Stock broker act as an agent whenever investor intends to sell or buy shares of the company. Below pic depicts how the buy and sell transaction happens and role played by broker
Why would any broking firm come out with IPO during lockdown?
It is counterintuitive that during the lockdown more and more people are participating in the stock trading.
Above chart clearly depicts that retail participation in the market is at highest level during the last 6 months.
Let’s see what brokers are saying
1. Zerodha: “We have seen an almost 300% bump in monthly new account openings from pre-covid to now”
2. Motilal Oswal: “Have seen our mobile application downloads double in the last couple of weeks along with a noticeable increase of more than 50% in our digital trades.
3. IIFL: “Our monthly new accounts have doubled since March and we expect even higher numbers in the month of June. Customer acquisition has doubled from the pre-Covid era.
4. Angel Broking: “Scaled life time high average monthly new accounts of over 1 lakh, since the lockdown started in March’20. Witnessed 2.2x growth in average monthly gross client addition in 2MFY21 over FY20.
What it shows that overall industry is in boom. It is no wonder that Angel broking is coming out with an IPO at this time
Before we arrive at the conclusion on apply for IPO or not, let’s understand business dynamics of broking business, competition, and financials strength
1. Business Dynamics :
A. Business Model
There are 2 types of broker
a) Traditional Broker – Traditional brokers offer detailed research reports and services (retirement planning, advisory, PMS etc.), but charge a significantly higher fee (0.3% to 0.8% of buy and sell value). E.g. Motilal Oswal, ICICI Securities, Angel Broking etc.
b) Discount Broker – Discount brokers charge very low fees, while simultaneously offering fast trading platforms and all essential services. E.g. Zerodha, RKSV, 5paise etc.
The question is who is dominating the market now. Please see below chart
Though overall market is fragmented, Zerodha is having highest market share of 16%.
Dominance of discount brokers is seen in USA as well. In USA, discounting brokers like Robinhood, Charles Schewab, Ameritrade etc are dominating broking industry and they charge almost Nil brokerage.
Below is commission rate charged by Charles Schwab (One of the largest brokers in USA)
Angel broking is a discount broker. It is very difficult to predict which business model will survive in the future. But currently, discount brokers are winning the war.
B. Competitive Advantage:
Competitive advantage helps investor to understand longevity and sustainability of growth and profits for business.
a) The one of the biggest source of competitive advantage, barriers to entry, is not present in the broking industry. Barriers to entry prevents other companies to get into the business and thus allowing incumbents to make money.
b) Cost of acquiring customer is higher for standalone broking firms vis-à-vis broking firms promoted by banks (ICICI securities promoted by ICICI Bank, HDFC securities promoted by HDFC Bank etc)
c) Brand power – Brand power is source of competitive advantage only when it helps company to charge higher price for the product sold or services provided. In the given business, though Angel broking is having recognizable brand, but it is not translating in pricing power.
Based on the above 3 factors, it can be concluded that Angel broking has low or no competitive advantage as compared to its peers.
As can be seen from above, PAT margin is volatile and Angel broking is having lowest PAT margin as compared to ICICI Securities and HDFC securities.
As broking business is cyclical, there will be volatility in the growth and profit margin of the company.
Broking business is asset light business. Angel’s return on equity is lower as compared to ICICI securities
It is a family run business. Promoter is holding around 55% stake in the company. In the prospectus they have mentioned below –
“Lalit T. Thakkar, one of the members of our Promoter Group and one of the Selling Shareholders, has in the past been debarred from accessing capital markets” – in 1995-96.
Though there are no such case pending against the promoter now, but it is red flag.
Angel broking has come up for IPO at a time when broking industry is in boom. So it will demand higher valuation. The same can be seen from below chart:
Angel is demanding same valuation as to ICICI securities even though ICICI securities is having better profitability and higher market share
There are only 1.22 active clients on NSE in India as compared to 135 cr India’s population (Though Top 20% will be target customer for broking business). So there is huge scope for growth in terms of broking business. But due to low barriers to entry and technological disruption in the industry, it is very difficult to predict the winner.
Angel broking has come up with an IPO at a time when broking industry is in boom. So it will command higher valuation as can be seen in higher PE.
It is advisable to stay away from Angel Broking IPO as it is difficult to ascertain winner in highly competitive industry and evolving business models.