Last fortnight, AngelOne extended a rally in its shares to 25% as it continues to surprise the broking industry long after its birth.

Losses, Malpractices and a Brokers Market

Dinesh Thakkar was born to a business family with a reputation in textile trading. 

His family background encouraged him to be independent, and he never considered taking up a job. In fact, he was bitten by the entrepreneurial bug much earlier than others. While still in school, he considered dropping out in the 8th standard!  

Realising the importance of early education, he stayed in school to complete his studies at K.C. College until the 12th standard.

After securing admission to prestigious schools in America for his master's, Dinesh took a bold call and decided to stop studying.  

Academics had never attracted him, as he had an appetite for something much bigger. 

While the family business was always attractive, he realised it had its own rules and restrictions.  

He’d borrow capital from his family to multiply it and utilise it as seed funding for his venture. Little did he know that he would soon stumble onto a problem he’d spend the better part of his life working on. 

As he began to invest in the stock market, he realized the multitude of inefficiencies that plagued it. 

In 1991, stock trading occurred through terminals. It involved going to stock broking offices, signing papers for transactions, and waiting for brokers to confirm the execution. 

Most brokers would only confirm the occurrence of a transaction on the weekend, after analysing their profit and loss statement, leaving consumers waiting for the longest of times. 

Brokers also often wrongly advise clients based on their selfish needs, leading to huge losses for newcomers to the market. 

In the early 90s, Thakkar would lose much of his capital in the first few months. 

With no one to serve a beginner's needs and shocked by how the industry ran, he decided it was time to make it more consumer-centric. 

Learning to Survive in the Stock Market Crash

Thakkar was keen to understand the deeper workings of the market.

He studied technical charts for over 12 hours a day until he began to perfect his game. Sensing that the market was unkind to newcomers, he would take it upon himself to serve individual clients. 

His rigorous homework made his recommendations much more accurate than those of his peers. 

Seeing the success of his recommendations and his concise and straightforward manner of advising friends and family, clients would soon come flocking to him. 

After completing the tedious process of applying for a broker license, he was ready. His business would soon take off, and he would end the year with earnings of INR 40 lakhs. 

His hopes tumbled to the ground the next year as the stock market suffered from one of the biggest scams in history. 

The 1992 stock market scam, perpetuated by Harshad Mehta, would see Indian investors lose over INR 5,000 Crore, and Thakkar’s fate was no different. 

As his clients defaulted on their payments, many advised him to declare bankruptcy and shut shop. 

Determined to keep going, he once again borrowed capital from his close friends, INR 1.5 Crore, to pay off his debts. Within a few years, he gradually recovered, fuelled by the desire to make investing easier for beginners. 

Angel Broking was born on 8 August 1996. 

Thakkar believed that through transparency and innovation, he would ease the fears of what could be generations of investors who would never again set foot in the stock market. A year later, in 1997, Angel Broking would quickly diversify into wealth management, retail, and corporate broking. 

At the time, investors had to go through brokers or authorised persons certified by the stock exchanges. 

Understanding that obtaining a broker license for each sub-broker would be time-consuming and expensive, Dinesh would employ a more efficient tactic. 

He would make his sub-brokers authorized persons and, based on their experience, share 50-70% of commissions with them. 

He believed that anyone with a basic knowledge of the markets could be an angel broker, and the idea seemed to work. 

The authorised person business model meant that Angel Broking would provide the brand and infrastructure in exchange for the brokerage. Angel was a people-light, broker-enabling brokerage. 

Tech company thinking long before it was cool.

It would also significantly benefit brokers, as they could quickly expand their footprint nationwide without spending much on staff and infrastructure. 

Higher transaction volumes for brokers would result in higher brokerage and commission splits. Within a few short years, the company would employ over 5,000 brokers and expand into commodities. 

His motto would be keeping the customers at the forefront, and he would introduce interesting innovations to differentiate and build trust.

He would be the first broker to use a walkie-talkie to share real-time prices with his customers, a simple technique not utilised in the market until then. 

It would also be one of the first companies to issue credit notes to customers within a day, a process that would have taken at least a week earlier. 

Angel Broking was well on its way to simplifying stock investing for the masses. 

Investing in Tech Ahead of the Curve

Angel Broking was ahead of its time in leveraging technology to complement its broker network. 

In 2001, it set up a web-enabled back office, a concept almost unheard of then. It then launched an internet trading platform in the era of dial-up connections and slow buffering speeds.

Dinesh and the team built a comprehensive IT infrastructure and invested heavily in data analytics. It enabled them to understand client needs and ideate on bespoke features and customised products to suit diverse investment objectives. 

For all its broking DNA, Angel Broking operated and innovated like a tech company before it was even a thing.

It focused on continuous product innovation and customer experience, but it appeared almost foolhardy back then. The result? Angel Broking scaled faster than the competition, with a significant cost advantage. 

By 2006, it had crossed 1 lakh unique trading accounts, and the rapid growth was noticed. In late 2007, it raised INR 152 Cr, diluting a 12% stake to fuel the rocket ship.

Angel Broking deployed the war chest to evolve into a diversified financial services company.

First, it instituted commodity broking and introduced portfolio management services. Next, it partnered with Birla Sun Life to distribute its products via its wide broker footprint, further cementing its credentials in the crowded space.

Angel Broking crossed 5 lakh unique trading accounts in 2008, growing the count fivefold in less than 2 years.

Progress begets more progress.

In the latter half of the decade, the launch of the iPhone and the widespread adoption of Android handsets upended how users accessed their trading accounts.

Recognising the shift, Dinesh and the team launched the mobile app version of the platform.

By 2011, Angel Broking had the largest distribution network among all broking houses and was, by all accounts, the fastest-growing equity broking house in the country.

Sustainable Revenue on Trading Tailwinds

To truly understand the engine driving Angel Broking’s growth, it's worth taking a closer look under the hood.

Angel Broking was a full-service broker and typically earned around 90% of its revenue from broking and advisory services.

The remainder came from interest income, depository operations, portfolio management service fees, and income from distribution activities. The broking and advisory services covered equity (cash delivery, intra-day, futures and options), commodity and currency trading, and debt products.

Angel Broking’s income in these areas was directly tied to transaction values.

In addition to its core brokerage services, Angel Broking provided qualitative and quantitative research, customised investment recommendations, and investor awareness initiatives on new products and market trends.

Beyond traditional broking, Angel Broking offered a margin trading facility against eligible collateral, distributed third-party financial products like mutual funds and insurance, and provided loans against shares.

As its core business thrived, Angel Broking remained at the forefront of technological innovation. In 2015, it was among the first brokerages to launch e-KYC authentication, a crucial step in modernising client onboarding.

About a year later, it introduced a fully digital onboarding process, utilising electronic and digital mediums to streamline client acquisition and enhance the user experience.

This period marked a significant shift in the brokerage industry. 

The traditional full-service model was increasingly challenged by a new class of discount brokers catering to younger, tech-savvy traders who were new to the market.

Zerodha Disrupts Brokerage Industry Revenue Pool

From 2014 to 2015, India's stock market experienced a significant rally.

Benchmark indices climbed about 25%—the most significant increase in five years, sparking heightened interest in stock trading.

Initially, traditional bank-led brokers dominated the scene, capturing nearly half of the total broking revenues estimated at around ₹5,000 crores, despite serving just 35% of the market. 

These firms excelled due to their extensive distribution networks and premium services, such as personalised research and trading advice, primarily targeting affluent, high-volume traders.

However, while profitable, their transaction-value-based fee structure was cost-prohibitive for newcomers and low-volume traders.

This pricing model marginalised millennials and modern traders seeking straightforward and economical stock market access.

Seeing this gap, discount brokers like Zerodha stepped in with a game-changing idea: a flat fee model. 

This meant you'd pay a fixed rate per order, no matter the size of your trade, which disrupted the stock broking market and attacked incumbents' profit pools. By 2016, Zerodha had amassed over 100,000 active clients, ranking 10th among brokers by active client numbers. 

The appeal of discount brokers' flat fee structure led to a twentyfold surge in trading volume, particularly in options, from 2015 to 2020, showcasing how discount brokers were reshaping trading dynamics.

On the industry side, the shift was significant.

From a mere 8% market share in active clients in 2016, discount brokers expanded to capture 25% by 2020, accounting for 14% of broking industry revenue, estimated at around ₹9,000 crores. 

Meanwhile, AngelOne, ranking fifth with 230,000 clients, closely watched these developments.

The broking industry was projected to grow 25% annually through 2028, and AngelOne was determined to keep up. 

Unlike traditional brokers, which tried to defend their revenue pools, AngelOne accurately read market shifts and enhanced their tech capabilities. 

They revamped their platforms to be more user-friendly for futures and options traders, where their flat fee model shone. This strategic shift resulted in an 80% sales increase expected over 5 years and stabilised their operating profits at around 30%.

With a clear vision for the future, AngelOne was well-prepared for the next growth phase, ready to meet and exceed the expectations of a burgeoning millennial customer base.

Mastering the Market Mix

In a decade, the number of households in India holding equities was set to skyrocket from 5% to 10%+. 

This expected surge in the equity market means ample growth opportunities for the brokerage industry.But with great opportunity comes the hefty challenge of attracting and keeping clients on your platform—something that COVID-19 has only made more pressing as more people turn to digital trading.

With new brokerages popping up everywhere, the competition was fierce to sign up clients and keep them actively engaged. Consumers were spoilt for choice in the crowded market, directly impacting brokerage companies' costs and revenues.

Angel One tackled these challenges head-on by building an impressive network of 11,000 franchisees across India, one of the largest in the sector. 

They complement this traditional strength with a fully digital onboarding process in full swing by 2020. This hybrid approach allows them to maintain a cost-to-income (C-I) ratio of about 65%, which was significantly better than traditional brokers like Motilal Oswal at 80% and digital-first platforms like UpStox and 5 Paisa, which range from 90% to over 110%.

This effective combination of franchise strength and digital efficiency keeps operational costs in check and eases employees' workloads, leading to a downward trend in employee costs over the years. 

Angel One isn’t just about keeping costs low; they’re also savvy about whom they target. 

By focusing on younger investors from smaller cities, they're tapping into a market that will only grow in financial sophistication and investment power. This strategy ensures that as these investors grow, they stick around, enriching the platform’s engagement and profitability.

From 2020 to 2021, Angel One launched multiple digital tools to keep users active and engaged. 

They introduced a comprehensive broking mobile app, machine-learning-based advisory services like “ARQ,” voice-based search, and multilingual options. 

They also expanded their product range to include Systematic Investment Plans (SIPs) and fixed-income products like bank FDs and corporate bonds, quickly rising to the top of new SIP sign-ups—all without additional marketing spend, thanks to their existing distribution and franchise network.

Powered by this and confident about the future, the company did an INR 600 crore IPO in late 2020. 

Zero Pricing Wins Investors Love 

The Indian brokerage market had begun to be divided into three main categories. 

First are the bank-led brokerages like ICICI, Kotak, and HDFC Securities, which cater mainly to HNIs and UHNIs.

They leverage their parent banks' trust and customer base, offering comprehensive advisory services and personalised relationship management. However, the premium cost tends to push away low-capital retail investors.

Next are full-service non-banking brokerages like Angel One, Motilal Oswal, and ShareKhan combine personal advisory services with competitive rates and serve both active HNIs and retail investors. 

Finally, discount brokers like Zerodha, Upstox, and Groww have revolutionised the market with tech-driven platforms that offer a seamless, user-friendly experience at minimal cost. These platforms primarily appeal to retail investors who prefer digital, self-directed trading.

By 2022, over 85% of new trading accounts were opened with discount and full-service brokerages, mainly by young, low-volume investors though potentially future high-revenue clients. 

Banks, meanwhile, struggled to attract new users and faced attrition. 

However, they sustained their revenue by retaining high-ARPU HNI clients, cushioning the impact of the declining user base. Nevertheless, banks saw their broking revenue share drop significantly from 50% to 28% in less than five years, reflecting the shifting market dynamics.

However, the rising competitive intensity weakened the ARPUs for bank and full-service brokers.

The new-age discount brokers mainly captured the trading surge, backed by aggressive marketing spending. Discount brokers like Groww spend about ₹5,000 to acquire each customer, which is 20-25 times higher than traditional brokers. 

With low costs, no account opening fees, and minimal brokerage, these brokers attracted millennials and first-time retail investors, who often have lower investment capacities but are less likely to stay invested during volatile market conditions.

Though Zerodha and Angel One operate as hybrid brokerages, they cater to low-volume retail investors with minimal fees and attract high-volume F&O traders, who contribute around 90% of the volume on NSE through their reliable technology platforms. 

Despite being a 28-year-old traditional company, Angel One operated like a startup.

By incorporating advisory services into its discount brokerage model, Angel One built a highly loyal customer base. This strategy yielded impressive results, with 89% of new customers in 2023 coming from smaller cities. 

Between FY 2021 and 23, revenue and PAT grew by 3x, churn was reduced, and client cohorts had begun to be profitable overall. 

With their savvy blend of old-school and new-tech rules, Angel One was all set to play the brokerage game like a chess grandmaster, outsmarting the competition one move at a time

SEBI’s Rescue Act in the F&O Loss Frenzy

The F&O segment in India witnessed a surge in activity in recent years

Heightened trading volumes and increased participation from retail investors. Market regulator SEBI recently expressed concerns that youngsters are gambling household savings in the risky world of derivative trading. 

It revealed that retail investors and proprietorship firms incurred trading losses of Rs. 52,000 crore in FY 24. In response to these concerns, SEBI released a whitepaper proposing measures to curb speculative trading in the F&O segment. 

Some measures include upfront collection of options premium, removal of calendar spreads, increase in minimum contract size, and rationalisation of weekly contracts from 18 to 6. These measures are expected to impact retail participation, likely affecting brokerage revenue streams heavily reliant on F&O trading.

For instance, weekly option premiums comprise 65% of overall industry premiums. Estimates suggest the industry might lose 35% of revenue from premiums. 

For Angel One, the implications of SEBI's proposed regulations are significant. A substantial portion of its revenue—estimated at 40-50%—comes from brokerage fees and commissions linked to the F&O segment. 

This is true not just for AngelOne but also for most of the discount broking segment.

SEBI also mandated that stock exchanges, clearing corporations, and depositories charge brokers uniform transaction fees, not based on the broker’s trading volume. Usually, brokers with high turnover enjoy lower transaction fees, enabling them to earn a ‘rebate’ by charging customers more than what they pay in exchanges. 

The new rule will impact rebate revenue for many high-turnover brokers, such as Zerodha, Upstox, Groww, and Angel One. They might either have to hike transaction fees, resort to charging brokerage on delivery trades, or look to ramp up alternate revenue streams like margin trade funding.

While Angel One remains a dominant player with 6 million active users, it faces stiff competition from Zerodha and Groww. Both have successfully capitalised on the growing retail participation in the stock market by offering low-cost, user-friendly platforms.

Angel One’s foray into wealth management and AMC (Asset Management Company) is aimed at leveraging technology to cater to the growing number of high—and ultra-high-net-worth individuals. The company recently onboarded a team of industry veterans to spearhead the wealth management business. 

Over the years, they observed that customers who start as traders often move to building a long-term portfolio. 

Angel One has focused on creating engagement journeys on SuperApp to capture higher lifetime value from such a progression. For example, they recently integrated credit and fixed-income products into the platform and enhanced the mutual fund journey to improve SIP adoption. 

The combination of experienced leadership and tech focus helps solidify its position in the financial services industry. 

The potential downturn in F&O trading could further exacerbate Angel One's challenges as it competes for market share in an increasingly competitive market. 

Guardian to Industry’s Regulatory Medicine

Given the firm's heavy exposure to the F&O segment, Angel One may need to explore alternative revenue streams to mitigate the potential loss. 

The adaptation might involve shifting from transactional revenue to sustainable streams such as wealth management, research and advisory services. 

The company also signed a five-year sponsorship deal with the Indian Premier League (IPL) to increase brand exposure across digital and televised media and widen its customer base, especially in Tier 2 and 3 cities.

While the company keeps a keen eye on the future, despite the challenges and competition, it continues to witness substantial growth in the core business. Q4 FY24 was its best quarter yet, with average daily orders growing 32.3% QoQ. They also added a record 2.8 million clients, with ~89% coming from Tier- 2 and 3 cities. 

Dinesh Thakkar’s 30-year journey is a story of resilience, innovation and a customer-centric approach. His strategy has been rooted in innovation and a willingness to adapt to changing industry dynamics. 

Over the years, he has demonstrated an ability to leverage technology early while creating an online trading platform, adopt unique business models like authorising sub-brokers, and expand rapidly in an evolving industry.

This time is no different. 

Thakker’s vision has transformed Angel One from a small brokerage firm into the country’s top three brokerages. He addressed the inefficiencies of traditional broking and empowered a new generation of investors.

He would have to rely on his strong fundamentals of transparency, technology and customer centricity to overcome regulatory challenges and win in the market. 

Looking forward, Angel One is well-positioned to capitalise on India's growing interest in stock trading. Its focus on Tier 2 and 3 cities, digital focus, and a hybrid approach of low-cost trading combined with wealth management and advisory set the stage for continued growth. 

As more Indian households turn to equity investments, Angel One could be the guardian to cushion the impending pain facing the brokerage industry with F&O. It forms that bridge between the legacy that could become interesting again and the new tech that keeps costs low.

Over the past thirty years, markets have changed, evolved, and gyrated, but AngelOne has risen, guarding the industry this time from mayhem.

Writing: Keshav, Parth, Nikhil, Raghav, Rajiv, Tanish and Aviral Design: Omkar and DALL-E