Angel Broking’s rise shows Zerodha’s self-assessment is too modest

Angel’s sharp re-rating in recent months shows that Zerodha’s valuation is conservative.
Angel’s sharp re-rating in recent months shows that Zerodha’s valuation is conservative.


Angel’s active client base has risen 2.9 times against last year’s levels to 1.66 million by end-April.

About eight months ago, when Angel Broking Ltd shares listed on the exchanges, they hardly had any takers. The stock listed at a 10% discount to its issue price in the initial public offering (IPO), and was trading at similar levels as recently as mid-April.

But the appointment of a new chief executive officer from Silicon Valley and blockbuster results for the March quarter turned things around dramatically for the stock. Angel Broking is now valued at nearly $1 billion, after a 185% jump in its share price since mid-April.

“Broking stocks are typically shunned by investors, given the cyclical nature of the business. And valuations are particularly low for traditional broking firms. In the Street’s view, Angel was categorized as such, even though it had pivoted to a discount broking model some time ago," said a market expert, requesting anonymity.

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Angel’s transition to the discount broking model has paid off well. Indeed, the growth in its active client base has been slightly ahead of market leader Zerodha, according to data released by the National Stock Exchange (NSE).

Compared to March 2020 levels, Angel’s active client base has risen by 2.9 times to 1.66 million by end-April this year. Zerodha’s client base grew 2.7 times to 3.80 million.

The moot question is that if Angel Broking is valued at around $1 billion, what valuations would the markets prescribe for Zerodha, which is far more profitable.

Angel ended fiscal 2021 with a profit of nearly 300 crore, while Zerodha’s profit is around 1,000 crore. Even using a similar price-to-earnings multiple, Zerodha would command a valuation of at least $3.3 billion. Investors would also be willing to ascribe a premium for its market leadership and continued high growth on a high base.

Of course, all of this is merely hypothetical as Zerodha’s founders have made it clear that they are not interested in listing the firm or selling a stake to private market investors. Instead, the firm provides liquidity for owners of employee stock options through a buyback programme, where the firm has valued itself at $2 billion.

Angel’s sharp re-rating in recent months and the incremental market share gains of discount brokers show that Zerodha’s self-valuation is conservative.

Note that the private market has also valued Groww, a tech investment firm, at about $1 billion, even though its active client base is less than 1 million, according to NSE data.

Angel’s performance in FY21 gives an indication of how well broking firms have been post-covid. “Between FY19 and FY21, (Angel’s) total broking turnover increased from 2,600 crore to 5,400 crore, and NSE-active client market share grew from 5% to 8.3%. This transformation is credited to the digital discount broking business model started by the company in late 2019," ICICI Securities said in a recent note to clients.

Angel is now embarking on enhancing its digital capabilities and artificial intelligence, and its appointment of a Silicon Valley veteran has got investors salivating on what the future holds. What they also need to keep in mind is that broking remains a cyclical business, and growth will come off significantly when the tide turns in the market.

“It’s a typical bull market driving growth. Most of the new traders entering the markets have not seen a bear market or a sideways market. Whenever that happens, we should see a lot of them moving out," said Madhukar Ladha, analyst, Elara Capital.

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