Motilal Oswal Recommends Buying Angel One; Target Price at ₹4100

Motilal Oswal is optimistic about Angel One and has given it a “Buy” rating with a target price of ₹4100 in their report dated October 15, 2024.

Strong Growth in 2Q FY25

In the second quarter of FY25, Angel One’s profit after tax (PAT) grew by 39% year-on-year to ₹4.2 billion, which was 5% higher than expected, thanks to better operational efficiency. Revenue from operations rose 45% year-on-year to ₹9.8 billion, aligning closely with estimates.

Increase in Orders

The total number of orders jumped to 489 million in 2Q FY25, up 45% from 338 million in 2Q FY24. However, the gross broking revenue per order fell by 11% year-on-year to ₹19.1, driven by a 19% decline in the cash segment and a 7% drop in Futures and Options (F&O).

Operating Expenses and Efficiency

Total operating expenses rose by 51% year-on-year, but this was 5% below estimates. The cost-to-income (CI) ratio increased to 50.1% from 48.7% in 2Q FY24, which was better than the estimated 52.5%.

Management expects a 13-14% impact on broking and related income due to new F&O regulations. They aim for the wealth segment to break even in three years, while other new businesses could do so in two years.

Future Estimates

Motilal Oswal has factored in a 6% decline in F&O orders for the third quarter and a 10% decline for the fourth quarter of FY25. They also anticipate a price increase of ₹3 per order starting in the first quarter of FY26. As a result, they have lowered their earnings per share (EPS) estimates by 9% for FY25 and 12% for FY26. However, there is potential for revenue growth from new segments that have not yet been included in their estimates.

Cost Management

Gross broking revenue increased by 29% year-on-year to ₹9.4 billion, driven by a 23% year-on-year growth in the F&O segment, strong growth of 52% in the cash segment, and a remarkable 93% increase in the commodity segment. Net interest income also rose to ₹2.8 billion, up 83% year-on-year, due to strong growth in the Margin Trading Facility (MTF) book.

Management Insights

Management noted that while the impact of the F&O circular is hard to measure, it may affect around 13-14% of broking income in the short term. However, efforts to reduce retail losses will improve long-term profitability. The company is focusing on diversifying its business, including launching credit products in partnership with several Non-Banking Financial Companies (NBFCs).

Valuation and Recommendation

Angel One has shown it can maintain profitability by adjusting its pricing to counter the impact of regulatory changes. Based on this and other adjustments, Motilal Oswal has raised the target price to ₹4100, based on an expected 18x earnings for September 2026. They maintain their “Buy” rating for the stock.