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Angel Broking IPO Details, Review & Analysis

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BASIS STRUCTURE OF ANGEL BROKING IPO

- The Angel Broking IPO is going to open on September 22.

This Angel Broking IPO Report is going to cover any questions that you may have about the initial public offering, Angel Broking IPO date, price, allotment, listing date, etc.

- This IPO plans to sell 1,96,07,843 equity shares to the public and raise an amount of Rs. 600 crores from the market.

- In this IPO, the share price is being set as a price band, and not as a fixed unique price.

- This means, the Angel Broking IPO is a book-building offering, and not a fixed price offering.

- The shares being offered through this IPO come from two sources — fresh issue and offer for sale.

- The fresh issue section comes from the company itself. This means, the company is floating new shares and diluting part of its equity.

- Angel Broking IPO intends to raise Rs. 300 crores in this manner, through the fresh issue of shares.

- This amount will be used to meet the working capital requirements of the company, and for other myriad corporate purposes.

- An amount of Rs. 230 crores will be devoted towards the working capital requirements.

- The other section of shares in the Angel Broking IPO, that is the offer for sale section, comes from existing shareholders.

- This is essentially an opportunity for existing shareholders to unload their stake in the company and sell their shares to the public.

- The amount raised through the offer for sale segment — Rs. 300 crores — will be credited to the shareholders and not to the company itself.

Among the existing shareholders who are selling their stake in the Angel Broking IPO are Ashok Thakkar and Sunita Magnani, among other individual shareholders.

- The table below summarises the information about the offering.

IPO DETAILS

Total number of equity shares 8,17,98,925
Number of equity shares on offer Rs. 300 crore
Equity for sale Rs. 300 crore
Face Value of each share Rs. 10
Price Band Rs. 305 — Rs. 306
Size of each lot 49 shares
Subscription window September 22-24
Allotment date September 29
Listing date October 5

- After the offering, the shares of Angel Broking IPO are going to be listed on the NSE and BSE from October 5.

ABOUT THE COMPANY

- Established in 1996, Angel Broking is one of the largest broking houses in India.

- Their primary business operation is to act as an intermediary between retail investors who want to participate in the capital markets, and the stock exchanges.

- This means, if you want to open a demat account and start trading in the stock market, Angel Broking will set it up for you.

- Angel Broking focusses on technology based financial services — they use technology to provide a seamless experience to customers.

- In 2018, 59.88% of total revenue earned from the broking services was earned through the digital platforms that the company provides.

- There are three kinds of brokers — banks, full-service brokers and discount brokers.

- Angel Broking is a full-service broking house.

- This means, apart from providing you with the basic demat account services, Angel Broking will also provide investment advice, and a relationship manager who will be there to address all your doubts and questions.

- Full-service brokers charge more than discount brokers, and provide a more extensive service in return.

- More recently, Angel Broking has also added a discount broking model to their services.

- Angel Broking’s business is based on a B2C dynamic. They service individual or retail investors.

CUSTOMERS

- Over the years, Angel Broking has built an extensive network. They have a presence in over 1,800 cities and towns.

- They are now one of the biggest broking houses in India.

- The company has a strong retail client base with over 1.1 million active clients.

- As of 2018, they had a network of over 18,000 sub-brokers.

- In the broking industry, Angel Broking services about 6.3% of the market of retail investors.

- As of June 2020, the company has 21.5 lakh operational broking accounts.

PRODUCTS & SERVICES

- The services that are offered by Angel Broking can be divided into two separate categories.

- First comes the broking and advisory service.

- This category includes the primary business of the company — the setting up of demat accounts and provision of broking services for retail investors who want to trade in the stock market.

- Along with that, Angel Broking also provides research and advisory support in the form of regular research reports, investor education initiatives and stock market advisory services.

- The other category is for other financial services.

- This category includes all the other services that Angel Broking provides that are not related to its broking business.

- Margin trading facility, loan against shares and other secondary services fall under this category.

MANAGEMENT

- There are three main promoters of Angel Broking — Dinesh Thakkar, Ashok Thakkar and Sunita Magnani.

- The table below lists out the existing shareholders of the company, along with their respective stake. This shareholding pattern is before the Angel Broking IPO.

NAME NUMBER OF SHARES STAKE
Dinesh Thakkar 1,67,68,805 23.29
Vinay Agarwal 2,18,643 0.30
Ketan Shah 29,680 0.04

- It is interesting to note that at the time of filing the DRHP, two of the directors of the company have outstanding loans and advances.

- Vinay Agrawal, Director and CEO, has an outstanding loan of Rs. 62.5 lakhs and Dinesh Thakkar, Chairman and Managing Director, has an advance of Rs. 30 lakhs.

- While this is not all that unusual, this figure should be tracked even after the Angel Broking IPO to ensure that the amount outstanding does not keep increasing steadily.

FINANCIAL OVERVIEW

- The table below contains a summary of the key financial figures for the Angel Broking IPO from the 2016 till 2020. All the figures stated below are in Rs. crores.

YEAR 2020 2019 2018 2017 2016 2015 2014
TOTAL REVENUE 747.77 757.68 784.38 552.31 381.31 364.39 256.05
TOTAL EXPENSES 635.9 655.9 603.29 443.38 341.73 307.74 246.34
TOTAL ASSETS 2159.21 2169.06 2272.13 1541.25 928.77 735.73 734.14
PROFITS AFTER TAX 86.62 82.95 107.92 31 25.49 36.15 7.33
NET CASHFLOW FROM OPERATING ACTIVITIES 622.35 654.21 (318.19) (268.89) (139.47) (10.23) (116.39)
LONG TERM DEBT - - 1.05 1.19 0.42 - 25

- As we can observe here, there has been a steady increase in the level of total revenue and total assets.

- Between 2014 and 2020, the total revenue showed a CAGR of 16.54%. As for the total assets, that showed a CAGR of 16.66%.

The graph below shows the change in total revenue over the years.

 

- Now, the majority of the revenue earned from operations comes from the brokerage section of the business.

- As of 2018, 63.41% of the total revenue came from the brokerage business and the remaining 36.59% of the revenue came from the other financial services being offered.

- The growth rate of the net profit earned by the company has been very impressive. Between 2014 and 2020, the net profit showed a CAGR of 42.3%.

- The graph below shows the change in net profit over the years.

- Another positive sign to observe here is that the level of long-term debt has been reducing over the years.

- The most recent data on the long-term debt was not available for FY2019 and FY2020.

- The level of long-term debt should be as low as possible.

- This is because long term borrowings tend to build up, unless they are serviced regularly, and can pose immense stress on a company’s balance sheet in terms of interest payments.

- A point of concern here, however, is the fact that the net cashflow generated from operating activities was negative till 2018.

- This means, even though operating revenue was being reported, this revenue was not being realised in cash.

- It is major red flag when the cashflow from operating activities is negative.

- This is because even though we may see increases in the level of total revenue or net profits, unless the cashflow is being recognised, these figures do not come to any use for the company.

- Since 2019, as we can see, the net cashflow from operating activities not only turned positive, but came quite close to the total revenue earned by the company.

- This is a promising sign, and investors should track this metric of the Angel Broking IPO to ensure that the net cashflow remains positive and comes as close to the total revenue as possible.

INDUSTRY OVERVIEW

- The Indian capital markets have been on a bullish trend for at least the last decade or so.

- Barring minor fluctuations, the inflow of capital into the stock market has been increasing steadily.

- In 2018, the equity markets experienced a 70% increase in daily turnover, and the broking industry experienced a surge of about 40%.

- According to CRISIL estimates, the average size of the equity broking industry is in the region of Rs. 20,000 crores.

- In the last decade, the equity broking industry experienced a CAGR of about 24%.

- The graph below shows the increase in the number of demat accounts in India over the years.

- Currently, the financial services industry is experiencing a new wave of innovation that is being led by the newer fin-tech firms that are coming up.

- In particular, we have to mention that recent surge in popularity in favour of the discount brokerage firms.

- These firms are characterised by minimal services and very low charges.

- The recent trends that can be observed in investor behaviour sees a very definite change in preferences in favour of discount brokerage firms.

- Angel Broking is primarily a full-service brokerage firm.

- Among its direct competitors are ICICI Securities, HDFC Securities, Motilal Oswal, ShareKhan and others.

- In fact, because of the steady growth of the discount brokerage firms, many full-service brokers are offering a discount brokerage service as well.

- Thus, they are converting from full-service brokers and adopting a more hybrid business model to keep up with the competition.

- Angel Broking and ICICI Securities are among those who are going the hybrid route.

- Noticeable players in the discount brokerage category include firms like Zerodha, 5Paisa, SAMCO, Upstox and others.

- Among them, Zerodha in particular has grown tremendously and is currently the largest brokerage firm in the country.

- The broking industry in India is highly fragmented.

- There are no barriers to entry and exit, and a large number of players leading to a high level of competition.

- However, the top 10 brokerage houses take up about 63% of the market share.

- The table below shows the average market share of the top brokers in India, in terms of the number of active clients.

NAME NUMBER OF CLIENTS MARKET SHARE (%)
Zerodha 11,13,000 12.3
ICICI Securities 9,35,000 10.3
HDFC Securities 6,48,000 7.1
Sharekhan 4,86,000 5.4
Kotak Securities 4,85,000 5.3
Axis Securities 3,11,000 3.4
Angel Broking 4,55,000 4.5
Motilal Oswal 3,33,000 3.7

- The graph below shows the average market share in terms of the number of clients. Angel Broking comes in at 4.5%.

- Let us now look at the average daily turnover (ADTO).

- The table below shows the market share of the top brokers in India in terms of the average daily turnover (ADTO).

NAME TOTAL ADTO (Rs. Crore) MARKET SHARE (%)
Kotak Securities 23,800 1.6
Motilal Securities 20,600 1.4
IIFL Securities 19,161 1.3
Angel Broking 25,137 1.7
JM Financial 10,748 0.7
5Paisa 27,638 2.0
Zerodha 1,26,900 10.0

- Apart from that, it is important to mention one more point.

- The idea of introducing a sub-broker segment into their business model has been a boon for Angel Broking.

- Motilal and Angel have both implemented this strategy and have built up a strong network of sub-brokers.

- This has been a huge help in bolstering their revenue.

COMPETITION

- As we mentioned before, the broking industry in India is highly fragmented.

- The market follows a structure of monopolistic competition.

- There are a large number of players here, and the products that they offer are all close substitutes for each other.

- The graph below shows the average revenue earned from the broking business by some of the top brokers in India.

- As of 2018, there were at least 300 active brokers on the National Stock Exchange.

- Out of that, Angel Broking captures 6.3% of the market.

- This means each individual firm has little or no control over the price that they charge.

- If they increase charges too much, they will lose out on market share as customers will simply go to one of their competitors.

- If they reduce charges too much, they might be able to attract a larger market share, but they might not be able to sustain the strain on their revenue line.

- Each firm is therefore a price taker, and not a price maker.

- The graph below shows the approximate CAGR experienced by some of the top brokerage houses in India over the years.

- One of the primary competitive strengths of Angel Broking is the fact that they have also introduced a discount broking model and converted into a hybrid broking house.

- This will enable them to capture the recent surge in popularity that discount brokerages are experiencing and maintain their competitive edge.

STRENGTHS

- One of the primary strengths of Angel Broking is the fact that they focus on the incorporation of technology into financial services.

- This is particularly important if you account for the fact that the requirements of the present day investors are very different from the traditional requirements.

- Millennials are always on the move, and the only way they can participate in the capital markets is through digital platforms that are easy to access and user-friendly.

- In 2016, Angel Broking received the “Best Technology House of the Year”, and in 2017, they received the “CEO Award for Digital Investing Platform of the Year”.

- A second advantage for the company is the fact that they have been in operation over two decades, and in that time, they have created an extensive network for the distribution of their products.

- As a company grows bigger and expands the scale of operations, it is observed that the costs associated with each additional unit of service provided falls.

- This means, the cost of servicing the first one million clients will be more than the cost of servicing the second million, and so on.

- This effect is called scale of operations. It increases efficiency and reduces the cost of administration, operation, marketing, distribution and others.

- Apart from these, there is also the overall boom in the Indian capital markets. Participation is increasing steadily and so is the size of the assets under management.

- As a digital broking platform, Angel Broking IPO stands to benefit directly from this industry growth.

WEAKNESSES

- One of the biggest risks that Angel Broking faces is the fact that it operates in a highly competitive industry. There are many comparable peers who also offer broking services.

- Thus, there is always pressure to reduce their prices and broking fees in order to attract customers in this competitive field.

- The reason why this is a point of concern is that the majority of Angel Broking’s revenues come from their broking services.

- In 2018, over 60% of the total revenue came from the broking services.

- If the company is forced to reduce prices owing to competitive pressure or any other reason, this will cut into their revenue sources and reduce the profit margin significantly.

- Another weakness is the fact that Angel Broking does not have sufficient penetration in the rural areas of the country.

- This means, the company will not be able to capture the new set of investors that are coming from these areas on the back of the myriad investor and financial awareness programs in the country.

- The third weakness is a huge red flag for any potential investor in the Angel Broking IPO.

- There are a number of pending cases against the directors and the promoters of the company. Some of the subsidiaries of Angel Broking are also involved in these litigations.

- Ranging from economic offences to civil violations, from arbitration to tax evasion, the list is quite extensive.

- The total amount involved in all the pending cases against the company amounts to about Rs. 54.5 crores.

VALUATION

- The table below compares the key financial ratios of the Angel Broking IPO with its peers in the broking business.

- As mentioned, this industry is highly fragmented and there are a large number of competitive peers.

- Thus it is important to check the valuation of the company to understand whether it is a good investment or not.

NAME MARKET CAP (Rs. Cr.) EPS (Rs.) P/E P/B EV/EBITDA
Angel Broking - 12 26.66 - -
ICICI Securities 15,422.84 16.8 28.4 11.32 8.9
Geojit Financial 975.84 2 15.4 2.65 7.31
IIFL Holdings 3,301 7.3 5.7 0.78 9.77
Motilal Oswal 9,604.52 12.2 56 2.67 21.57
JM Financial 7,800.81 6.5 9.93 0.97 6.28

- The broking industry in India is experiencing a surge, and as the fourth largest broker in the country, Angel Broking is ideally placed to capture a portion of this surge.

- The company has shown a good growth rate in the past, and it is expected that this will continue for the next 5-10 years at least, bolstered by the industry growth rate.

- The graph below shows the EPS of some of Angel Broking’s peers.

- The flip side, however, is when you also consider the valuation of the company along with its growth potential.

- Most analysts feel that this issue is on the expensive side as compared to its valuation.

- “The pricing is a bit expensive. We were expecting the price band to be Rs. 25-30 lower,” said Narottam Dharawat of Dharawat Securities.

- A common rule of thumb is to check whether the company’s P/E value is lower than the industry average. This indicates that the company is undervalued by the market.

- The average P/E ratio among broking companies is 24.1.

- As you can see here, the Angel Broking P/E ratio is 26.66.

- This means it is higher than the industry average, and the company’s valuation is towards the higher side.

- Here, it is also important to remind you of the fact that until FY2019, the company’s net operating cashflow was negative.

- There are also the multiple legal cases that are outstanding against the firm and its promoters.

- So, even though the company is expected to keep growing in future, these two points and the expensive valuation is something to consider before you invest in the Angel Broking IPO.

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