WOTS#9

WOTS#8 talked about how the financial services ecosystem is evolving with multiple new players emerging offering specialised services such as demat and issuer solutions. These companies are indexed into the mega trend of "financialisation of India" as the populace shifts towards digital assets.

Discount broking is one such trend, benefiting from the multiplicative effects of several tailwinds:

1. Increased Demat Participation - itself 3x+ in 4 years (but still very small in the context of the population) - driven by education, ease of kyc (completely digital) and higher incomes

2. Increasing Trading Activity - even on a per-demat account basis - driven by a more listed options and a further proliferation of derivatives trading

3. Value Migration - Tech-platform driven discount brokers swiftly squeezing market share gains (4000 bps!) from mainstream brokers

The above factors have come together to create one of the most prolific multi-baggers in recent history: Angel One . Since its IPO in 2020 just 3 years ago @ 305 , the stock is up 10x excluding dividends, beating incumbents ICICI SECURITIES , IIFL Securities (which is a slightly different institution-oriented business) and SMC Global Securities Ltd.

The essence of investing is to spot a combination of such mega-trends (what Charlie Munger would call a lollapalooza) and let them play out. The emotional challenges along the journey can be especially daunting, including when Nithin Kamath wrote a post on why he thought Zerodha , the market leader for discount broking should be valued at 10-15x PAT

I think the right valuation is probably unpredictable - nobody can really tell what a stock should trade at - but to value a market leader at 10-15x PAT when the broader index itself trades at 18-20x did not seem to be the right framework. Of course, when buying (as this case was for Zerodha's buyback) - lower valuation will always seems better :)

What I do know is markets really love industry tailwinds, revenue growth, earnings inflection and good capital allocation (incl dividend payouts)- all of which AngelOne was able to demonstrate in its 3 year listed journey. Not surprisingly, the stock trades today at 25x PE - a significant premium to where Mr. Kamath thinks the discount broking industry should trade.

Disclaimer: invested in AngelOne