SuperApp Expansion And AI Investments Will Improve Customer Engagement

Key Takeaways

• Strategic fee adjustments and tech investments aim to stabilize revenue, improve efficiency, and sustain profitability despite regulatory changes.
  
• Expansion into new services and markets, focusing on customer acquisition and diversification, is set to boost revenue and earnings.
  
• Strategic diversification and regulatory changes may dilute core business focus and impact profitability through increased costs and decreased revenue.

Catalysts

Provides broking and advisory services, margin funding, loans against shares, and financial products to its clients in India.

• Angel One's strategic move to introduce flat fee brokerage for cash delivery orders and interest charges on noncash collateral is expected to counter the revenue loss from regulatory changes, likely stabilizing revenue in future quarters.
  
• The expansion of Angel One's SuperApp strategy, including new product launches like insurance and mutual fund services, is set to enhance customer retention and attract new clients, potentially boosting revenue and lifetime value.
  
• The robust focus on client acquisition, especially from Tier 2 and Tier 3 cities, coupled with a growing market share in retail equity turnover, indicates potential for increased revenue and market penetration.
  
• Investment in tech capabilities, such as AI-driven personalization and analytics, is anticipated to improve operational efficiencies and customer engagement, potentially leading to better net margins and sustained profitability.
  
• Angel One's entry into the asset and wealth management space with plans for low-cost passive investment products, along with a strategic play in the credit distribution business, is likely to diversify revenue streams and enhance earnings over time.

Angel One Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Angel One's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.2% today to 24.9% in 3 years time.
• Analysts expect earnings to reach ₹16.3 billion (and earnings per share of ₹181.91) by about March 2028, up from ₹13.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹13.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.7x on those 2028 earnings, up from 15.0x today. This future PE is greater than the current PE for the IN Capital Markets industry at 18.8x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.48%, as per the Simply Wall St company report.

Angel One Future Earnings Per Share Growth

Risks

• Regulatory changes, such as the implementation of a flat fee structure and the rationalization of F&O trading, have led to a significant decline in net income, with an estimated 18% impact on revenue, potentially affecting overall profitability and growth.
  
• Competitive pressures in the credit distribution space, combined with challenges like KYC fraud and borrower delinquencies, may introduce growth headwinds and impact revenue generation in this new business segment.
  
• The company's aggressive client acquisition strategy, while crucial for growth, might increase costs and pressure net margins in the short term, affecting profitability if customer behavior does not normalize quickly.
  
• The shift to passive-only mutual fund products like ETFs and index funds involves an educational push to change investor behavior, which can be slow and resource-intensive, impacting revenue from the asset management business.
  
• Strategic diversification into various financial services, including wealth management and credit, requires significant upfront investment and operational focus, which could dilute efforts from the core broking business and lead to increased costs with uncertain returns.

Valuation

• The analysts have a consensus price target of ₹2742.143 for Angel One based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹3200.0, and the most bearish reporting a price target of just ₹2215.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹65.7 billion, earnings will come to ₹16.3 billion, and it would be trading on a PE ratio of 27.7x, assuming you use a discount rate of 14.5%.
• Given the current share price of ₹2215.35, the analyst price target of ₹2742.14 is 19.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.