Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A+/Positive/CRISIL A1+' ratings on the bank facilities and commercial paper of Angel Broking Limited (Angel Broking).

 

CRISIL Ratings belief that Angel Group shall continue to sustain improvement in market position which in-turn will result in further improvement in its earnings profile. There has been sharp increase in the active client base of Angel group during last 2-3 quarters; stood at 25.0 lakh as on Sep 30, 2021 from 16 lakh as on March 31, 2021. Angel group continue to hold its market position in terms of active client at third largest as of Sep 2021 (as compared to 6th largest as of Sep 2020). This improvement in market position has also translated in improvement of earnings profile with broking income for the company increasing by around 80% to Rs 907 crore in fiscal 2021 (Rs 504 in fiscal 2020). Additionally, given the group also offers allied services (such as margin trading facility) this led to improvement in its overall total income by around 71% during fiscal 2021. Further, with the continued momentum in client additions and the increasing number of transactions, the group continued to have strong topline; during Q2 of fiscal 2022, the core broking income grew by around 62% (Y-o-Y) to Rs 359.8 crore as compared with Rs 222.2 crore in the corresponding quarter of the previous year. Similar, impact was seen in total income which improved by around 69.3% (Y-o-Y) to Rs 538.2 crore during the second quarter of fiscal 2022.

 

Nevertheless, given the cyclic nature of the capital market industry, the group’s ability to sustain its market position and further improve its earnings profile will be key rating sensitivity factor. Additionally, the group’s ability to increase diversity within its revenue profile shall be a key monitorable.

 

Angel group has transformed itself to a tech-based broking house during last 2-3 years and has invested significantly towards IT expansion and marketing to attract large volume of retail clients. The group has focused at increasingly onboarding clients directly through the digital medium and in turn, improved its operating leverage. The benefits that the group has started reaping from these investments is reflected in performance of fiscal 2021 – cost-to-income ratio stood at 66.4% from 82.9% a year ago. As of Sep 30, 2021, the cost-to-income ratio of the group stood at 65.2%. Its cost-to-net income ratio (after adjusting for sub-brokerage expenses) stood at 52.3% and 74% for fiscal 2021 and fiscal 2020, respectively.

 

Consequently, the group’s net profit improved to Rs 298 crore in fiscal 2021 as compared with Rs 81 crore a year ago. For the Q2 of fiscal 2022, net profit stood at Rs 134.3 crore (Rs 74.6 crore in Q1 fiscal 2021).  Although profits and cost to income ratio have improved, they are relatively lower as compared to its peers. Therefore, considering the inherent cyclic nature of capital markets, ability of the group to sustain its earnings profile and improve its cost to income ratio from here on, will remain key monitorable.

 

The rating continues to consider Angel group’s strong market position and the extensive experience of the promoters in the retail broking segment, a comfortable capital position and sound risk management systems. These strengths are partially offset by high dependence on broking income, increasing competition in the broking segment and susceptibility to uncertainties inherent in the capital market business.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has consolidated the business and financial risk profiles of Angel Broking Ltd with its wholly owned subsidiaries, Angel Fincap Private Ltd, Angel Financial Advisors Pvt Ltd, Angel Securities Ltd, Angel Digitech Services Pvt Ltd and Mimansa Software Systems Pvt Ltd. This is because all these companies, together referred to as the Angel group, have highly integrated operations and common directors and senior management. Moreover, the management has articulated that in case of distress in any of these companies, other group companies will provide financial support, including transfer of funds, on a timely basis.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

* Strong, improving market share in the equity broking segment

The Angel group is a well-established brand with over three decades of presence in the broking industry. As on Sep 30, 2021, the company had 25.0 lakh active customers on NSE, a sharp jump of 148% from ~10 lakh active customers in Sep 2020. Additionally, its market share within active client space (National Stock Exchange; NSE) increased significantly to 9.3% as on Sep 30, 2021, compared with 8.3% and 7.1% as on March 31, 2021 and September 30, 2020, respectively. This improvement was driven by significant increase in client additions in fiscal 2021 that continued in Q1 of fiscal 2022. Angel group’s active client base increased by more than 12-14 lakh between Sep 2020 and Sep 2021.

 

The management has been focused on transforming its operations to a fully digital platform and has launched easy-to-use trading applications for its customers in the recent past. It started the digitisation process of its entire operations back in fiscal 2015 by onboarding clients through eKYC and giving them discounts for trading online. The easy-to-use trading platform helped the company reach out to newer clientele. These digital initiatives taken by the group, led to huge spike in overall client additions since November 2019. Also, these initiatives have helped Angel Broking to position itself among top three discount brokers and garner major clients, resulting in significant increase in broking income.

 

* Longstanding presence with extensive experience of promoters in the capital market sector

Angel Broking has been operating for three decades and is led by Mr Dinesh Thakkar (MD and Chairman), a veteran of the capital market and a first-generation entrepreneur. The management has been instrumental in transforming the Angel group from a traditional to a digital broking company. This has in-turn helped Angel Broking to successfully pivot its business model in accordance to changing environment within broking industry. It has proactively embraced the shift in industry trend by offering trading through mobile applications and use of e-KYC and a flat-fee based pricing model. Further, with technology driven model, the group has recently onboarded Mr Narayana Gangadhar who has more than 20 years’ experience in leading technology businesses at Sillicon Valley companies. Further, the management has redefined ‘Angel One’ to further strengthen and cover all of Angel’s digital services under one platform, and to monetise the core brokerage platform through additional products and services.

 

* Sound risk management systems

The risk management systems are adequate, in accordance with the company’s current and planned scale of operations. Across segments, the company has a granular portfolio and relatively stringent margin collection policies to partially offset the market volatility risk. On top of the exchange specified minimum value at risk + extreme loss margin, the company charges additional margin to scrips based on its categorisation into ‘Blue chip’, ‘Good’ and ‘Average’ scrips. Furthermore, the company has capped maximum individual client limit exposure at Rs 10 crore in the cash segment and Rs 15 crore in the futures segment to avoid concentration risk related to a single client.

 

The sound risk management systems are evidenced by the company not facing any major losses or bad debts (excluding two exceptional incidents) in the last several years; average bad debt remained around 1.7% (adjusted for one time exceptional write off of Rs 16.6 crore in fiscal 2020) of total income over the past three fiscals through 2021. Even in April 2020, when crude suffered sharp volatility, it did not have any material impact on the Angel group, unlike a few other brokers. The group had reported loss of only Rs 12.7 crore in Q1 of fiscal 2021 despite being one of the market leaders in commodity broking segment. The losses were contained primarily owing to its policy of capping single client exposure. Furthermore, bad debts written off in Q1 of fiscal 2022 stood at just Rs 2.78 crore.

 

* Comfortable capitalisation

The Angel group’s capitalisation has remained comfortable for the past several years. Reported net worth is estimated at Rs 1305 crore as on Sep 30, 2021, with a 1-time gearing (Rs 1131 crore and 1 time, respectively, in March 2021). IPO has led to increase in capital inflow of Rs 284 crore in fiscal 2021. Further, the capital position is supported by steady accretion of Rs 298 crore in fiscal 2021. The group’s gearing largely comprises borrowings to meet its working capital requirements. While the company has a huge opportunity in this segment, the gearing is expected to remain below 3 times even during peak demand. The Angel group’s financial performance in the Q2 of fiscal 2022 is significantly supported by traded turnover and active clients. Consequently, accretion for fiscal 2022 is expected to be higher compared with the previous fiscal, further improving the overall networth and capital position. Despite improvement in capital position, Angel’s absolute networth is lower as compared with other peer capital market entities.

 

Weakness:

* Despite improvement, the earning profile remains vulnerable to uncertainties inherent in the capital markets

For the past five fiscals and through June 2021, Angel group’s revenue is highly skewed towards broking income and accounts for two-third of total income. Given higher reliance on broking income, any significant volatility in the market’s performance can directly put pressure on Angel group’s overall income profile. Also compared to other equally established large capital market entities, Angel’s share of broking income is relatively high. The income from other distribution products is expected to gradually increase in the medium term. The group’s ability to steadily increase diversity in its revenue profile over the medium term will be key monitorable. In addition to this, sustainability of average brokerage (defined as gross broking income by 3 months lagged active client) over the medium term will remain a monitorable.

 

Further, the Angel group has transformed itself into a technology-based broking house in the last two-three years. To achieve this transformation and to attract a large volume of retail clients, the group has invested a significant quantum of funds towards information technology (IT) capacity expansion and advertising activities. Besides, it has the highest number of authorised persons in the industry for its B2B business, leading to higher brokerage payout. This, in turn, has resulted in a high cost- to -income ratio on gross basis.

 

The group is increasingly on-boarding its clients directly through the digital channel; during fiscal 2021, the group acquired around 85% of its clients through digital mode. This direct acquisition has also helped to the group in terms of reducing the brokerage sharing costs (on incremental basis) and, in turn, improve its operating leverage. Benefits derived by the group from these investments is reflected in its performance during fiscal 2021. The cost to income ratio of the group improved to around 66.4% (~52.3% on net basis) during fiscal 2021 in comparison from 82.9% a year ago. As of June 30, 2021, the cost-to-income ratio of the group stood at 65.2. Its cost-to-net income ratio (after adjusting for sub-brokerage expenses) stood at 52.3% and 74% for fiscal 2021 and fiscal 2020, respectively. For June 30, 2021, the cost to income ratio (on net basis) stood at 53.2%. Consequently, the group's net profit stood at Rs 298.05 crore for fiscal 2021 compared with Rs 81.4 crore in fiscal 2020 (Rs 79.6 crore in fiscal 2019). Nevertheless, despite improvement in both profits and cost to income ratio, Angel group lags behind when these metrics are compared with to its peers. Additionally, capital markets have been inherently cyclic in nature and sharp down falls or sharp volatilities may result in slowdown in trading activities (particularly by retail investors). Therefore, considering the inherent cyclicality of capital markets, ability of the group to sustain its earnings profile and improve its cost to income ratio from here on, will remain key rating sensitivity factor.

 

* Highly competitive capital market industry

The Angel group’s businesses are confined within the capital market industry, which faces intense competition, with multiple players offering low-cost products to clients. The industry has seen a huge transformation in the last three years, with technology-based discount brokers entering and dominating the market. The competition is expected to increase as more players with cash burn ability propose to enter this space, further intensifying the price war in the industry. The company's key broking business remains exposed to economic, political, and social factors that drive investor sentiments.

 

Given the volatility in the business, brokerage volume and earnings are highly dependent on the level of trading activity in capital markets. Specifically, since March 2020, the stock markets have seen high retail participation and daily trading volume coinciding with the lockdown to contain the Covid-19 pandemic and people remaining at home. A significant proportion of client additions at the industry level are in the age bracket of 25-30 years without significant savings surplus. The upward movement of the key benchmark indices during this period, too, has further contributed to the lure of stock market trading and potential gains. CRISIL Ratings notes that while lock down restrictions were lifted by most of the state governments by July 2020, the momentum of increased retail participation has continued to sustain so far over the last 12 months. While this has benefited Angel Broking as well as other broking players, long term sustainability of the market momentum will remain a key monitorable.

 

Further, gross broking income by 3 months lagged active clients has declined by 37% in the Q1 of fiscal 2022 (YoY). CRISIL Ratings believes this could drop further if there is any significant market correction in the near term. Maintenance of active clients in total user base and along with continuous engagement of first-time investors in trading activity will remain monitorable. 

 

* Susceptibility to the risk of regulatory changes

Over the last couple of years, the broking industry has witnessed continuous regulatory revisions. With the objective of further enhancing the transparency levels and limiting the misuse of funds, SEBI has introduced a few regulations in the last one year. Some of these regulations include upfront margin collection for intraday positions and limiting the usage of power of attorney. The industry is undergoing changes pertaining to margin collection and pledging practices effective September 1, 2020. The newer margin collection practices will change the vintage business model of various small to mid-sized broking companies that relied on relationships by offering differential leverage and margin payment avenues to clients. This is likely to lead to decline in the overall competitiveness towards larger digital and bank-based brokers.

 

The regulations of upfront margin collections for intraday trading are expected to decrease the leverage levels in the industry to 4-5 times from the current 10-15 times prevalent across the industry. This reduction in leverage essentially means that the level of positions (in terms of volume) taken by retail investors will also get impacted. While these regulations have not affected Angel group’s performance so far, CRISIL Ratings will continue to monitor the same on an ongoing basis. Furthermore, as per new regulations, the shares owned by investors can be lien marked with the respective broker instead of having to follow the current practice of transferring it to the broker’s pool account. CRISIL Ratings understands that most top brokers (including the Angel group) have already streamlined their systems in accordance with the revised regulations. However, this may impact small and mid-sized brokers given their not-so-advanced IT infrastructure and risk management systems. These revised regulations did not have any visible impact on large brokerage houses (including Angel group) thus far. CRISIL Ratings believes that these regulations will benefit the industry with increased transparency and the de-risk broking platform for retail customers.

Liquidity: Strong

Liquidity is comfortable because of the agency nature of business and healthy unutilised bank overdraft (OD) facilities of Rs 208 crore as on Sep 30, 2021. All the bank facilities are working capital and are matched against exposures extended to the clients. As those instruments are for a short tenure ranging between 15 days and three months, the company deposits the amount received from these facilities once they are closed by the client. Furthermore, the company starts raising incremental funds once the overdraft utilisation reaches 75-80%. Its cash inflow to cash outflow monthly remains more than 1.5-1.6 times. The company maintains margins in the form of fixed deposits (FDs) at exchange level. The overall FDs of the company remains around Rs 1,700-1,800 crore on a steady state level and will increase or decrease depending on client activity

Outlook: Positive

CRISIL Ratings believes that Angel Group will continue strengthen its market position by steady increase in active clients. This improvement in market position will benefit the group to maintain its earning profile and core profitability over the medium term. 

Rating Sensitivity Factors

Upward factors

• Cost-to-income ratio (on gross basis) improving to below 60% on a steady-state basis
• Improvement in income diversity and profitability on a sustained basis
• Sustenance of improvement in the market share leading to significant scale-up of operations

 

Downward factors

• Impact on business risk profile, indicated by drop in market share impacting broking income
• Weakening of the earnings profile or sustained increase in cost-to-income to over 80%

About the Company

Angel Broking was incorporated in 1997 by Mr Dinesh Thakkar, the chairman and MD of the company. The company is engaged in retail broking in equity, commodity, and currency segments. It is a member of BSE, NSE, Metropolitan Stock Exchange of India Ltd, Multi Commodity Exchange of India Ltd and National Commodity and Derivatives Exchange Ltd.

 

The company has the largest authorised person channel with more than 15,000+ authorised personnel. Company pricing for products stood at Rs 0 for delivery trade and Rs 20 for the intraday cash, F&O, commodity, and currency segment. The company provides products such as margin trading facility, loan against shares (through AFPL), financial product distribution, research, and advisory and depository services other than the broking services that it extends.

Any other information: Not applicable

Annexure - Details of Instrument(s)

^Interchangeable between bank guarantee and overdraft facility