Tighter regulations to benefit, not hurt broking; cost effective model key challenge: Angel’s Dinesh Thakkar

In the next five years, I am looking at Angel as a fintech company, says Dinesh Thakkar.

The current phase of slowdown in the broking industry is likely to be short lived, as a lot of first time investors are now coming from tier-3 and tier-4 cities, says Dinesh Thakkar, founder of broking firm Angel One. In an interview to Moneycontrol, Thakkar said that tighter regulations, despite the short term pain for brokers, would help growth the market in the long run as it would strengthen the trust of clients in brokers. “Brokers should focus on quality on services, not on custody of assets. Many of the regulations that are coming now were long overdue,” he said.

Thakkar also felt pessimism about the broking industry, as reflected in the underperformance of broking stocks, may be overdone. “Future perceptions of growth have rarely proved right, let us not forget that the market had overvalued broking stocks in 2007-08,” he said.

Edited excerpts from the interview:

The pace of new client additions is slowing for the industry in general. In the past too, there have been periods when retail investors would come rushing, followed by a lull for the next few years. Do you see the current phase as a repeat of the previous cycles where growth will be lower in the foreseeable future?

I feel today’s situation is different from the past for two reasons: regulations and access to information are much better today, and there have been major changes in terms of demographics and socioeconomics. Urban and tier 1 are 11 percent of the population, tier 2 would be 5-6 percent, and the rest tier-2 plus cities. The last segment got activated in a big way in 2020 because quality digital infrastructure was available, and penetration of smart phones was high. Majority of the people who have entered the market recently are youngsters, who are social media savvy.  In the past, much of the participation was from urban and tier-1 cites. Whenever there was a crash, these investors would withdraw and it would take 2-3 years for new investors to take their place Secondly the government has found a way to manage inflation better than in the case in the past. High inflation like what we saw in 2012-14 can be very painful for equities. All these considered, I feel the current phase (of slowdown in new broking accounts) would be short lived. In fact, digital players like us are not seeing any slowdown. We are getting 3.5-4 lakh new accounts every month. 90 percent of them are from tier-2 and beyond. These are markets that were not available in the past.

How do you see the discount broking space evolving? More brokers are taking this route to grow volume...

Discount broking started with the objective of providing low broking charges and nothing more. But today, there is not much difference between discount broking and full services broking services. Today most digital brokers are using AI/ML (artificial intelligence) to give advisory services and help clients take better investment decisions. Some of them are offering even better services than the so-called full service brokers. The value addition may differ across players. Because costs are low, brokers are able to pass them on to clients through lower charges. We don’t use the term discount for other e-commerce services where consumers benefit from lower prices. Then why use the term discount brokers? I would say the two classes of brokers today are digital brokers and physical brokers, the latter segment is clearly growing much faster.

Despite the recent rally, broking stocks are still some way off their highs. The feeling among many investors is that the glory days of broking are behind, and that tighter regulations will keep shrinking the profitability of brokers. Is the market right to be worried?

I wouldn’t say market is worried. I would say that market is illogical. Sometimes they give high price for something that may never materialise, and at other times they will not anticipate something that can develop down the line. Market moves on perception not reality. But when it comes face-to-face with reality, valuations will be reassigned. Right now, the feeling seems to be that growth will be lower and so valuations are low. Let’s not forget, broking stocks were valued at 40 and 50 times (forward earnings) in 2008. When market saw the growth rates can’t sustain, valuations corrected to 14-15 times. Future perceptions of growth have rarely proved right.

But aren’t the recent regulatory changes hurting? Already, float income has shrunk considerably for brokers and market is worried that if SEBI extends the ASBA facility for derivatives trades as well, it would cause an even sharper drop in income. What is your take on the regulatory changes that are happening. Most of your rivals are complaining about it, though not in public.

My experience right from the 90s has been that when regulators step in, things get safer for customers, and that is good for long term growth. Whatever is not necessary for brokers should not be with brokers. Earlier, infrastructure and connectively was a problem, and so clients assets (funds and shares) would remain with the brokers. That led to many brokers misusing assets and abusing trust. Tighter regulations indirectly benefit those brokers who always focus on giving the best service to their clients.

But there is term pain when instances of bad behaviour (by brokers) come to light; some years back when there was an incident, clients were mistrustful of even large brokers, banks refused to give credit lines. And if credit is tight, then expansion becomes a problem. I don’t think tighter regulations are meant to discourage investors.

Of course, it can be hard for most brokers because they prefer status quo. I don’t believe in that, things should change. There is technology to segregate assets, and it should be used. Brokers should focus on quality on services, not on custody of assets. Many of the regulations that are coming now were long overdue. Because they are being implemented rapidly, the industry is feeling the pain. When margin and leverage rules were tightened, brokers said business will fall by 25 percent at least. Where has that happened?

Some years back Zerodha’s Nithin Kamath had tweeted that many are overestimating the size of the addressable market for the broking industry. Broking accounts as a percentage of the total population is the not the best indicator of penetration levels was his argument. You have been a retail-focussed broker all along. What is the bet you are taking while putting money in growing your business?

Nithin Kamath was referring to it in the context of the number of tax paying people. I would look at it differently. I am looking at people who have PAN accounts, that number is 60 crore. I am looking at people who have a bank account even if it is for getting a subsidy. That number is closer to 100 crore. If somebody has the ability to save Rs 1000 a month, why should that person not put that money in an equity SIP product. For instance consider a farmer who is saving Rs 2000 a month... we know that equity is a far more safer product if invested regularly, that too as portfolio of stocks. A farmer may think that portfolio is something meant for only rich people. Why should that be? We are looking at a market that is tier-2 and beyond. And then there are many college students who are talking about equities even if they have not started investing. They are aware about the benefits of equity investing and at some point they too will enter the market. To me the addressable market is much larger. The challenge for brokers is to figure out a feasible business model. The solution is there, I can reach that person and sell him an SIP, but I may just make a few rupees on that, which won’t cover my cost of acquisition. The business model is the challenge right now, not demand.

Much of the volumes today are happening in the options market, while cash market volumes are steadily falling. What explains this trend? Is it a good thing at all, considering that the primary objective of the stock market is to connect borrowers and savers. How does rampant speculation help achieve this objective? Besides, isn’t there a possibility of a risk to the system because of over trading in options?

The riskier part of the futures and options market is writing of options. It is the HNIs and institutions who are writing options. Retail investors are buyers of options, where the risk of a blow up is much lower. One may ask why are retail investors buying options and not shares. One reason that most of the new entrants are youngsters in their early 20s. They do not have much capital, they are in the process of creating it. Remember, the best of value investors in India too created capital by starting off as speculators. The big moves in the market post-pandemic attracted a lot of youngsters and they figured out that the only way they could participate was through Nifty and Bank Nifty options, given limited capital. In 2000, during the dot com bubble, new entrants to the market were mostly engineers who were drawing handsome salaries because of the Y2K bubble. They bought shares like Global Tele and Himachal Futuristics and burnt their fingers. I have seen that when retail investors buy shares and the market tanks, they never sell in the hope of prices recovering. And if you happened to be in the wrong set of stocks, you never saw that price again. In F&O trading you need to keep a stop loss. And when stop losses are triggered, the traders introspect on what went wrong. So there is a learning, though it comes at a price. HNIs and institutions are writing options against stock they already own, and option buyers are buying on margin. So concerns about a risk build in the system may be overdone. As for the buyers of options, I am sure that at some point they will invest in equities because they a) they would have figured out equity investing by then, and b) they will realise that wealth can be created only through long term investing. They may even invest in mutual funds or ETF, but they will not move away from equity.

Mutual funds are becoming increasingly popular with retail investors. Do you see that as a competition for direct equity investing?

Not at all, I think mutual funds complement direct equity investing. When people enter the equity market, the most aggressive head for options, the less aggressive ones go for equity investing and the conservative ones chose mutual funds. The direction is the same, but the products are different. We are seeing this trend in our super app when we acquire a customer. The idea behind the super app, which we have created by merging our existing apps, is to have one app with the solutions to all their needs. It was launched in March, and in three months we have done around 1.25 lakh mutual fund SIP registrations. I feel that if you connect this app to the financial ecosystem—MFs, insurance companies, banks, NBFCs—gauge the needs of our customers and be a neutral guide for the best product that meets their requirement, it can make a huge difference.

How do you see the super app moving the needle for Angel?

Today most of our customers are coming from tier 2 and beyond, and they require all financial products, being it trading investment, insurance, borrowing. Many of them are borrowing money at the wrong price. What I am doing through this app is telling my customer that we will manage your finances and solutions for you. For instance, the app will tell you how much home loan EMI as a proportion of your salary you can and should be—too less an EMI means you will be looking another house soon, and too much means you would even be without a house if something goes wrong—and where should you be borrowing from, and if your credit profile, the app should nudge the consumer into getting a better from another lender. When you acquire a customer and sell him multiple products you are not only able to increase your revenues, but you are also able to increase the trust of the customer in the app. It becomes a lifeline of sorts for the customer. And my data becomes even richer as the person keeps consuming more and more from me. When customer gets two good products from a relationship manager, he will go back to the same relationship manager. This holds true for an app as well.

Are you trying to derisk your business model through the super app, by positioning yourself as a personal finance advisor than just a stock broking firm?

The primary goal is not to derisk the business model. The idea is to give our customers the full range of solutions for their financial requirements. One of the collateral benefits will be that it will help derisk our business to a certain extent. But it is not as if we have not managed market volatility in the past.

In the next five years, I am looking at Angel as a fintech company, one which started as a stock broker and will grow into an app for multiple money management and financial services. It does not make sense to acquire a customer and give him just one service. Individual is same but his requirements will keep changing over time, and someone who can offer multiple services on one app will be more effective. So if you are talking about life time value or life time relationship, it has to be fintech. The time has come for converging all services into one. It can be through organic, inorganic or through partnerships. If you look at the industry before digitisation, relationship managers were given sales targets, so products would be sold not based on clients’ requirement, but based on their targets. I can’t give a target to the app. When I build an app, I am trying to figure out the needs of my customer. The byproduct is that customer ka life time ka poora value aa aajata hai (I earn from the customer over his life time). So I have to look at life time value when building solutions; I am not looking at immediate revenues.

Your firm had a clear edge in the offline market because rivals were unable to replicate the branch network you had created over the years. Now that you are looking to become a fintech play, you will be up against the new age brokers who not only are very good when it comes to technology, but also have deep pockets. Where does Angel stand in this competitive landscape?

Nothing really changes whether you are a digital broker or a physical broker. What matters is how well you are able to understand your clients requirements and then provide the right solutions. We have a client base of around 15 million. The data collected over the years gives us a fairly good understanding of their behaviour. But there are challenges no doubt. We have to first analyse all the data and then see what are the solutions that we can come up with, which then will ensure that they stay with us for longer. I don’t think we are at a disadvantage compared to pure play digital brokers, because this is uncharted territory for everyone. Globally too there are no models that we can look up to because of the uniqueness of India’s market. As I mentioned earlier too, you can acquire customers, but how can you serve him in a manner that is cost effective. Because the ticket size right now is very small.