CRISIL has assigned its 'CRISIL A1+' rating to the Rs.150 crore commercial paper programme of Angel Broking Limited (Angel Broking). The rating on outstanding bank facilities has been reaffirmed at 'CRISIL A+/Stable/CRISIL A1+'
 
On September 14, 2020 CRISIL had assigned its 'CRISIL A+/Stable/CRISIL A1+' ratings to the bank facilities of Angel Broking.
 
The rating takes into consideration the 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 average, albeit improving, earnings with high dependence on broking income, increasing competition in the broking segment and susceptibility to uncertainties inherent in the capital market business.
 
The Angel group is a well-established brand with over three decades of presence in the broking industry. Recently, its market share within active client space (National Stock Exchange; NSE) increased significantly to 6.7% as on July 31, 2020, compared with 5.3% and 4.7% as on March 31, 2020 and March 31, 2019, respectively. This improvement was driven by significant increase in client additions in the first four months of the current fiscal. Angel Broking added a total of 2.79 lakh clients in terms of NSE active clients as of July 2020 of the current fiscal, accounting for a 13.7% market share in total client additions in the industry during this period. This increase in market share and client additions can also be attributed to change in the pricing model adopted by the Angel group from April 2019 onwards.
 
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. This, coupled with successful shift to a flat-fee-based model from the commission-fee-based model in April 2019, helped Angel Broking positon itself among the top discount brokers and garner major clients, resulting in significant increase in income. Overall broking income for the company was flat at Rs 504 crore in fiscal 2020 despite a 39.6% increase in active clients. This was largely because of change in the pricing plan, leading to nearly 65% drop in pricing structure. However, subsequent increase in clientele by the end of March 2020 partially offsets the impact of overall brokerage revenue for 2020. With the continued momentum in client additions and the increasing number of transactions, the group's broking income stood at Rs 178.1 crore in the first quarter of fiscal 2021, which is 41.3% higher than broking income in fiscal 2020 on an annualised basis.
 
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 1.1% of total income over the five fiscals through 2020. The company faced a one-off exceptional write-off of Rs 16.6 crore in fiscal 2020. 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 has reported loss of only Rs 12.7 crore in Q1 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.
 
The rating also takes into account the promoter's extensive experience in the broking industry and the adequate capital position maintained by the Angel group. Angel Broking has been operating for three decades and is led by Mr Dinesh Thakkar (MD and Chairman). The executive management is headed by Mr Vinay Agrawal (CEO), who has been with the Angel group for over 22 years. The management has been instrumental in transforming the Angel group from a traditional to a hybrid broking company. As the broking industry faced high pricing pressure from upstart discount brokers, Angel Broking successfully pivoted its business model. 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.
 
The Angel group's capitalisation has remained comfortable for the past several years. Reported net worth is estimated at Rs 639.1 crore as on June 30, 2020, with gearing of 1 time (Rs 591 crore and 0.8 time, respectively, in fiscal 2020). The capital position is supported by steady accretion of Rs 80-90 crore in the last three fiscals. The group's gearing largely comprises borrowings to fund the margin trading facility of its clients. 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 Q1of fiscal 2021 is significantly supported by traded turnover and active clients. Consequently, accretion for fiscal 2021 should be higher compared with the previous fiscal, further improving the overall networth and capital position. 
 
For the past five fiscals and through June 2020, 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.  
 
Angel group has transformed itself to 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. Besides, it has the highest number of authorised sub-brokers in the industry for its B2B business leading to higher brokerage payouts. This in-turn has resulted in high cost-to-income ratio, 82.9% for fiscal 2020 (82.3% for fiscal 2019). However, its cost-to-net income ratio (after adjusting for sub-brokerage expenses) stood at 74.0% and 73.1% for fiscal 2020 and fiscal 2019, respectively. Nevertheless, the group is focused at increasingly onboarding clients directly through the digital medium and in turn, improve its operating leverage. The benefits that the group has started reaping from these investments is reflected in first three months performance of current fiscal ' cost-to-income ratio reduced to 70.5% for the said period (54.7% on a net basis) (this ratio includes unprecedented one-time loss of Rs 12.7 crore due to extreme volatility in crude oil price on Multi Commodity Exchange). Consequently, the group's net profit is at Rs 47.3 crore for the first quarter of fiscal 2021 compared to Rs 81.4 crore during fiscal 2020. The sustainability of the recent improvement in overall earnings profile will be dependent on the group's ability to sustain this improvement in revenue due to higher trading volumes and consequently manage its cost-to-income ratio in the medium term. This will be a key rating sensitivity factor.
 
Angel group's businesses are confined within capital market industry which has been highly competitive with multiple players offering low cost products to the clients. The industry has seen huge transformation in the last three years with tech-based discount brokers entering and creating their dominance in the market. The competitive intensity is expected to continue with more players proposing to enter in this space which may further intensify 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 volatile nature of the business, brokerage volumes 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 volumes coinciding with the lockdown and people remaining at home. CRISIL understands a significant proportion of the new client additions at the industry level are in the age bracket of 25 to 30 years who may not have significant savings surplus. CRISIL believes that the sharp upward movement of the key benchmark indices during this period has led to broad-based gains across portfolios and contributed to the lure of stock market trading. More importantly, traditional debt savings avenues are also offering relatively low interest rates. While this has benefited Angel as well as other broking players, CRISIL notes that the ability of this demographic age segment to sustain down cycles is not yet tested. Hence, sustainability of the market momentum will remain a key monitorable.
 
The broking industry will be undergoing some crucial changes related to margin collection and pledging practices effective September 1, 2020. These changes are expected to cause significant modifications in the operational and business models of broking entities over the medium term.

For arriving at the ratings, CRISIL has consolidated the business and financial risk profiles of Angel Broking Ltd with its wholly owned subsidiaries, Angel Fincap Pvt Ltd, Angel Financial Advisors Pvt Ltd, Angel Securities Pvt Ltd, Angel Wellness 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.

Strengths
* Strong, improving market share in the equity broking segment
Angel Broking has remained among the top 10 brokers of the country over the past several years. 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. Furthermore, to strengthen its market position the company launched 'ITRADE' Flat fee structure (Rs15-30) in April 2019. In November 2019, the company launched the 'ITRADE prime' plan, wherein the brokerage for delivery trades was reduced to Rs 0, while for intraday cash, futures and options (F&O), commodity and currency, it was priced at flat Rs 20 per order. This pricing change, coupled with digital initiatives, led to huge spike in overall client additions since November 2019.
 
As on July 31, 2020, the company had 8.6 lakh active customers on NSE, a sharp jump of 48% from 5.8 lakh in March 2020 and 4.1 lakh in March 2019. The company had an active client market share of 6.7% as of July 2020, improving from 5.3% as of March 2020 and 4.4% as of March 2018. It is now the fourth largest broker in terms of active clients. In the overall turnover, the Angel group's market share (as per CRISIL's calculation¹ in the cash segment improved to 8.4% in the first quarter of fiscal 2021 from 6.8% in fiscal 2020. On single leg basis, the Angel group's market share within cash segment improved to 17.26% in the first quarter of fiscal 2021 from 13.73% in fiscal 2020. Within the F&O segment, the market share (as per CRISIL's calculation¹improved to 3.8% in the first quarter of fiscal 2021 from 2.6% in fiscal 2020. On single leg basis, the Angel group's market share within F&O segment improved to 7.77% in the first quarter of fiscal 2021 from 5.14% in fiscal 2020. Furthermore, the equity average daily turnover for Angel Broking increased significantly to Rs 57000 crore in in the first quarter of fiscal 2021 from Rs 37000 crore in fiscal 2020, a growth of 54% compared with 18% for the industry.
 
* 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 executive management is headed by Mr Vinay Agrawal (CEO), who has been with the Angel group for over 22 years. The management has been instrumental in transforming the Angel group from a traditional to a hybrid broking company with the B2B as well as the B2C model. As the broking industry faced high pricing pressure from upstart discount brokers, Angel Broking successfully pivoted its business model. 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.
 
* Sound risk management systems
The company has sound risk management systems, with categorisation of stocks and limits on exposure of a single client. It categorises stocks into blue chip, good and average based on parameters of market capitalisation, networth, employee cost, power cost and tax paid, among others. Based on this categorisation, the company applies margin over and above the exchange-prescribed minimum. Furthermore, the company has placed limits on maximum exposure to a single client in cash and F&O, among others. This has led to granularity of exposure and has limited losses arising from chunky exposure of 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. The company's average bad debts, excluding the two incidents of exceptional loss in fiscal 2020, remained around 1.1% of its total income over the five fiscals through 2020. The company faced a one-off exceptional write-off of Rs 16.6 crore in fiscal 2020. 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 is has 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. With the management's thrust on regularly revisiting its risk management policies, the group is expected to have minimal bad debt in the near term.
 
* Comfortable capitalisation
The Angel group's capitalisation has remained comfortable for the past several years. Reported net worth is estimated at Rs 639.1 crore as on June 30, 2020, with gearing of 1 time (Rs 591 crore and 0.8 time, respectively, in fiscal 2020). The capital position is supported by steady accretion of Rs 80-90 crore in the last three fiscals. The group's gearing largely comprises borrowings to fund the margin trading facility of its clients. The company has a huge opportunity in this segment; future growth will be funded by additional debt. However, gearing is expected to remain below 3 times even during peak demand. The Angel group's financial performance in the Q1 of fiscal 2021 is significantly supported by traded turnover and active clients. Consequently, accretion for fiscal 2021 should be higher compared with the previous fiscal, further improving the overall networth and capital position. 
 
The Angel group has filed a draft red herring prospectus with Securities and Exchange Board of India (SEBI) for initial public offering (IPO) of Rs 600 crore, of which Rs 300 crore has been offered for sale by its majority investor, International Finance Corporation, and seed capital investors; the remaining Rs 300 crore is expected to be fresh issuance. If the IPO goes through and the group is able to raise additional funds, the group's capitalisation will improve further.
 
Weaknesses
* Earnings profile indicated by moderate cost-to-income and relatively high dependence on broking income
For the past five fiscals and Q1 of fiscal 2021, the Angel group's revenue is highly skewed towards broking income and accounts for two-third of the total income. Overall broking income for the company was flat at Rs 504 crore in fiscal 2020 (Rs 501 crore in fiscal 2019) despite a 39.6% increase in active clients. This was largely because of change in the pricing plan, leading to nearly 65% drop in pricing structure. However, subsequent increase in clientele by the end of March 2020 partially offsets the impact of overall brokerage revenue for 2020. With the continued momentum in client additions and the increasing number of transactions, the group's broking income stood at Rs 178.1 crore in the first quarter of fiscal 2021, which is 41.3% higher than broking income in fiscal 2020 on an annualised basis.
 
Any significant volatility in the market's performance will directly impact the company's broking revenue and, in turn, can put pressure on the overall income profile. Also, compared with other equally well-established large broking companies, Angel Broking's share of broking income is relatively high. Income from other distribution products is expected to gradually increase over the medium term. The group's ability to steadily increase diversity in its revenue profile over the medium term will be key monitorable.  
 
The Angel group has transformed itself into a technology-based broking house in the last two-three years. In order 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 manpower 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 reported and net basis (excluding brokerage payments).
 
On a reported basis, cost-to-income for the company stood at over 82.9% in fiscal 2020 and 82.3% in fiscal 2019, while on a net basis (excluding brokerage expenses), the cost to income stood at 74.0% and 73.1% for fiscals 2020 and 2019, respectively. Nevertheless, the group is increasingly onboarding its clients directly through the digital medium, which is expected to reduce the brokerage sharing costs and, in turn, improve the operating leverage. Benefits derived by the group from these investments is reflected in its performance in the first three months of the current fiscal. Because of substantial traction seen in client additions and increase in average daily turnover, overall earnings of the company increased significantly in the first quarter of fiscal 2021. This has resulted in cost-to-income ratio reducing to 70.5% for the said period (54.7% on a net basis) (this ratio includes unprecedented one-time loss of Rs 12.7 crore due to extreme volatility in crude oil price on Multi Commodity Exchange). Consequently, the group's net profit stood at Rs 47.3 crore for the first quarter of fiscal 2021 compared with Rs 81.4 crore in fiscal 2020 (Rs 79.6 crore in fiscal 2019). Sustenance of recent improvement in the overall earnings profile will be dependent upon stability of higher trading volume and, consequently, the group's ability to manage its cost-to-income ratio over the medium term. This shall be a 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. While this has benefited Angel Broking as well as other broking players, sustainability of the market momentum 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, 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. The likely impact of this change on the Angel group's performance on an ongoing basis will be a monitorable. 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 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 in particular given their not-so-advanced IT infrastructure and risk management systems. While these revised regulations may affect the performance in the near term, in the long run, the industry will benefit from increased transparency and the de-risk broking platform for retail customers.

Liquidity is comfortable as a result of the agency nature of business and healthy unutilised bank overdraft (OD) facilities of Rs 121.8 crore as on July 31, 2020. Furthermore, the company had unutilised OD against fixed deposits (FDs) and mutual funds of another Rs 237 crore as on July 31, 2020, which can be utilised as per the requirement. All the bank facilities are working capital and are matched against the margin trading facility 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 on a monthly basis 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.

CRISIL believes Angel Broking will continue to benefit from its strong market position, healthy risk management systems and comfortable capitalisation.

Rating Sensitivity Factors
Upward factors
*Cost-to-income ratio improving to below 60% on a steady-state basis
* Improvement in income diversity 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%.

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 43 service outlets and around 2,500 employees. The company has the largest authorised person channel with more than 11,000 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.

¹CRISIL's market share calculation is based on a two legged approach (both buy and sell aspects of the transaction).

Any other information: Not applicable