Angel Broking IPO: Best suited for investors with high risk appetite

Increase in direct market participation has bolstered critical benchmarks in recent times; key financials don't offer comfort

The time is ripe for Angel Broking to hit the market, given the higher acceptance for IPOs and a huge spurt in direct retail participation. With over two decades of experience and a total revamp in its business model, the IPO may appeal to those who believe in ‘financialisation of savings’. Angel Broking holds a unique position in the broking space that isn’t very crowded, but for some reason hasn’t attracted much interest.

Operations

With 72 per cent of revenues coming from broking, this has been Angel’s focal point. Despite being a low-cost broker, the firm offers services like research and investment advisory. In order to provide holistic services, it offers margin trading facility — a key requirement in the derivatives (futures and options or F&O) segment — besides extending loans against shares.

Angel is also a distributor of mutual funds (MFs), as well as insurance products (both health and life). 

Angel is fast expanding its market share in the F&O segment, a business that necessitates high working capital.

Business highlights

Angel may carve a niche among listed players because of its digital capabilities. Only 15 per cent of its business comes from dealers, with 53 per cent of clients sourced online and 21 per cent coming through referrals. Overall, digital platforms accounted for 82 per cent of Angel’s clients sourced in Q1FY21. The firm has four key digital offerings — trade.angelbroking.com, Angel Broking Mobile App, Angel SpeedPro, and Angel BEE. ARQ, its machine learning tool, helps customers understand their needs, following which they opt for a platform. With 2.5 million customers and over 4.39 million downloads of its mobile app, Angel’s ranking moved up to 2nd in Q1FY21, in terms of incremental client additions. The recent influx of retail investors into equities has helped growth.

Financials
 

Angel hasn’t impressed much prior to Q1. The negative operating cash flow position in Q1, at Rs 278.3 crore, doesn’t inspire confidence. Operating cash flows were negative in FY18, at Rs 306.3 crore.

Key risks

The question is if investors are willing to fund working capital requirements. According to Angel’s red herring prospectus (RHP), the firm will not be permitted to raise further debt for margin trading if total debt exceeds 5x its net worth.

The RHP states: “Any delay in the offer may have an adverse effect on our business, results of operation, cash flows, and financial condition.” Read along with the uninspiring financials and negative cash flow position, the issue entails risk. Use of Angel as a brand name is also under litigation.

An adverse verdict could result in extensive branding and communications costs. The key risk is sustainability of Q1’s customer acquisition rates. 

Valuations

At 28x its FY20 earnings, analysts at Anand Rathi feel the issue is fairly priced. However, valuations along with risks involved make the IPO best suited to investors with a high risk appetite.