Sector Update
Update | Financials
Sector
| 3 October 2024
Capital Market
F&O regulations: The cat’s out of the bag
Final measures tad better than consultation paper
SEBI has finally announced regulations to curb F&O volumes and strengthen the
framework. Most of the measures are similar to the ones announced in the
consultation paper released on 30th July’24.
However, one measure from the consultation paper did not find a mention in the final
regulation (rationalization of tick size) and two measures came in a relatively better
form: 1) Minimum contract size increased to at least INR1.5m vs. INR2-3m in two
phases in the consultation paper and 2) increase in extreme loss margin only on the
expiry day at 2% vs. the 8% cumulative increase on pre-expiry and expiry day in the
consultation paper.
The regulations will be partially implemented from Nov’24 and, resultantly, the impact
on volumes will be visible from Dec’24.
Our sensitivity analysis yields nil earnings impact for Angel One in FY26 if the order
volumes are down 10% vs. our assumption of 16% growth and the company is able to
increase its realization from INR19.7 to INR25. We maintain our BUY rating on
ANGELONE.
Similarly, for BSE earnings, the hit would be miniscule if the derivative volumes decline
by 20% instead of a 22% increase built in our forecasts and the premium to notional
turnover ratio increases from 0.072% to 0.09%. We maintain our Neutral rating on
BSE.
Angel One: Levers will be used at appropriate time to offset the profitability
hit
If all the measures listed in the consultation paper are included in the final
regulations, turnover volumes for ANGELONE are likely to be impacted.
However, it is difficult to ascertain the absolute impact at the current juncture.
Most importantly, changes in customer behavior are difficult to predict. In the
past, the allocation of customers’ money from their wallets to trading activities
has not changed meaningfully even after regulatory changes.
Which measure to implement and the quantum of charges will be decided as
and when they regulations are implemented and some impact is visible. Actions
by competitors will be tracked closely before executing any of these steps. The
choice for ANGELONE and its peers will be between 1) taking a hit on margins,
leading to a higher market share, and 2) raising the charges and risking losing
some market share in the interim.
Important criteria before deciding on final actions for ANGELONE would be the
impact on LTV of the customer from these regulations. Ideally, since the
measures are aimed at reducing customer losses (if implemented), the longevity
of the customer in the system increases. Additional products will only add to the
LTV in the longer term, thus giving the company the ability to spend on higher
acquisitions.
Research Analyst: Prayesh Jain
(Prayesh.Jain@MotilalOswal.com)
/ Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com)
Research Analyst: Muskan Chopra
(Muskan.Chopra@MotilalOswal.com)
/ Kartikeya Mohata
(Kartikeya.Mohata@MotilalOswal.com)
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
3 October 2024
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Investors are advised to refer through important disclosures made at the last page of the Research Report.