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MOSL: ANGEL ONE: OPEX savings drive 11% earnings beat

ANgel One: OPEX savings drive 11% earnings beat

(ANGELONE IN, Mkt Cap USD1.7b, CMP INR1649, TP INR2200, 33% Upside, Buy)

• ANGELONE's PAT surged 18% QoQ and 59% YoY to INR2.1b (11% beat) in 2QFY23. The profitability was driven by a 3% beat in operating revenue, which rose 8% QoQ and 52% YoY to INR4.6b. The key contributor to the outperformance was the 10% beat in net interest income.
• The volatility in the equity market led to a decline in the active client ratio to 36.2% in 2Q from 38.5% in 1QFY23.
• Operating expense grew 30% YoY, but was flat QoQ at INR2.7b (6% lower than our expectations), driven by a 59% YoY jump in employee costs. Other expenses grew 19% YoY to INR1.6b, 11% lower than our estimate. This was in spite of one-off expenses of INR166m.
• CIR declined substantially to 47.6% (better than our estimate of 51.7%) from 51.6% in 1QFY23. The same improved 500bp YoY. Except for a one-off item pertaining to a reversal of the margin penalty for the last four quarters that was passed to clients, CIR stood at 44.7%.
• The number of orders improved to 230m in 2QFY23 from 207m QoQ.
• The board has recommended a dividend of INR9 per share.
• We have raised our estimates by 5-6% to factor in a lower-than-expected operating cost in 2QFY23. We expect some part of this to be sustainable, given the management's outlook of declining customer acquisition costs. We maintain our Buy rating on the stock with a revised TP of INR2,200 (premised on 18x Sep'24E EPS).

Beat on interest revenue; share of F&O continues to rise

• The growth in operating revenue was healthy (up 8% QoQ and 52% YoY) at INR4.6b (3% ahead of our estimate), driven by a healthy performance in interest income.
• Gross broking business saw a robust 11% QoQ rise on account of a 12%/11%/2% revenue increase in F&O/Commodity/ Cash Broking.
• The share of the F&O segment in gross broking revenue rose to 82% in 2Q from 81% in 1QFY23.
• On a quarterly basis, average revenue per client fell to INR430 in 2Q from INR453 in 1QFY23.
• Other income was higher by 9% QoQ and 16% YoY.

Lower OPEX drives a significant improvement in the C/I ratio

• Total OPEX was flat QoQ, but grew 30% YoY to INR2.7b (6% lower than our estimates). A decline in other expenses led to a contraction in CIR to 47.6% from 52.6% YoY.
• Employee costs grew 59% YoY and 8% QoQ to INR1.1b (in line). Administration costs fell 3% QoQ to INR1.6b (11% below our estimate).
• The decline in marketing costs can be attributable to: 1) lower marketing spends as reflected in the decline in client additions; 2) lower lead rates QoQ as the same were elevated in 1QFY23, due to the IPL; and 3) decline in customer acquisition costs

Highlights from the management commentary

• The payout was a major event for the Broking industry. ANGELONE performed well as it hardly lost any business during this period. The management promptly acted in the same weekend and recovered 80% of the capital in three-to-four business days.
• ESOP costs rose QoQ as the higher share of ESOP grants offered in 1Q was booked in 2QFY23. The management expects some rationalization going forward - INR300m/INR470m in 2HFY23/FY24 v/s INR440m in 1HFY23.
• The QoQ decline in ARPU was due to a higher share of new to the market customers. However, this has not impacted the payback period, which continues to remain at six months. This has been possible due to a decline in the CAC.