“Subscribe” to Angel Broking

Leveraging digital platforms to enhance clients base 21th Sep. 2020

Salient features of the IPO: Recommendation Subscribe • Angel Broking Limited (ABL) is one of the largest retail broking houses in India in terms of active clients. Key business segments Price Band Rs305 -306 per share include broking & advisory services, margin funding, loan against Face Value Rs 10 per share shares and financial product distributions. • ABL entered into the broking industry over 22 years ago and has over Fresh Issue Size Rs3,000 mn the years built an online and digital broking and financial services Share for Fresh Issue platform with a pan India presence. 9.8 mn shares (Higher Price Band)

Key competitive strengths: OFS Issue Size Rs3,000 mn • One of the largest broking houses with strong brand equity • Client acquisition through diversified digital platform Total Issue Size Rs6,000 mn • Integrated, end to end, and advances digital experience ensuring client satisfaction Bidding Date Sep 22' 2020 - Sep 24' 2020 • Diversified product offering across segments at competitive price MCAP at Higher Price Rs25,030.5 mn • Robust business metrics building operating leverage Band • Experiences management team with proven executive capabilities ICICI Securities Ltd., Edelweiss Book Running Lead Valuation: At the CMP of Rs306, demanding valuation at Rs25,030 mn is Financial Services Ltd., SBI Manager valued at P/E of 28.9x (post issue adjusted FY20 EPS of Rs10.6) and P/BV Capital Market Limited of 2.7x (post issue adjusted BVPS of Rs115). Link Intime India Private Registrar Below are few key observations of the issue: (continued in next page) Limited • ABL is the fourth largest brokerage house in India in terms of active Industry Financial Services clients. ABL has over 9 lakh NSE active clients as of Aug 31’ 2020 which places it fourth behind only to Zerodha, ICICI Securities and RKSV Securities. The company generates major business (around 70% Retail application money at higher cut-off price per lot of total revenue) from brokerage segment (as retail brokerages Number of shares per lot 49 income). Brokerage services to retail clients primarily compromises trading in equities, equity derivatives, commodities and currency Application Money Rs14,994 per lot derivatives.

• As per the mgmt, ABL is well placed to capitalized on the expected Allocation Detail growth in the broking sector in India with increasing participation of Qualified Institutional retail clients in the equity market. Even in the economic lockdown 50% phase, brokerages companies in the country have witnessed a Buyers (QIB) substantial growth in opening of trading & demat a/c. Since April, more than 5 million new demat accounts have been opened with Non-Institutional 15% depository firms CDSL and NSDL. Investors (NII)

• ABL strategized to focus more on leveraging digital platforms to Retail Individual Investors 35% strengthen leadership position to become the largest retail broking (RIIs) firm in India, both by broking revenue and active clients. ABL witnessed an increase of 18.7% from 1.8 million clients in FY20 to Shareholding Pattern 2.15 million clients as of Q1FY21. Pre-Issue Post Issue • Promoter & promoter Being one of early mover in the brokerage industry and over two 55.2% 44.8% decades of experience, ABL assessed the technological development group trend in the earlier stage and hence made advanced progress in Public 43.8% 56.2% digital platforms. With app like Angel Broking Mobile Aap, Angel BEE Total 100.0% 100.0% Aap, SpeedPro and NXT, the company has planned to leverage the growth opportunity in India’s under penetrated brokerage industry. Source: Choice Broking Research, RHP In Q1FY21, 85% of ABL’s total clients have been acquired digitally of which 53% are acquired through performance marketing, 21% through referrals and 11.2% through digital referral associates (DRA). Analyst Satish Kumar • The company in RHP has outlined its primary strategy is to profitably grow retail broking, margin funding and distribution businesses (022-67079999; Ext:913, Deskphone through online and digital platforms. Mob:9167120440 Email [email protected]

1 • While, the company posted significant progress in client acquisition from 1.06 mn in FY18 to 2.15 mn by Q1FY21, operating revenue contracted by a CAGR of -2.6% during FY18-FY20. The mgmt attributed this to decline in brokerage rate.

• ABL has introduced competitive pricing plan in 2019 namely Angel itrade which compromises plan of Rs0 for equity delivery and Rs20 for all other segments. We think the move was being taken to tackle the competitions imposed by discount brokers. Now mgmt planned to grow revenue only be adding new customers, while brokerage prices to keep low to remain competitive amidst increasing competition in the industry.

• ABL is planned to raise of Rs3,000 mn as fresh issue to meet working capital management (Rs2,300 mn) and general corporate purposes. However, balance sheet shows strong cash position of the company, creating some uncertainty for equity dilution through fresh issue. ABL’s cash and bank balance as of Jun 30’ 2020 stood at Rs19,611 mn and has the negative net debt position.

• After adjusting net worth with fresh proceed of Rs3,000 mn, RoE reduced to single digit of 9.2% from 14.7% (calculated on FY20 PAT). While BVPS increased to Rs114.8.

• ABL has augment its digital base to record strong customers acquisition in under penetrated broking industry which is witnessing substantial growth in retail client segments. Average daily turnover in Indian equity market increased to Rs14,350 bn in FY20 from Rs7,045 bn in FY18 driven by equity derivative segment (97% of ADTO). While, ABL’s net client addition run rate was 113,191 in Q1FY21 compared to 43,582 in FY20.

• We believe ABL to keep posting strong customers acquisition numbers going forward, however its strategy to keep brokerage low to compete with discount brokerages could keep profitability under pressure. At the CMP of Rs306, demanded valuation at Rs25,030 mn is valued at P/E of 28.9x (post issue adjusted FY20 EPS of Rs10.6). Other brokerage companies’ valuation include ICICI Sec (P/E: 28.3x) and Aditiya Birla Money P/E: 22.4x). ABL’s strategy to focus on leveraging digital platforms for client acquisition has started yielding benefits. Alternatively, the company is also competing with discount brokers through reducing brokerage charges and additionally providing other value-added services like research advisory. 5paisa Capital, a discount broker launched by IIFL in 2015, is trading at valuation of P/BV of 6.7x as compared to ABL’s P/BV of 2.7x. • Thus, considering all parameters, we assign ‘Subscribe’ rating to the issue.

P/E P/BV PAT Revenue Net Companies M. Cap CMP EPS BVPS RoE (%) RoA(%) (x) (x) (TTM) TTM worth Rs mn Angel Broking 25,030.5 306 10.6 28.9 114.8 2.7 867.9 7,246.2 9.2% 4.0% 9,390.8 Geojit Financial Services 9,770.3 41 2.8 13.3 21.2 1.8 677.4 3,208.1 13.4% 11.6% 5,040.8 5Paisa Capital Ltd. 9,682.4 380 -1.8 -204.0 54.3 6.7 -45.7 1,277.1 -3.3% -3.2% 1,382.4 Aditya Birla Money 2,364.6 42 1.9 22.4 5.6 14.2 120.0 852.1 38.4% 2.2% 312.7 ICICI Securities 1,54,305.1 479 19.3 28.3 32.5 14.6 6,213.1 18,645.1 51.4% 21.1% 12,095.4 IIFL Securities 12,576.3 39 4.7 8.3 25.5 1.5 1,501.0 6,894.8 17.1% 1.6% 8,797.9

* Angel broking PAT and revenue were taken for FY20 Source: Choice Broking Research, RHP

• Angel Broking is coming with initial public offer (IPO) of Rs6,000 mn. The issue compromises Rs3,000 mn as fresh issue and Rs3,000 mn as offer for sale (OFS).

• Price band for the issue is Rs305-Rs306 per share

• The issue will open on Sep 22’ 2020 and closes on Sep 24’ 2020

• At the higher price band, number of fresh issue shares is 9.8 mn. Post issue, total number of share increased to 81.8 mn which translate to a market cap of Rs25,030.5 at the higher price band.

• Promoters namely Ashok D Thakkar is selling 3.2 mn shares (Rs183.35 mn) and Sunita A Magnani is selling 0.75 mn shares (Rs45 mn). Post issue, promoter stake will reduce to 43.8% from 55.2% in pre issue.

• International Finance Corporation (IFC) an institutional investor, is selling equity shares worth of Rs1,200 mn

• Objective of the issue is 1) to meet working capital requirements and 2) general corporate purpose.

• Not more than 50% of the net offer shall be available for allocation on a proportional basis to a qualified institutional investors (QIIs). Further not less than 15% shall be available for allocation on a proportional to non-institutional investors (NIIs) and not less than 35% of net offer shall be available for allocation to Retail Institutional Investors (RIIs).

• The offer is being made through book building process.

• With 9.8 mn shares as fresh issue, equity will dilute ~14%.

• Average cost of acquisition by selling promoters is Rs0.99, Rs6.48.

Indicative IPO process time line:

Unblocking of Offer Closes on ASBA Account 24-Sep-2020 30-Sep-2020

Offer Opens on Finalization of Commencement 22-Sep-2020 Basis of Credit to Demat of Trading Allotment Accounts 05-Oct-2020 29-Sep-2020 01-Oct-2020 Company introduction:

Angel Broking Limited (ABL) is one of the largest retail broking houses in India in terms of active clients. Key business segments include broking & advisory services, margin funding, loan against shares and financial product distributions.

Broking and allied services are offered through online and digital platform and has a network of over 11,000 authorized persons as of Jun 30’ 2020. ABL has a well diversified network in the country as customer outreach spans across approximately 96.9% or 18,649 pin codes in the country. As per RHP, the company primary focus is to profitability grow retail broking, margin funding and distribution businesses through online and digital platforms. The company has launched various apps like Angel Broking Mobile App, trade.angelbroking.com, Angel Speed Pro, Angel BEE which are powered by ‘ARQ’ a rule based investment engine. Broking services is provided through various web, digital, and .exe platform, which are integrated with each other enabling clients to have seamless trading and investment experience, positioning to benefit from the development of the Indian financial markets, increased emphasis on digitalization and growth in returns from such financial investments.

Business Performance

ABL reported sales of Rs7,246.2 mn in FY20 and around 70% of the business came as brokerages income. However, over FY18-FY20, sales contracted by a CAGR of -2.6% despite the significant clients addition. Mgmt attributed this decline to the reduction in brokerages charges for the clients. EBIDTA and NPM stood at 21.9% and 12.0% in FY20 as compared to 25% and 11% in FY19. Return of Equity (RoE) stood at 14.7% in FY20. In Q1FY21, the company reported sales of Rs2,384 mn and PAT at Rs482.6 crore with strong improvement in efficiency at EBIDTA margin of 29.2% and NPM of 20.2%.

Source: Choice Broking Research, RHP Business Overview:

The company provides broking services across equity, commodity and currency segments along with debt products. ABL also facilitates opening of demat accounts as a part of broking and advisory services. ABL is a member of BSE, NSE, MSEI, MCX and NCDEX. To complement broking & advisory services, ABL provides the additional services like 1) research services 2) investment advisory and 3) investment education. In addition to broking & advisory services, the company also provides other services like marginal trading facility, distribution and loans against shares.

Marginal trading facility: ABL provides marginal trading facility to clients for leveraging their eligible collateral by funding their requirements on cash delivery segments of equities. Such funding is subject to exposure against margins that are mandated by stock exchanges.

Distribution: ABL also distributes third party financial products such as mutual funds and health & life insurance products through offline channels and digital platforms such as ‘Angel Broking’ and ‘Angel BEF’.

Loan against shares: The company also provides loans against shares to retail clients through subsidiary Angel Fincap Private Limited.

Source: Choice Broking Research, RHP Competitive strengths: • One of the largest broking houses with strong brand equity • Client acquisition through diversified digital platform • Integrated, end to end, and advances digital experience ensuring client satisfaction • Diversified product offering across segments at competitive price • Robust business metrics building operating leverage • Experiences management team with proven executive capabilities

Business strategy: • Strengthen leadership position to become largest retail broking business in India • Augment investment in mobile platform, artificial intelligence, machine learning capabilities and newer technologies • Establish a leadership position in investment advisory space to support business • Capitalization of the growing investable wealth in India

Risk and concerns:

• Increasing competition in the industry • Challenges from discount brokers business model • Changing norms by SEBI • Volatility in equity markets

Consolidated (Rs mn)

Profit & Loss A/c Cash Flow Statement Particulars FY18 FY19 FY20 Q1FY21 Particulars FY18 FY19 FY20 Q1FY21 Cash Flow from Operating Operating Revenue (OR) 7,642.8 7,579.8 7,246.2 2,384.2 (2,970.0) 7,087.6 6,433.0 (2,900.2) Activities Fee and commission expense (2,464.0) (2,419.6) (2,304.4) (764.9) Cash Flow from Investing 414.3 (193.6) (281.3) 277.1 #REF! (1,219.7) (1,591.7) (1,598.0) (373.1) Activities Impairment of financial Purchase of fixed assets and (97.1) (151.5) (377.1) (189.8) (66.3) (116.4) (126.2) (55.8) instruments properties Cash Flow from Financing Employee Benefit Expenses (190.5) (189.1) (209.2) (49.7) 2,324.7 (3,654.7) (4,488.9) 1,647.1 Activities Other Expenses (1,282.5) (1,522.9) (1,382.2) (360.4) Net Cash Flow (231.0) 3,239.3 1,662.8 (976.1) EBITDA 2,579.4 1,894.1 1,584.5 696.0 Opening Balance of Cash and Depreciation and Amortization 1,461.3 1,230.3 4,469.6 6,132.4 (190.5) (189.1) (209.2) (49.7) Bank Balances Closing Balance of Cash and Expenses 1,230.3 4,469.6 6,132.4 5,156.3 EBIT 2,388.9 1,705.0 1,375.4 646.4 Bank Balances Finance Costs (945.7) (684.5) (488.6) (81.8) Financial Ratios Other Income 157.1 261.4 300.9 81.7 Particulars FY18 FY19 FY20 Q1FY21 Exceptional Items 0.0 0.0 0.0 0.0 Revenue Growth Rate (%) -0.8% -4.4% PBT 1,600.3 1,281.9 1,187.7 646.3 EBITDA Growth Rate (%) -26.6% -16.3% Tax Expenses (502.5) (447.9) (319.8) (163.7) EBITDA Margin (%) 33.7% 25.0% 21.9% 29.2% PAT 1,097.9 834.0 867.9 482.6 EBIT Growth Rate (%) -28.6% -19.3% EBIT Margin (%) 31.3% 22.5% 19.0% 27.1% Balance Sheet Adjusted PAT Growth Rate (%) -24.0% 4.1% Reported PAT Margin (%) 14.4% 11.0% 12.0% 20.2% Particulars FY18 FY19 FY20 Q1FY21 Fixed Asset Turnover Ratio (x) 6.6 6.7 6.5 2.2 Share Capital 720.0 720.0 720.0 720.0 Total Asset Turnover Ratio (x) 0.3 0.3 0.3 0.1 Reserves and Surplus 4,015.8 4,594.4 5,194.2 5,670.9 Working Capital Turnover Ratio 1.4 1.3 1.1 Long Term Provisions 44.0 52.3 67.1 79.3 (x) Trades Payables 6,146.6 6,377.6 9,394.9 15,036.8 Current Ratio (x) 1.3 1.4 1.4 1.3 Short Term Borrowings 11,374.3 8,718.2 4,908.8 6,580.1 Debt to Equity (x) 1.3 1.2 1.6 2.4 Total Debt (Rs.) 11,374.3 8,718.2 4,908.8 6,580.1 Tax liabilities (Net) 2.1 2.7 0.5 58.9 Net Debt (Rs.) 1,927.2 -1,141.5 -9,226.8 -13,030.9 Other short term liabilities 1,242.4 1,358.2 1,304.7 1,341.5 Net Debt to EBITDA (x) 0.7 -0.6 -5.8 -18.7 Other long term liabilities 241.5 261.9 311.7 469.4 Net Debt to Equity (x) 0.4 -0.2 -1.6 -2.0 Total Liabilities 23,786.7 22,085.3 21,901.7 29,956.8 Property, plant and equipment 1,065.1 1,062.9 1,038.8 1,024.5 RoE (%) 23.2% 15.7% 14.7% 7.6% RoA (%) 4.6% 3.8% 4.0% 1.6% Intangible Assets 91.6 72.8 68.3 66.9 RoCE (%) 50.0% 31.8% 23.0% 10.0% Tax assets (net) 76.4 127.4 98.1 61.8 RoIC (%) 27% 17% 14% 6% Short term investments 65.0 149.1 352.7 23.6 EV 26,957.7 23,888.9 15,803.7 11,999.6 Inventories 0.6 0.5 0.5 0.0 EV/Sales (x) 3.5 3.2 2.2 5.0 Trade Receivables 1,568.2 2,146.4 390.3 562.8 EV/EBIDTA (x) 10.5 12.6 10.0 17.2 EV/EBIT (x) 11.3 14.0 11.5 18.6 Cash and Bank Balances 9,447.1 9,859.7 14,135.6 19,610.9 Valuation ratios Short Term Loans and Advances 10,924.4 7,616.9 2,805.8 8,144.1 Restated Adjusted EPS (Rs.) 13.4 10.2 10.6 7.9 Other Assets 548.4 1,049.6 3,011.9 462.1 Restated BVPS (Rs.) 57.9 65.0 72.3 114.8 Total Assets 23,786.7 22,085.3 21,901.7 29,956.8 P/E (x) 22.8 30.0 28.8 38.9 P/BVPS (x) 5.3 4.7 4.2 2.7 EV/EBITDA (x) 10.5 12.6 10.0 17.2

Source: Choice Broking Research, RHP

© CHOICE INSTITUTIONAL RESEARCH Equity Research Team Name Designation Email id Sundar Sanmukhanis Head of Research - Fundamental [email protected] Satish Kumar Research Analyst [email protected] Rajnath Yadav Research Analyst [email protected] Ankit Pareek Research Associate [email protected] Sunandh Subramaniam Sr. Research Associate [email protected] Sachin Gupta Research Associate [email protected] Diksha Mhatre Research Advisor [email protected]

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