A soaring high Angel

The world of stock trading has transformed tremendously in recent years. Thanks to technological advancements and ease of payment, one can trade in the stock market at the click of a button.

A SEBI report in January 2023 stated that the number of individual traders engaging in F&O (Futures and Options) - complex financial instruments - has skyrocketed, increasing almost seven times from around seven lakh in FY19. This surge not only reflects the growing interest in stock trading but also the democratisation of access to financial markets.

Apart from traders, this transformation has also benefited discount brokers. They facilitate transactions between traders and the stock exchange at a fee (or brokerage). Thanks to technology (simplified user experience, cloud computing, ease in digital onboarding), these brokers have seen hassle-free client acquisition.

One standout example is Angel One , a listed discount broker that has seen its value increase more than elevenfold since its debut in October 2020. What has fueled Angel One's impressive growth? Let's find out.

The realisation of a digital revolution early on

Angel One recognised the potential of digital trading over traditional calling-over-the-phone operations early. By 2019, it had zero branches (180 earlier) and completely digitised processes.

This increased Angel One's revenue per employee by more than four times and operating profit margin by over 11 percentage points from FY18 to FY23. The ROCE has increased from 13 per cent in FY19 to 45 per cent in FY23. Moreover, its client acquisition run rate improved from a monthly average of nearly 22,000 in FY19 to nearly 4,00,000 in FY23.

Shift in target demographics

With the metropolitan and Tier 1 cities already penetrated, Angel One focused towards Tier 2 and 3 cities and beyond. It has acquired over 90 per cent of its clients from these cities. As a result, its market share in the NSE active client base has doubled in the past three years.

Increased investor participation in the market

The Indian capital market has been on an upswing since March 2020. Moreover, 580 companies have been listed on the stock exchange since FY21 till now.

As a result, many new retail investors have entered the markets. Between FY21 and November 2023, a whopping 9.4 crore new demat accounts have been opened.

This has led to a rise in Angel One's average daily turnover (ADTO). Moreover, it has been gaining market share across the retail segment, with the maximum gain witnessed in the commodity segment.

Comparison against its peers

Most of Angel One's peers are unlisted (Zerodha, Groww and Upstox), so we could not get our hands on their financials. But we took a sneak peek at an important quantitative factor - customer complaints lodged by clients against brokers. While the number of complaints against all five brokers is less than 1 per cent of their active clients, Angel One had the highest count on an absolute basis.

Though it is not the best comparison, we don't have any other choice. We look at Angel One's only closely listed competitor, 5Paisa Capital .

For every year in the last five financial years, 5Paisa Capital has spent more on advertisement as a per cent of revenue than Angel One. However, its numbers haven't borne fruit yet. Moreover, 5Paisa Capital's share of brokerage income to its topline has been on a decline. Their broking revenue has decreased from 83 per cent in FY19 to 63 per cent in FY23. Further, its retail market share has stagnated at around 3 per cent since FY22.

Future outlook

Technological advancements have enabled discount brokers to process their trades efficiently with nil-to-low incremental expenses. This has increased the share of the top five discount brokers in the total NSE active client base from 50 per cent in Q3 FY21 to 63 per cent in Q3 FY24. Whether this trend will continue remains to be seen.

Following in the footsteps of Zerodha, Angel One has also ventured into the asset management space. The company plans to introduce passive mutual funds after receiving the final approval from SEBI.

A word of caution

Investors must remember that the broking industry is cyclical. It thrives when the markets are booming and faces challenges during downturns.

A case in point is Central Depository Services or CDSL. It witnessed a whopping three crore new demat account openings when Sensex generated a return of 17.4 per cent in FY22. But the very next year, when the index gave a meagre 0.8 per cent return, CDSL's total demat count for FY23 plummeted by 32 per cent. These are reflected in their financials, too, as in FY23, they had no revenue growth and saw a decline of about 11 per cent year-on-year in their net profit.

Moreover, Angel One is trading at a P/E (price-to-earnings) ratio of 27 times, more than its three-year-median P/E of 20 times.

Also read: Tech giant soars 30 per cent despite an earnings slump