8- 10%). This works out to an interest income from MTF book at Rs648mn.

Based on average cash and investments balance of Rs25bn (average calculated on basis of on opening and closing balance sheet numbers) and balance interest income of Rs968mn, we have estimated the yield at 3.9% in FY21. How we have estimated the MTF book? We expect FY22E/FY23E average MTF book at Rs11bn/Rs12.3bn (FY21-end MTF book was Rs11.8bn). We have estimated the MTF book as a percentage of cash ‘average daily turnover’ (ADTO). We reckon that the same must be a function of cash delivery ADTO, but in the absence of information, we have used overall cash ADTO as proxy.

FY21 MTF book percentage of cash ADTO was 17%. We expect it to declined marginally to 15% / 16% in FY22E/FY23E as rising upfront margin requirement can reduce the speculative volume in the system and increase the cash delivery ADTO, which in turn can lead to higher demand for funding. Also, the seamless pledge-repledge mechanism can be the trigger going forward.

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Angel Broking, May 26, 2021 ICICI Securities

We expect the own cash and financial investments of Rs31bn / Rs38bn and yield an investment income of Rs1.1bn and Rs1.5bn based on an estimated a yield of 3.5%/3.9%.

Table 5: Estimating interest income for ABL Approximated calculations for yields for FY21 FY21 FY22 FY23 FY24 FY25 Total Interest income (as reported) 2,005 Interest cost (as reported) 389 Net interest income (A) 1,616

As per ABL Average MTF book for FY21 (Rs mn) 7200 11,194 12,362 16,600 21,048 Assuming Net yields for FY21 9.0% 9.1% 9.2% 9.3% 9.3% MTF interest (B) 648 1,019 1,137 1,544 1,957

Net Interest from cash and investments (A-B) 968 1,085 1,463 1,615 1,739 Total cash 24,953 30,998 37,718 46,135 49,699 Cash and Investments (average during FY21) (currently taken on the basis of op and closing reported numbers) 3.9% 3.5% 3.9% 3.5% 3.5% Source: Company, I-Sec research

Chart 28: Average client funding book has risen at a strong pace With the new pledge / 12,000 Average Client funding book repledge mechanism and strong rise in 10,000 ADTO, MTF book has 9,600 8,000 seen a robust growth. 8,259 7,129 7,200 6,000

(Rs mn) (Rs 5,680 4,000

2,000

- FY20 Q2FY21 Q3FY21 Q4FY21 FY21 Source: Company, I-Sec research

Chart 29: Exposure per client was higher in Q4FY21 compared to Q4FY20

70,000 Exposure per client

60,000 64,068

50,000 51,088

40,000 Rs Rs 30,000

20,000 18,019 10,000

- Q4FY20 Q3FY21 Q4FY21 Source: Company, I-Sec research

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Angel Broking, May 26, 2021 ICICI Securities

Chart 30: MTF Book Segmentation

< 0.1mn 0.1 - 0.5mn >0.5mn 110.00% 0.50% 2.10% 2.60% 100.00% 3.10% 5.80% 7.10% 90.00% 96.30% 92.10% 90.30%

80.00% (%)

70.00%

60.00%

50.00% Q4FY20 Q3FY21 Q4FY21 Source: Company, I-Sec Research

New segments, other services hold option values

Research services: ABL has a dedicated research team of 54 members (as on Jun’20) catering to quantitative and qualitative research requirements related to the stock market such as equity fundamentals, technical, derivatives, commodities, currencies, and mutual funds.

Investment advisory: ABL provides investment advisory services to its retail clients with customised investment recommendations aided by its rule-based investment engine ‘ARQ’, which assists clients in achieving their investment goals across various investment avenues such as equities, debt, currency, commodities, derivatives, mutual funds, and insurance products.

Distribution of financial products: ABL also undertakes distribution of third-party financial products such as mutual funds, and health and products, according to clients’ requirements. Such distribution is undertaken through both offline channels and its digital platforms, ‘Angel Broking’ and ‘Angel BEE’.

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Angel Broking, May 26, 2021 ICICI Securities

Chart 31: Angel BEE app helps in selection of investment products based on goals and helps in managing expenses and monitor spends.

Source: Company, I-Sec Research

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Angel Broking, May 26, 2021 ICICI Securities

Chart 32: Distribution income trend for ABL 45 Distribution

40 42 40 35

30 32 32 25 25 25

20 23 (Rs mn) (Rs 15 15 10

5

- Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Source: Company, I-Sec research

Loans against shares: Through its subsidiary, AFPL, which is registered as an NBFC, ABL provides loans against shares to retail clients.

Income through DP charges ABL offers free delivery trades to client in its flat-fee plan. However, it charges DP charges on per debit trade to its clients. Income from DP charges stood at Rs867mn in FY21, up 151% YoY. We expect DP income of Rs1.1bn and Rs1.2bn in FY21E/FY23E.

Foray in AMC business ABL has announced its interest to enter into the AMC business. However, the amount to be invested in this business will be decided and approved by the Board. Also, the proposal is subject to necessary statutory approvals.

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Angel Broking, May 26, 2021 ICICI Securities

Fixed nature of expenses offers operating leverage

FY21 total operating costs rose 39% vs net revenue growth of 89%. Employee costs were up 8% YoY to Rs1.7bn while other income increased by 68% YoY to Rs2.98bn due to robust client addition during the year.

Management believes that, payback period of cost of acquisition has reduced dramatically due to transition to the digital mode. Once the customer is on boarded, the cost towards servicing the same is very limited.

Chart 33: Total Income / Expenses and EBITDA margin trend

Total Income Total Expenses EBITDA margin 3,500 3,016 55 49 49.3 48.5 3,000 45 43 39 2,500 2,221 36 2,116 35 2,000 30 1,618 1,553 25

Rs mn Rs 1,500 1,265 1,170 1,138 1,179 1,126 1,026 1,074 923 15 1,000 12 799 759 774

500 5

- (5) Q1FY20 Q2FY20 Q3FY20 Q4FY21 Q1FY21 Q2FY21 Q3FY21 Q4FY21

Source: Company, I-Sec research

Chart 34: Growth trend in total income and total operating expenses Total Income Total Opex 160%

140% 138% 120%

100% 101% 80% 86% 88% 60%

40% 48% 38% 20% 34%

0% -10% -20% Q1FY21 Q2FY21 Q3FY21 Q4FY21

Source: Company, I-Sec research

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Angel Broking, May 26, 2021 ICICI Securities

Table 6: FY20 detailed cost break up. FY 20 Employee costs 1598 Advertisement and publicity 477 Software connectivity license/maintenance expenses 209 Legal and Professional charges 199

Other Expense Broking Bad Debts 89 DP Bad Debts 73 Travel and conveyance 122 Office Expenses 64 Communication Costs 58 Electricity 47 Printing and stationery 47 Rent, rates and taxes 100 Ind AS credit - Rent exp. (75) Administrative support services 30 Repairs and maintenance 24 Corporate social responsibility expenses 23 Loss on account of Error Trades (Net) 20 Bank Charges 10 Security guards expenses 8 Loss on sale/write off of PPE 6 Insurance 4 Auditors' remuneration 5 Director's fees, allowances and expenses 2 Membership & subscription fees 3 Total 659 Source: Company, I-Sec research

Chart 35: Expected increase in employee cost and other expenses Employee costs Other expenses Employee cost growth (YoY) Other expenses growth

3,500 3,234 80% 2,957 3,042 3,000 70% 60% 2,500 2,126 50% 1,941 2,000 1,759 1,718 1,598 40% 1,500 30% 20% 1,000 10% 500 0% 0 -10% FY 20 FY21E FY22E FY23E

Source: Company, I-Sec research

One-off incidents: FY20 and FY21 profits were impacted due to two major events (one in each year):

 In FY20, ABL wrote-off Rs166mn as bad debts. This was related to an incident at the client-end, who had taken a position in . Client had given the margin money in the form of a cheque for the position undertaken by him. Following day, Sun Pharma stock a sharp decline and due to shortfall in margin, ABL systems squared off the position resulting into a loss for the client and client in return dishonoured the payment.  In FY21, MCX wrote-off Rs130mn as bad debts for the loss faced by clients in crude negative price fiasco

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Angel Broking, May 26, 2021 ICICI Securities

Investment thesis

Market share in retail segment continues to improve…

 Angel Broking’s (ABL) overall equity retail market (cash + derivatives) share stood at 22.8% in Apr’21, up 127bps MoM.  Its overall retail ADTO (cash + equity derivatives + commodity + currency) for Apr’21 came in at Rs4,421bn (up 11% MoM) driven by healthy growth in retail F&O ADTV, which stood at Rs4,266bn (up 10.6% MoM in Apr’21).  Retail cash ADTO grew 7.3% MoM to Rs59bn in Apr’21 and its market share stood at 14.3% in Apr’21.  ABL’s F&O market share stood at 23% as on Apr’21 which are seen a sharp improvement from 6.7% seen in Q4FY20  Retail share has also improved from 20.9% in Q4FY20 to 27% in Apr’21  Number of trades have grown 2.5x from 270mn trades in FY20 to 670mn trades in FY21

Chart 36: Retail F&O market share has seen sharp Chart 37: Retail cash market share has declined improvement

25 23 25 21 22 20 20 20 18 20 18 18 17 17 17 15 15 16 15 13.8 14 14 15 14 12 15 12.7

10 8 7 10 6 4.4 5 3.4 5

0

0

Oct-20 Apr-21

Jan-21

Mar-21 Feb-21

Nov-20 Dec-20

Q1FY20 Q2FY20 Q3FY20 Q1FY21 Q2FY21 Q4FY20

Oct-20 Apr-21

Jan-21

Mar-21

Feb-21

Nov-20 Dec-20

Q1FY20 Q2FY20 Q3FY20 Q1FY21 Q2FY21 Q4FY20 Source: Company, I-Sec research Source: Company, I-Sec research

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Angel Broking, May 26, 2021 ICICI Securities

Chart 38: Retail commodity market share has Chart 39: Overall market share has seen continued remained steady with marginal improvement in improvement. Apr’21

28 30 28 27 25 23 26 27 26 26 22 25 25 21 25 20 21 20 18 19 20 15 15 15 14.5 12 15 12.4 10 8 7 10 6 4.7 5 3.7 5

0 0

Oct-20 Apr-21

Oct-20 Apr-21

Jan-21

Jan-21

Mar-21 Feb-21

Mar-21 Feb-21

Dec-20 Nov-20

Nov-20 Dec-20

Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21

Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q1FY20 Source: Company, I-Sec research Source: Company, I-Sec research

… led by robust client acquisition strategy …

ABL has shown strong capability to acquire customers through various diversified digital platforms. Based on average client addition in Q1FY21, 85% of clients were acquired digitally, of which: 1) 53% were acquired through performance marketing, either by way of organic or paid leads; 2) 21% through referrals from their existing clients, and 3) approximately 11% through digital influencers. The remaining 15% of acquired clients were through ABL’s network of authorised persons. Company added 550k / 511k / 956k clients in Q2/Q3/Q4FY21.

Chart 40: Gross client additions 1000 Gross client addition ('000) 900 956 800 700 600

500 550 511 400

300 347 200 231 100 68 119 141 0 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Source: Company, I-Sec research

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Angel Broking, May 26, 2021 ICICI Securities

Chart 41: Ratio of new clients added in flat fee and traditional plan.

Flat fee Traditional plan Gross client addition (RHS) 120 1200

100 1000 10 10 10 10 19 20 19 29 80 90 90 90 90 800 81 80 81

60 71 600

(%) ('000) 40 400

20 200

0 0 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Source: Company, I-Sec research

… which in turn has also aided increase in NSE-active client base

We believe comparing Current quarter (CQ) over last quarter (LQ) in terms of active clients and total clients respectively can be a better metric as the clients added in the last month of the quarter may take some time to become active.  ABL has been adding active clients at a strong pace.  Ratio of active client base (CQ) by client base (LQ) has seen an improving trend. The trend remains same when compared to when the comparison is done on the same base (i.e. CQ over CQ) Table 7: Active rate for ABL Incremental Incremental Active Active active client active client Gross NSE active client (CQ) client (CQ) (CQ) / (CQ) / client client Client Active / Client / Client Incremental Incremental addition additions base clients base (LQ) base (CQ) clients (LQ) clients (CQ) Q1FY20 68 2,133 426 Q2FY20 119 6 2,201 432 20% 20% 9% 5% Q3FY20 141 39 2,320 471 21% 20% 33% 28% Q4FY20 231 105 2,461 576 25% 23% 74% 45% Q1FY21 347 191 2,692 767 31% 28% 83% 55% Q2FY21 550 242 3,039 1,009 37% 33% 70% 44% Q3FY21 511 212 3,589 1,221 40% 34% 39% 41% Q4FY21 956 344 4,100 1,565 44% 38% 67% 36% Source: Company, I-Sec research

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Angel Broking, May 26, 2021 ICICI Securities

Chart 42: ABL’s NSE-active client base has Chart 43: Active client market share has improved consistently improved from 5.3% in FY20 to 8.3% in FY21

1,800 9.0% 8.4% 1,660 8.1%8.3% 1,565 7.6%7.8% 1,600 8.0% 7.4% 1,454 7.1%7.2% 1,400 1,325 7.0% 6.7% 1,221 6.3% 1,123 5.7% 1,200 1,069 6.0% 5.3% 1,009 5.0% 1,000 856 894 767

('000) 800 4.0% 576 600 3.0%

400 2.0%

200 1.0%

- 0.0% FY20 July'20 Sept'20 Nov'20 Jan-21 Mar-21 FY20 July'20 Sep'20 Nov'20 Jan'21 Mar-21 Source: Company, I-Sec research Source: Company, I-Sec research

Chart 44: Market share in incremental active clients has also remained steady at 11-13%

16% 14% 14% 14% 13% 13% 12% 12% 11% 11% 11% 10% 10%

8%

6%

4%

2% 1%

0% June'20 July'20 Aug'20 Oct'20 Nov'20 Dec'20 Jan'21 Feb'21 Mar-21 Apr-21 Source: Company, I-Sec research

Digital capabilities will ensure operating leverage benefits

Client acquisition, operations and client servicing have all moved to digital platforms enabling scale and in turn operating leverage. Client acquisition cost has decreased from Rs2,507 per client in Q2FY20 to Rs697 in Q1FY21 over the past year. ABL’s is focused on providing end-to-end digital experience by innovating and implementing technology across various services. This has enabled it to reduce costs and offer simplified and competitive pricing to clients with value-added services.

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Chart 45: EBITDA margin and ADTO trend suggest strong operating leverage benefit

EBITDA Margin ADTO (RHS) 60 4000

49 49.3 48.5 3500 50 43 3000 39 40 36 2500 30

(%) 30 2000 (Rs bn) (Rs 1500 20 1000 10 500

- 0 Q2FY20 Q3FY20 Q4FY21 Q1FY21 Q2FY21 Q3FY21 Q4FY21

Source: Company, I-Sec research

Table 8: A snapshot of ABLS digital capabilities Peak trades handled in Q4 ’21, demonstrating robust IT infrastructure (nos.) 5.0mn App downloads*(nos.) 10.3mn Avg. time taken to onboard client 5 mins Direct clients on-boarded digitally 100% Orders executed online by direct clients >99% Orders placed through mobile app 75%+ Source: Company, I-Sec research

Chart 46: Angel broking is the 4th fastest growing app in Finance category

Source: Company, I-Sec research

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Angel Broking, May 26, 2021 ICICI Securities

New CEO’s illustrative background holds promise

Mr Narayan Gangadhar has 20+ years global experience in leading technology business in Silicon Valley companies live Google, Microsoft, Amazon, Uber, Ola technologies. He has vast experience in leading highly disruptive businesses by driving innovation in products technology, capacity building and process automation. As ABL has transformed into purely a fin-tech company, new CEO fits well for the position to lead company strategy going forward.

Details of past employments  OLA (May’20 – Apr’21) – Group Chief technology officer.  Volley Automation (Feb’18-Jul’20) – Founder and CEO o Volley Automation leveraged the power of robotics & cloud computing to built integrated solutions that allowed developers to park cars using upto 50% less space  Uber (Aug 2015-Aug 2017): Head of engineering  Google: (Mar’10-Aug’15): Sr Director Google infrastructure and cloud engineering  Amazon web services (Sep’09-Nov’10): General Manager and Director of engineering  Microsoft (Jun’01-Jul’07): handled various engineering roles.

Additional business opportunity offer option value

Angel BEE ‘Angel BEE’ app is capable of addressing the financial investment and risk mitigation requirements of retail clients. Management believes Angel BEE has strong brand presence and by using a targeted strategy of offering services under different brands can be revenue driver going ahead.

AMC business ABL plans to set up technology-based asset management (AMC) business. India’s shift towards larger financial savings bodes well for this plan.

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Angel Broking, May 26, 2021 ICICI Securities

FY21 result review: Flagship year with Rs3bn profit

Q4FY21 result review  Net broking revenues grew 37% QoQ led by strong growth in ADTO.  Company added 0.96mn clients in Q4FY21 (up 87% QoQ), Number of trades grew 33% QoQ, ADTO rose 66% to Rs3.7trn, and average client fund stood at Rs9.6bn (up 69% QoQ).  Of the total net broking revenues, flat-fee segment stood at Rs1.28bn while that in the traditional plan was at Rs0.5bn.  EBITDA margin was maintained at 49% for past three quarters.  In the earnings call company indicated that there has been a negligible impact of phase-2 of new margin norms on net broking income.  Dividend payout ratio stood at 35% in FY21.

Table 9: Q4FY21 result review Q4FY21 Q1FY21 Q2FY21 Q3FY21 Q4FY21 YoY QoQ Interest income 349 349 493 381 545 Fin cost 104 82 143 56 108 Net Interest income 245 267 350 325 438 78% 35%

Fees and commission 1,559 2,032 2,604 2,655 3,488 Sub broker payouts 627 765 919 881 1,065 Net brokerage income 932 1,267 1,685 1,774 2,423 160% 37% 38% 35% Other income 88 85 81 120 155

Total Income 1,265 1,619 2,117 2,219 3,016 138% 36%

Total Expenses Employee benefit 359 373 397 445 503 40% 13% Impairment expenses 95 190 74 41 42 -56% 1% Others expenses 319 360 603 640 1,008 215% 57% Total Expenses 774 923 1,074 1,126 1,553 101% 38%

EBITDA 492 696 1,043 1,093 1,464 198% 34% margins 39 43 49 49 49 Depreciation 49 50 46 47 40 PBT 442 646 996 1,045 1,424 222% 36% Taxes 117 164 251 313 404 Reported PAT 326 483 746 732 1,020 213% 39% Extraoridnary 128 49 Income from Discounted

operations Adjusted PAT 326 611 746 782 1,020 213% 30% Source: Company

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Angel Broking, May 26, 2021 ICICI Securities

Financials and Valuation

We value Angel broking at 18x FY23 EPS of Rs50 arriving at a target price of Rs900.

Table 10: Comparison table Consensus EPS estimates (Rs) P/E (x) CMP (Rs) FY22E FY23E FY22E FY23E MOSL 808 46.8 54.5 17.3 14.8 5 Paisa 352 10.0 18.0 35.2 19.5 IIFL wealth 1,188 49.0 59.1 24.0 20.1 Source: Bloomberg

Chart 47: Total income is expected to grow 10% Chart 48: PAT is expected to grow 14% / 17% in and 12% in FY22/23 FY22/23

12,000 4,500

4,000 10,000 11,030 4,090 9,855 3,500 3,504 8,000 8,971 3,000 3,066 2,500 6,000

2,000

Rs mn Rs Rs mn Rs 4,000 4,753 1,500

1,000 2,000 500 867

0 - FY20 FY21 FY22 FY23 FY20 FY21 FY22 FY23 Source: Company, I-Sec Research

Chart 49: EBITDA margin is expected to remain Chart 50: ROE is expected to be in the range of strong 27-28% in FY22/23

60.0% 40.0%

35.0% 50.0% 35.6% 51.4% 47.9% 49.4% 30.0% 40.0% 25.0% 28.1% 27.4%

30.0% 20.0% 29.4% 15.0% 20.0% 15.2% 10.0% 10.0% 5.0%

0.0% 0.0% FY20 FY21 FY22 FY23 FY20 FY21 FY22 FY23 Source: Company, I-Sec Research Source: Company, I-Sec Research .

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Angel Broking, May 26, 2021 ICICI Securities

Risks

 General economic and market conditions in India and globally (as well as any reduction in brokerage fee) could have a materially adverse effect on business, financial condition, cashflows, results of operations, and prospects.  Company is subject to extensive statutory and regulatory requirements and supervision, which have material influence on, and consequences for, its business operations.  The operation of businesses is highly dependent on information technology and the company is subject to risks arising from any failure of, or inadequacies in, IT systems.

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Angel Broking, May 26, 2021 ICICI Securities

Financial summary

Table 11: Profit and Loss statement (Rs mn, year ending Mar 31) Year to March FY20 FY21 FY22E FY23E Operating Income (Sales) 4,753 8,971 9,855 11,030 Operating Expenses 3,357 4,675 4,983 5,360 EBITDA 1,396 4,296 4,871 5,670 % margins 29.4 47.9 49.4 51.4 Depreciation & Amortisation 209 184 202 221 Recurring PBT 1,186 4,112 4,669 5,450 Add: Extraordinaries - - - - Less: Taxes 320 1,046 1,165 1,360

Net Income (Reported) 867 3,066 3,504 4,090 Recurring Net Income 867 3,066 3,504 4,090 Source: Company data, I-Sec research

Table 12: Balance sheet (Rs mn, year ending Mar 31) FY20 FY21 FY22E FY23E Assets Cash and cash equivalents 14,136 18,774 27,055 34,126

Trade Receivables 390 2,277 2,682 2,950 Loans 2,806 11,285 11,104 13,621 Investments 3,059 14,345 10,211 11,226

Fixed Assets 1,107 1,061 1,161 1,261 Other assets 404 395 395 395

Total Assets 21,902 48,138 52,607 63,579

Liabilities Equity share capital 720 818 818 818 Reserves and surplus 5,194 10,492 12,769 15,428 Networth 5,914 11,310 13,588 16,246

Borrowings 4,909 11,715 13,472 15,493

Other Liabilities 11,079 25,113 25,548 31,840

Total Liabilities 21,902 48,138 52,607 63,579 Source: Company data, I-Sec research

Table 13: Cash flow statement (Rs mn, year ending Mar 31) FY20 FY21 FY22E FY23E Operating Cash flow 2,143 4,900 4,669 5,449 Working Capital Changes 4,582 -13,468 4,346 2,492 Taxes paid -293 -972 -1,165 -1,360 Capital Commitments -125 46 -100 -100 Free Cash Flow 6,308 -9,494 7,750 6,481 Cash flow from Investing Activities -281 344 -100 -100 Dividend paid -234 -1,073 -1,226 -1,432 Extraordinary Items - - - - Chg. in Cash & Bank balance 1,663 -255 8,281 7,071 Source: Company data, I-Sec research

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Angel Broking, May 26, 2021 ICICI Securities

Table 14: Key ratios (Year ending Mar 31) FY20 FY21 FY22E FY23E Per Share Data (in Rs.) EPS(Basic Recurring) 12.1 37.5 42.8 50.0 Recurring Cash EPS 15.0 39.7 45.3 52.7 Dividend per share (DPS) - 13.1 15.0 17.5 Book Value per share (BV) 82.4 138.3 166.1 198.6

Growth Ratios (%) Operating Income -0.6% 88.7% 9.9% 11.9% EBITDA -3.4% 207.8% 13.4% 16.4% Recurring Net Income -14.8% 253.8% 14.3% 16.7% Recurring CEPS -11.6% 165.3% 14.1% 16.3%

Operating Ratio (%) Employee expenses/Sales 33.6% 19.2% 19.7% 19.3% Opex & Other exps /Sales 37.0% 33.0% 30.9% 29.3%

Effective Tax Rate 27.0% 25.4% 24.9% 24.9% D/E Ratio (x) 0.83 1.04 0.99 0.95

Valuation P/E 59.2 19.1 16.7 14.3 P/B 8.7 5.2 4.3 3.6 Dividend Yield - 1.84 2.10 2.45

Return/Profitability Ratio (%) Recurring Net Income Margins 18.2% 34.2% 35.6% 37.1% RoCE 11.0% 17.9% 17.3% 17.2% RoNW 15.2% 35.6% 28.1% 27.4% Dividend Payout Ratio 0.0% 35.0% 35.0% 35.0% EBITDA Margins 29.4% 47.9% 49.4% 51.4% Source: Company data, I-Sec research

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Angel Broking, May 26, 2021 ICICI Securities

Index of Tables and Charts

Tables Table 1: Financial savings mix ...... 6 Table 2: Contribution of top 5 / 10 / 25 / 50 brokers to BSE and NSE cash turnover ...... 8 Table 3: Revenue and profit trend of global brokers ...... 13 Table 4: Brokerage estimation sheet ...... 17 Table 5: Estimating interest income for ABL ...... 19 Table 6: FY20 detailed cost break up...... 24 Table 7: Active rate for ABL ...... 27 Table 8: A snapshot of ABLS digital capabilities ...... 29 Table 9: Q4FY21 result review ...... 31 Table 10: Comparison table ...... 32 Table 11: Profit and Loss statement ...... 34 Table 12: Balance sheet ...... 34 Table 13: Cash flow statement ...... 34 Table 14: Key ratios ...... 35

Charts Chart 1: Total cash turnover in NSE and BSE has seen strong growth… ...... 3 Chart 2: …so has turnover in equity futures across FY01-FY21...... 3 Chart 3: There has also been strong growth in equity options too…...... 3 Chart 4: …while MCX commodities turnover dipped due to introduction of CTT in FY12 and latest year growth was hit due to sharp decline in crude oil volumes...... 3 Chart 5: Depository accounts have seen a huge rise in FY21, indicating rising equity culture at individual levels ...... 4 Chart 6: Percentage of Americans who invest in stock market ...... 4 Chart 7: Estimating potential size of Investor base in India ...... 5 Chart 8: Individual investor mix in NSE’s cash and derivatives turnover ...... 5 Chart 9: Financial saving ...... 6 Chart 10: Data-savvy and younger users to drive adoption of smartphones ...... 7 Chart 11: Proportion of data subscribers in overall subscribers to increase dramatically over next five years ...... 7 Chart 12: Proportion of NSE active clients handled by top-5 brokers (based on active clients) ...... 9 Chart 13: Top-5 brokers acquired 67% of the total incremental clients in FY21 ...... 9 Chart 14: NSE cash delivery ADTV has improved, and though intraday ADTV has moderated from Feb’21 highs, it remains largely above its average levels ...... 11 Chart 15: Retail ADTV has improved and retail mix in cash volumes has remained steady, however impact due to higher upfront margin requirement needs to be seen...... 11 Chart 16: Overall cash ADTV has remained steady ...... 12 Chart 17: NSE derivatives have witnessed strong growth while retail mix has seen a marginal dip ...... 12 Chart 18: Headline commission rate for Charles schwab ...... 13 Chart 19: Net revenue bridge of ABL between FY20 and FY21 ...... 14 Chart 20: ABL’s Brokerage model ...... 14 Chart 21: Overall brokerage revenues have seen strong growth… ...... 15 Chart 22: …led by robust growth in flat-fee plan...... 15 Chart 23: While traditional plan revenues have remained steady…...... 15 Chart 24: … of which B2B plan saw strong growth in Q4FY21 ...... 15 Chart 25: Gross broking revenue split ...... 15 Chart 26: Net brokerage contribution from direct clients and B2B plan (AP) ...... 16 Chart 27: Segment wise bridge of gross brokerage revenue between FY20 and FY21 ..... 16 Chart 28: Average client funding book has risen at a strong pace ...... 19 Chart 29: Exposure per client was higher in Q4FY21 compared to Q4FY20 ...... 19

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Angel Broking, May 26, 2021 ICICI Securities

Chart 30: MTF Book Segmentation ...... 20 Chart 31: Angel BEE app helps in selection of investment products based on goals and helps in managing expenses and monitor spends...... 21 Chart 32: Distribution income trend for ABL ...... 22 Chart 33: Total Income / Expenses and EBITDA margin trend ...... 23 Chart 34: Growth trend in total income and total operating expenses...... 23 Chart 35: Expected increase in employee cost and other expenses...... 24 Chart 36: Retail F&O market share has seen sharp improvement ...... 25 Chart 37: Retail cash market share has declined ...... 25 Chart 38: Retail commodity market share has remained steady with marginal improvement in Apr’21 ...... 26 Chart 39: Overall market share has seen continued improvement...... 26 Chart 40: Gross client additions ...... 26 Chart 41: Ratio of new clients added in flat fee and traditional plan...... 27 Chart 42: ABL’s NSE-active client base has consistently improved ...... 28 Chart 43: Active client market share has improved from 5.3% in FY20 to 8.3% in FY21 ... 28 Chart 44: Market share in incremental active clients has also remained steady at 11-13% 28 Chart 45: EBITDA margin and ADTO trend suggest strong operating leverage benefit ..... 29 Chart 46: Angel broking is the 4th fastest growing app in Finance category ...... 29 Chart 47: Total income is expected to grow 10% and 12% in FY22/23 ...... 32 Chart 48: PAT is expected to grow 14% / 17% in FY22/23 ...... 32 Chart 49: EBITDA margin is expected to remain strong ...... 32 Chart 50: ROE is expected to be in the range of 27-28% in FY22/23 ...... 32

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Angel Broking, May 26, 2021 ICICI Securities

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