Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facilities and debt instruments of Angel One Limited (Angel One [erstwhile Angel Broking Ltd]; part of the Angel group) to ‘Positive’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL AA-’; the rating on the short-term facilities and commercial paper has been reaffirmed at ‘CRISIL A1+’. CRISIL Ratings has also assigned its rating ‘CRISIL AA-/Positive’ on Rs 500 crore of Non-Convertible Debentures.

 

CRISIL Ratings has also withdrawn its rating on the long-term principal-protected market-linked debentures of Rs 100 crore of Angel One upon the company’s request; the same were never placed. This is in line with the withdrawal policy of CRISIL Ratings (Refer Annexure below).

 

The outlook revision is driven by continued strong market position in the broking segment as well as increasing diversification of revenue profile towards other capital markets segments. The group continues to strengthen is market position, as reflected in addition of around 70 lakh clients during the last 12 months, taking its overall client base to 1.95 crore as of December 2023. The active client base also grew 25% year-on-year and stood at 5.3 lakh as of December 2023 (~4.2 lakh as on December 31, 2022). Consequently, the group has maintained its strong market position in terms of trade volumes, with overall average daily turnover (ADTO) growing by 150% to Rs 35,971 as on December 31, 2023 billion from Rs 14,478 billion a year ago. Number of contracts also improved to 350 million in December 31, 2023 from 226 million in December 31, 2022.

 

This led to an improvement in earnings profile, with overall profit after tax (PAT) of Rs 786 crore (translating into return on equity of ~43%) during the nine months of fiscal 2024. The broking income grew around 32% year-on-year to Rs 1,499 crore for the same period from Rs 1,192 crore for the corresponding period previous fiscal. Besides, total income increased by 33% to Rs 2,920 crore, driven by sharp rise in income from allied services, primarily margin trading facility. 

 

For the five fiscals through December 2023, the group’s revenue has been highly skewed towards broking income, which accounted for 67-69% of total revenue. While broking will remain the flagship business, the group has been focusing on leveraging its customer base since the last 3-4 quarters, for cross-selling other financial services products including mutual funds, insurance products, and retail loans. Currently, income from distribution activities is just around 1%. Additionally, income from Margin Trading Funding (MTF) book, which accounted for 8% of total income in fiscal 2023, is expected to increase this fiscal given healthy growth in the MTF book. The group’s assets under management in the MTF book stood at Rs 1,974 crore as on December 31, 2023, against Rs 1,377.3 crore as on December 31, 2022. Nevertheless, ability to diversify revenue profile further will remain a key sensitivity factor.

 

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 continued high dependence on broking income, increasing competition in the broking segment and susceptibility to uncertainties inherent in the capital market business.

Analytical Approach

CRISIL Ratings has consolidated the business and financial risk profiles of Angel One with its wholly owned subsidiaries: Angel Fincap Pvt Ltd (AFPL), Angel Financial Advisors Pvt Ltd, Angel Securities Ltd, Angel Digitech Services Pvt Ltd, Mimansa Software Systems Pvt Ltd, Angel Crest Ltd, Angel One Asset Management Company Ltd, Angel One Trustee Ltd and Angel One Wealth Management Ltd. This is because all these entities, 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 and improving market share in the equity broking segment

The group is a well-established brand with presence of over three decades in the broking industry. As on December 31, 2023, it had 53 lakh active customers on the National Stock Exchange (NSE). Additionally, its market share within the active client space (NSE) increased to 14.8% as on December 31, 2023, from 13.1% as on March 31, 2023, driven by significant increase in client additions and continued improvement in market volumes. The group has maintained its strong market position in terms of trade volumes, with overall average daily turnover (ADTO) growing by 150% to Rs 35,971 as on December 31, 2023, billion from Rs 14,478 billion a year ago. Number of contracts also improved to 350 million on December 31, 2023, from 226 million on December 31, 2022.

 

However, despite this, the share of active clients to total clients declined to 27.18% for the third quarter of fiscal 2024 from 31.16% for fiscal 2023. This is expected to drop further in the case of any significant market correction in the near term. Active participation of clients and revenue generated from active clients will remain monitorable over the medium term.

 

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 group to reach out to newer clientele. The digital initiatives have led to a huge spike in overall client additions since November 2019 and helped Angel One to position itself among the top three digital brokers.

 

• Extensive experience of the 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 group from a traditional into a digital broking company. This has helped the company 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 its 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, and good and average. The robust risk management systems are reflected in no major losses or bad debt (barring 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 three fiscals through 2023. 

 

• Comfortable capitalisation

Reported networth and gearing stood at Rs 2,786 crore and 0.4 time, respectively, as on December 31, 2023 (Rs 2,162 crore and 0.4 time, respectively, as on March 31, 2023). Gearing largely comprises borrowings to meet working capital requirement and fund margin funding book (stood at Rs 1,974 crore as on December 31, 2023). While the company saw a huge opportunity in MTF book, management has indicated that gearing is expected to remain below 3 times even during peak demand.

 

Also, tapping the equity market with an initial public offering led to an increase in capital inflow of Rs 284 crore in fiscal 2021. Another Rs 2,000 crore expected to be raised over the medium term is expected to support capital profile.

 

Weaknesses:

• High dependence on broking income exposing earnings profile to uncertainties 

The group’s revenue is highly skewed towards broking income, which comprised of 68% of total income (higher than other large capital market entities) in the nine months of fiscal 2024. Hence, any significant volatility in the market’s performance can directly put pressure on the group’s overall income profile. The income from other distribution products is expected to gradually increase over the medium term. The group’s ability to steadily diversify revenue profile will be monitorable.

 

Furthermore, the Angel group has transformed itself into a technology-based broking house in the last 2-3 years by investing significant funds in IT (information technology)-related capacity expansion and advertising activities. Besides, it has the highest number of authorised persons in the industry for its B2B business, leading to substantial 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, which has helped to reduce brokerage sharing costs (on incremental basis) and, in turn, improve operating leverage. Benefits derived from these investments is reflected in its performance in fiscal 2023 and the nine months of fiscal 2024.

 

The group has also maintained strong focus on stabilising cost-to-income ratio while adding clients. Majority of customer additions is through the digital medium (mobile application), which has improved operating leverage by reducing cost-to-income ratio to 61% in fiscal 2023 from 64% in fiscal 2022 from 66% in fiscal 2021. However, during the nine months ended December 2023, cost-to-income ratio stood at 64%, slightly higher than the quarterly average of 62-63% for the past eight quarters. With plans to enhance revenue diversity by offering multiple products, ability to sustain earnings profile by maintaining cost-to-income ratio will remain monitorable.

 

Consequently, the group's net profit stood at Rs 890 crore for fiscal 2023 against Rs 624 crore in fiscal 2022. For the nine months of fiscal 2024, the group reported a PAT of Rs 786 crore. Additionally, capital markets have been inherently cyclical in nature, and any sharp volatility may result in slowdown in trading activities (particularly by retail investors). Therefore, ability to sustain earnings profile and improve 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 group’s businesses are confined to the capital market industry, which is intensely competitive with multiple players offering low-cost products. 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 plan to enter this space. Apart from the pricing war, many players have been offering various types of incentives and rewards to gain clients. Therefore, the group’s key broking business remains exposed to market, economic, political and social factors that drive investor sentiment.

 

Given the volatility in 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 improvement in daily trading volume. A significant proportion of client additions at the industry level are in the age bracket of 25-30 years without significant savings surplus. CRISIL Ratings notes that the momentum of increased retail participation has continued to sustain so far. Though this has benefited broking players such as Angel One, long-term sustainability of the market momentum will remain monitorable. Maintenance of active clients in total user base, along with continuous engagement of first-time investors in trading activity, will also remain key rating sensitivity factors. 

 

• Susceptibility to regulatory changes

Over the last couple of years, the broking industry has witnessed continuous regulatory revisions. With the objective of further enhancing transparency levels and limiting the misuse of funds, the Securities and Exchange Board of India (SEBI) has introduced a few regulations in the last one year. Some of these include upfront margin collection for intraday positions and limiting the usage of power of attorney. The industry has been 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. This essentially means the level of positions (in terms of volume) taken by retail investors will get impacted. While these regulations have not affected the 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. 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 supported by the agency nature of business and healthy unutilised bank overdraft (OD) facility of around Rs 700 crore as on December 31, 2023. All the bank facilities are working capital and are matched against exposures extended to clients. As those instruments are for a short tenure of 15 days and three months, the company can match its client recoveries with its debt obligation. Furthermore, the company starts raising incremental funds once the overdraft utilisation reaches 75-80%. It maintains margins in the form of fixed deposits at exchange level. The overall fixed deposits remain at Rs 2,500-3,000 crore on a steady-state level and will increase or decrease depending on client activity.

Outlook: Positive

The Angel group will continue to maintain its strong market position in the broking business, and also sustain its comfortable capital position over the medium term. 

Rating Sensitivity factors

Upward factors

• Substantial improvement in revenue diversity with share of non-broking income increasing to around 40% of overall revenue profile
• 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 group

Angel One was set up in 1997 by Mr Dinesh Thakkar. The company is engaged in retail broking in the 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 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. Apart from broking, the company also provides products such as margin trading facility, loan against shares (through AFPL), financial product distribution, research, and advisory and depository services.

 

On August 9, 2023, Angel One informed the stock exchanges that its board has approved a scheme of arrangement involving transfer of business to two wholly owned subsidiaries: Angel Securities Ltd (ASL) and Angel Crest Ltd (ACL). As per the announcement, the broking business of Angel One will be transferred to ASL and ACL. This transaction will happen through slump sale and no cash consideration will be payable for the same. The rationale behind this transfer is to enhance operational efficiency and optimise management bandwidth across strategic businesses. The group’s board has decided to streamline the business under each of these two channels into two separate legal entities.

Key Financial Indicators

As on / for the period ended March 31		9M Fiscal 2023	Fiscal 2023	Fiscal 2022	Fiscal 2021
Total assets	Rs crore	12504	7478	7219	4814
Broking income	Rs crore	1992	2080	1573	907
Total income	Rs crore	2920	3021	2305	1299
PAT	Rs crore	786	890	624	298
Cost to income ratio	%	64	61	64	66.4
Return on networth	%	42	48	39	34.3
Gearing	Times	0.6	0.4	0.8	1.2

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size  (Rs. Crore)	Complexity level	Rating assigned  with outlook
NA	Non Convertible Debentures*	NA	NA	NA	500	Simple	CRISIL AA-/Positive
NA	Bank Guarantee	NA	NA	NA	2090	NA	CRISIL A1+
NA	Working Capital Demand Loan^	NA	NA	NA	715	NA	CRISIL A1+
NA	Working Capital Demand Loan	NA	NA	NA	10	NA	CRISIL A1+
NA	Working Capital Demand Loan^	NA	NA	NA	300	NA	CRISIL AA-/Positive
NA	Overdraft Facility	NA	NA	NA	100	NA	CRISIL A1+
NA	Proposed short term bank loan facility	NA	NA	NA	385	NA	CRISIL A1+
NA	Proposed long term bank loan facility	NA	NA	NA	700	NA	CRISIL AA-/Positive
NA	Cash Credit & Working Capital Demand Loan	NA	NA	NA	200	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

 

Annexure - Details of Rating Withdrawn

ISIN	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	Withdrawn

*Yet to be issued