Zerodha’s Nithin Kamath on why the company is conservative in valuation

Nithin Kamath, co-founder and CEO of discount brokerage firm Zerodha on Saturday explained the company's conservative approach to valuation.

Kamath took to social media to explain why the company values itself at $2 billion. The Zerodha CEO, in a series of tweets explained the company's approach to valuation.

"The only reason why we do a valuation exercise at Zerodha every year is for our ESOP buyback.

I keep getting asked why are we valuing ourselves at just $2Billion currently when smaller players are raising money at far higher valuations. Here is why we're conservative," Kamath wrote.

"Some background: We don't promise ESOPs for anyone on our team. Frankly, we never thought we were building something that could become so valuable. So we never thought of ESOPs. But around 2017 when the business started growing, we created an ESOP scheme to share the success," he further added.

ESOPs approach

Kamath further added that the company offers ESOPs to employees who have completed one year with the company.

This is to be sure if they are with us for the right reasons. We tell everyone to think of the ESOP scheme as their retirement fund which will compound over the long term if we do well working together as a business," he explained.

He further added that all ESOPs come with zero strike price (no cost) and top of the liquidity preference. Every year that number of new ESOPs issued is greater than that of ESOPs bought back.

ESOP buyback is optional and the company also has a loan scheme where its team can take loans at around bank Fixed Deposit rates against the vested ESOPs, Kamath added.

"Our ESOP buyback is from the profits we carve out & not through external fundraising.

This is so that everyone can focus on profitability which improves the odds of us being sustainable & resilient in the long run. The ESOPs will then truly be a retirement fund for everyone," he further explained.

"I've been in the markets across multiple cycles to know that what happened last 18 months was an outlier. There is no easy money to be made in the markets in the long run. When the going gets tough, greed disappears & with that trading activity & volumes & inflated valuations," he further added.

The Zerodha CEO added that if the markets were to remain subdued for a few more weeks, activity for all capital market participants will be down by at least 30 per cent.

"It doesn't matter even if the product is made in heaven. Our business is cyclical & highly correlated to the markets," he wrote.

"We want ESOPs to be like a low volatility retirement fund because this would probably be a large chunk of the networth for many on the team. Valuation ups & downs can be mentally taxing," he further wrote, adding that since the company does not plan to raise external money, they thought that around 15 times that PAT was a fair value.

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