Angel One is consistently acquiring customers, but an active customer base requires monitoring

Shares of Angel One Ltd are up 12% from a 52-week low hit on March 1. Much of the gain can be attributed to the brokerage firm’s February business update. Gross new customer additions rose 15% month-on-month to 0.45 million — the highest since May 2022, according to a report by Motilal Oswal Financial Services.

Moreover, the total customer base grew 3.4% sequentially to 13.3 million last month. Daily orders were up 2% month-on-month at 4.2 million, again the highest ever, Motilal Oswal said.

Hence, it remains to be seen whether the customer activation rate improves in the coming quarters. This metric indicates the number of active customers in the company’s overall customer base. The rate stood at 33% in the December quarter (Q3FY23), remaining under pressure due to volatile market conditions, according to HDFC Securities’ Q3 review report. “While the pace of customer additions remains healthy, the weak activation rate is reflected in a 10% quarter-on-quarter decline in average revenue-generating orders per customer,” according to a report by HDFC Securities.

Turning to February results, Angel One’s retail market share across all segments rose 70 basis points (bps) month-on-month to 22.6%. One basis point is one hundredth of a percentage point. This includes equities, cash, futures and options, and commodities. While the cash segment saw a sequential decline in market share of 23 bps to 12.7% in February, the commodities segment saw a sharp improvement of 573 bps to 56.9%. This growth was driven by a 27.7% increase in the segment’s average daily turnover (ADTO). Angel One’s total ADTO saw a 3.2% increase month-on-month.

While the company’s operating results appear strong, there are a few concerns regarding the growth of active customers. Due to macroeconomic uncertainty, retail share in the stock market is slowing down. If this trend continues, it could impact Angel One’s customer acquisition and overall growth.

ICICI Securities analysts noted in their report that a significant risk is the possible impact on business dynamics of the departure of the company’s CEO, Narayan Gangadhar.

Moreover, regulatory risks could arise from a possible impact on trading income due to the proposed blocking of funds from trading in secondary markets. This, along with targeted measures to curb rising derivatives volumes on exchanges, are key risks for Angel One stock, according to analysts at ICICI Securities.

That said, as per the company’s Q3 statements, revenue from mature clients — those who have been with the brokerage firm for more than two years — is slowly growing, indicating client longevity. This bodes well for the long-term prospects for revenue growth. Angel One is one of the top players with the largest active client base on NSE.

To be sure, despite the recent share price rally, Angel One shares are down 11% over the past year.