Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities and debt instruments of Angel One Ltd (part of the Angel group, erstwhile Angel Broking Ltd) at ‘CRISIL AA-/CRISIL PPMLD AA-/Stable/CRISIL A1+’.

 

On August 9, 2023, Angel One informed the stock exchanges that its board has approved scheme of arrangement involving transfer of business to 2 wholly owned subsidiaries viz Angel Securities Ltd (ASL) and Angel Crest Ltd (ACL. As per the announcement, the broking business that has hosted in flagship entity Angel One Ltd, will be transferred to its wholly owned subsidiaries ASL and ACL. This transaction will happen through slump sale and no cash consideration will be payable for the same. The announcement further mentions that the rationale behind this transfer is to enhance operational efficiency and optimize the management bandwidth across strategic businesses, Angel Group’s board has decided to streamline the business under each of these two channels into two separate legal entities. In addition, the disclosure clarifies that the broking business (which is currently hosted in Angel One Ltd) will be segregated in 2 parts i.e. client acquired through authorised persons (APs), affiliates, etc will be transferred to ASL whereas business/clients acquired through ‘Direct’ channel will be transferred to ACL. Nevertheless, the transaction completion is subject to requisite approvals from regulator, stock exchanges, Hon’ble NCLT, etc.

 

CRISIL Ratings understands that post completion of this re-organisation, Angel One will remain ultimate flagship entity of Angel Group and all subsidiaries will be held underneath (including ACL and ASL). The group will continue to remain consolidated at Angel One level with having fungibility of fund transfer. Hence, CRISIL Ratings does not envisages any impact on the credit profile of the Angel Group due to this re-organization. Nevertheless, post completion of the business transfer process, the debt and bank loan facilities rated by CRISIL Ratings for Angel One will get transferred in similar proportion between ASL and ACL (basis on the fund utilisation in respective business).

 

The rating factors in sustained improvement in the company’s market position which has resulted in steady improvement in its earning profile. The Angel group has maintained healthy pace of client additions. Despite volatility, the group added around 46 lakh clients during the last twelve months taking its overall client base to 1.38 crore as of March 2023. The group’s active client base grew by 10% and stood at 44 lakhs as on June 30, 2023 (~40 lakh as on June 30, 2022). Furthermore, the group continues to hold its strong market position as shown as third largest in terms of active client base and second largest in terms of incremental active client additions as on March 31, 2023. This increase in active client has translated to improvement in the earnings profile with broking income increasing around 32% to Rs 2080 crore in fiscal 2023 from Rs 1,573 crore in fiscal 2022. Besides, total income increased around 31%, driven by sharp rise in income from allied services, primarily margin trading facility. During first quarter of fiscal 24, the company has reported a total income of Rs 811 crore.

 

The group’s ability to sustain its market position through continued momentum of client additions and steadily improving its earnings by diversifying its income profile will be critical, given the cyclical nature of the capital market industry.

 

The group’s sustained focused on onboarding clients through the digital medium has improved its operating leverage, as reflected in slight improvement in cost-to-income ratio to 61% in fiscal 23 from 64% in fiscal 2022 from 66% in fiscal 21. Its cost-to-net income ratio (after adjusting for sub-brokerage expenses) stood at 50%in fiscal 2023 from 52% for fiscal 2022 as well as fiscal 2021.Consequently, the group’s net profit improved to Rs 890 crore as against Rs 625 crore in fiscal 2022. During first quarter of fiscal 24 the company has reported a PAT of Rs 221 crore. Although profitability and cost to income has improved; when compared some of the larger peers, cost to income ratio has remained high. Hence, the group’s ability to sustain its earnings profile and steadily improve cost-to-income ratio will remain a key monitorable.

 

Furthermore, the ratings continue to factor in the extensive experience of the promoters in the retail broking segment and the group’s 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 One 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 presence of over three decades in the broking industry. As on March 31, 2022, the company had 43 lakh active customers on the National Stock Exchange (NSE), 16% growth from 37 lakh active customers in March 31, 2022. Additionally, its market share within the active client space (NSE) increased significantly to 13.1% as on March 31, 2023, compared with 10.1% as on March 31, 2022. This improvement was driven by significant increase in client additions in fiscal 2021 that continued in fiscal 2022 and fiscal 2023 as well. However, the share of active client to total client ratio has declined to 29.14% for Q1 fiscal 2024, 31.16% for fiscal 2023 from 39.7% for fiscal 2023.

 

The management has transformed operations to a fully digital platform and has launched easy-to-use trading applications for its customers. It started digitising its operations in fiscal 2015 by onboarding clients through electronic know your customer (eKYC) and giving them discounts for trading online. The easy-to-use trading platform has helped the company reach out to newer clientele. The digital initiatives taken by the group led to huge spike in overall client additions since November 2019. Also, these initiatives have helped Angel One to position itself among the top three digital brokers and garner major clients, resulting in significant increase in broking income.

 

Longstanding presence with extensive experience of its promoters in the capital market business

Angel One has been operating for three decades and is led by Mr Dinesh Thakkar (MD and Chairman), a veteran of the capital market sector 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 helped Angel One to successfully pivot its business model in response to a changing environment within the broking industry. It has proactively embraced the shift in industry trends by offering trading through mobile applications and use of e-KYC and a flat-fee-based pricing model. Furthermore, with a technology-driven model, 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 plus extreme loss margin, the company charges additional margin to scrips based on its categorisation as Blue chip, Good and Average scrips. The company’s sound risk management systems are reflected in no major losses or bad debt (excluding two exceptional incidents) in the last several years. Average bad debt remained at 1.1% (adjusted for one-time exceptional write off of Rs 16.6 crore in fiscal 2020) of total income over the past three fiscals through 2023. 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 crore in the first quarter of fiscal 2021, despite being one of the market leaders in the commodity broking segment. The losses were contained primarily on account of its policy of capping single client exposure.

 

Comfortable capitalisation

The Angel group’s capitalisation has remained comfortable for the past several years. Reported net worth stood at  Rs 2369 crore as on June 30, 2023. Reported networth is estimated at Rs 2162 crore as on March 31, 2023 with gearing of 0.4 time (Rs 1,584 crore and 0.8 time, respectively, in March 2022). The capital position is supported by steady accretion of Rs 890 crore in fiscal 2023. Furthermore, initial public offering led to increase in capital inflow of Rs 284 crore in fiscal 2021. The group’s gearing largely comprises borrowings to meet its working capital requirement. While the company has a huge opportunity in this segment, the gearing is expected to remain below 3 times even during peak demand.

 

Weakness:

Dependence on broking income remains high, which makes the earnings profile vulnerable to uncertainties 

For the past five fiscals and through March 2023, the 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 the 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 over the medium term. The group’s ability to steadily diversify its revenue profile over the medium term will be a key monitorable.

 

Furthermore, the Angel group has transformed itself into a technology-based broking house in the last 2-3 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 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 2023, the group acquired around 100% of its clients through the digital mode. This direct acquisition has also helped the group in terms of reducing the brokerage sharing costs (on incremental basis) and, in turn, improving its operating leverage. Benefits derived by the group from these investments is reflected in its performance during fiscal 2023. The cost-to-income ratio of the group improved to around 61% (50% on net basis) during fiscal 2023, compared to 64% a year ago. Consequently, the group's net profit stood at Rs 890 crore for fiscal 2023, compared to Rs 624 crore in fiscal 2022. Despite improvement in both profit and cost-to-income ratio, the Angel group lags behind these metrics when compared to its peers. Additionally, capital markets have been inherently cyclical in nature and sharp falls or volatility may result in slowdown in trading activities (particularly by retail investors). Therefore, considering the inherent cyclicality of capital markets, the ability of the group to sustain its earnings profile and improve its cost-to-income ratio, will remain a key rating sensitivity factor.

 

Highly competitive capital market industry with every player expanding towards the digital acquisition model

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 remain high as more players with cash burn ability propose to enter this space, further intensifying the price war in the industry. Apart from the pricing war, many players have been offering various types of incentives and rewards to gain clients. Therefore, the Angel group’s key broking business remains exposed to market, economic, political and social factors that drive investor sentiment.

 

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 on account of people staying at home during the lockdown to contain the Covid-19 pandemic. 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 has further contributed to the lure of stock market trading and potential gains. CRISIL Ratings notes that while lockdown restrictions were lifted by many 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 One as well as other broking players, long-term sustainability of the market momentum will remain a key monitorable.

 

Furthermore, gross broking income by three-month lagged active clients has declined 11% year-on-year in the fourth quarter of fiscal 2023. 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 along with continuous engagement of first-time investors in trading activity will remain a key 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, the Securities and Exchange Board of India (SEBI) 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 in favour of 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 that are 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 the Angel group’s performance so far, CRISIL Ratings will continue to monitor it 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 these regulations will benefit the industry with increased transparency and de-risk the 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 around Rs 700 crore as on May 31, 2022. 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 can match its client recoveries with its repayment obligations Furthermore, the company starts raising incremental funds once the overdraft utilisation reaches 75-80%. The company maintains margins in the form of fixed deposits (FDs) at exchange level. The overall fixed deposits of the company remain at Rs 2500-3000 crore on a steady-state level and will increase or decrease depending on client activity.

Outlook: Stable

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

Rating Sensitivity factors

Upward factors

• Substantial improvement in revenue diversity with share of broking income maintained at around 60% of overall revenue profile on a steady-state basis
• Improvement in cost-to-income ratio from current levels on steady-state basis

 

Downward factors

• Impact on business risk profile, as indicated by drop in market share impacting broking income
• Weakening of the earnings profile or sustained increase in cost-to-income ratio to over 75%

About the Company

Angel One (erstwhile 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 the Bombay Stock Exchange, 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 personnel channel with more than 15,000 authorised personnel. The pricing for its products stood at Rs 0 for delivery trade and Rs 20 for the intraday cash, futures and options, commodity and currency segments. 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:

CRISIL Ratings has taken note of announcement made by Angel One Limited (Angel One) on July 15, 2023, on stock exchanges regarding prohibition of onboarding new Authorized Person (APs) for a period of six months as per the Member and Core Settlement Guarantee Fund Committee ("MCSGFC"/ "Committee") of National Stock Exchange of India Limited ("Exchange”), order dated July 14, 2023. CRISIL Ratings has published credit bulletin on July 24, 2023 regarding this development. The same is accessible at below link:

 

https://www.crisilratings.com/mnt/winshare/Ratings/RatingList/RatingDocs/AngelOneLimited_July%2024,%202023_RR_324214.html

Annexure - Details of Instrument(s)

SIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Long Term Principal Protected Market Linked Debentures*	NA	NA	NA	100	Highly complex	CRISIL PPMLD AA-/Stable
NA	Bank Guarantee	NA	NA	NA	2060	NA	CRISIL A1+
NA	Working Capital Demand Loan^	NA	NA	NA	805	NA	CRISIL A1+
NA	Working Capital Demand Loan	NA	NA	NA	300	NA	CRISIL AA-/Stable
NA	Overdraft Facility	NA	NA	NA	50	NA	CRISIL A1+
NA	Proposed short term bank loan facility	NA	NA	NA	485	NA	CRISIL A1+
NA	Proposed long term bank loan facility	NA	NA	NA	700	NA	CRISIL AA-/Stable
NA	Cash Credit & Working Capital Demand Loan	NA	NA	NA	100	NA	CRISIL A1+
NA	Commercial Paper Programme	NA	NA	7 to 365 Days	750	Simple	CRISIL A1+

^Interchangeable between bank guarantee and overdraft facility

*Yet to be issued