ICICI Securities has reaffirmed its BUY rating on Angel One, setting a target price of Rs 3,700, offering a 15% upside from its current market price of Rs 3,225. The report highlights Angel One's strong business execution, expanding market share in key segments such as cash volumes, derivatives, and active NSE clients, coupled with significant growth in its margin trading funding (MTF) book. While regulatory changes could impact the company’s earnings in the near term, the diversification into new business segments like asset management, wealth management, and insurance distribution provides long-term growth potential.

Strong Business Execution

Growing Market Share: Angel One has made substantial gains in the market, expanding its share in cash volumes to 17.5%, its share in F&O volumes to 20.7%, and its share in active NSE clients to 15.5%. These improvements underline the company’s dominant presence in the Indian capital markets.

Expanding MTF Book: Angel One’s MTF book grew by 48.1% in Q2FY25 compared to the previous quarter, demonstrating robust demand for margin trading services. As of September 2024, the MTF book had reached Rs 43 billion, a testament to its rising appeal among retail investors. The company plans to further boost this by reducing lending rates to 14.99% starting in November 2024, which could support further growth.

Q2FY25 Results: A Closer Look

Record Earnings Growth: Angel One posted an EBITDA of Rs 5.9 billion in Q2FY25, marking a 42% sequential growth. This was achieved despite the elevated expenses incurred in the previous quarter due to the company's IPL sponsorship. Adjusted for those costs, EBITDA grew by 12.8% quarter-over-quarter, reflecting the company’s efficient cost management.

Improvement in EBITDA Margins: The company’s EBITDA margins rose to 49.9% in Q2FY25, up from 37.7% in Q1FY25. This strong margin expansion reflects Angel One's ability to manage operational costs effectively while continuing to grow its client base.

Impact of Regulatory Changes

SEBI’s New Regulations: The upcoming regulatory changes from SEBI, which are expected to be implemented between November 2024 and April 2025, are likely to impact Angel One’s net broking revenue. These changes include upfront collection of option premiums, removal of calendar spread margin benefits, and intraday monitoring of position limits, among others.

Earnings Impact: The company estimates a 12-14% reduction in net broking revenue due to these changes. However, Angel One is optimistic that this impact will be offset by an increase in client participation and the monetization of its cash delivery orders, where the company plans to charge Rs 20 or 0.1% per executed order starting in November 2024.

Diversification and New Business Segments

Entry into Wealth Management and Credit Distribution: Angel One is diversifying its revenue streams by entering new business segments. The company has already launched credit distribution and fixed deposit distribution through its Super App, partnering with NBFCs like Aditya Birla Capital and Shriram Finance. Cumulative disbursements have reached Rs 3.6 billion as of September 2024.

Wealth Management Growth: Angel One is also expanding its wealth management division, focusing on High Net Worth Individuals (HNIs). The management expects this division to reach breakeven within 2-3 years, contributing to future revenue growth.

Financial Projections

Revenue and Profit Estimates: ICICI Securities expects Angel One’s revenue to grow to Rs 46,533 million in FY25 and Rs 51,847 million in FY26, driven by its expanding client base and monetization strategies. PAT is projected to rise from Rs 14,912 million in FY25 to Rs 16,629 million in FY26, with an expected EPS of Rs 185.

EBITDA Margins and Client Growth: Despite regulatory headwinds, EBITDA margins are forecasted to remain steady at 45.2% for FY25 and FY26, supported by efficient cost management. The number of total clients is expected to grow to 44.8 million by FY26, up from 27.5 million in Q2FY25, highlighting the company’s success in expanding its retail customer base.

Investor Recommendation

Target Price of Rs 3,700: ICICI Securities reiterates its BUY recommendation for Angel One, with a target price of Rs 3,700, implying a 15% upside. This valuation is based on a 20x multiple of FY26 estimated EPS. Key factors supporting this recommendation include:

Strong business execution in core segments.
Significant growth potential from new business segments like wealth management and AMC.
Resilience against regulatory changes, with plans to offset revenue loss through cash order monetization and client acquisition.

Conclusion

Angel One continues to perform strongly, despite regulatory challenges on the horizon. With a well-diversified business model and significant growth potential in wealth management, credit distribution, and AMC, the company is well-positioned to weather short-term earnings pressures. Investors are advised to maintain a BUY stance, with an expected target price of Rs 3,700 over the next 12 months.