Portfolio

Not a single employee of Zerodha works with a revenue target: CEO

Lokeshwarri SK | Updated on September 04, 2020 Published on September 03, 2020

Nithin Kamath, Founder and CEO of Zerodha

Brokerage has been growing 100% YoY over the last three years, says Nithin Kamath

Zerodha (zero and ‘rodha’, a Sanskrit word for hurdles) bootstrapped and founded by Nithin Kamath 10 years ago, has disrupted the brokerage industry in India. A pioneer in the discount broking model, the firm provided a tech-enabled DIY alternative to traditional broking models that proved a hit with millennials. Of note is the fact that the firm managed its stellar growth entirely through internal cash-flows, choosing the freedom to live by its own rules over ‘deep pockets’ that PE or VC funding provide.

In this exclusive interview with BusinessLine, Nithin Kamath, Founder and CEO of Zerodha, talks about the company, and other issues pertaining to Indian capital markets. Edited excerpts:

You have crossed the 30-lakh-customer mark in July. So, what was the number, say, in January this year?

The total customer base is now 30 lakh, but active customers, according to exchanges, is 22 lakh. We have added 10 lakh customers in the last six months. The new customers have mainly come in to transact in stocks, some also buy mutual funds. The last three or four tranches of sovereign gold bonds have also been very popular.

The age profile of our new customers is between 20 and 30. The average age of our customer has dropped from 31-32 to 28-29 in the last six months.

What is the value of transactions done by Zerodha every day, across stocks, commodities, currencies, mutual funds, and bonds, among others?

Value-wise it is a ridiculously big number, in tens of thousands of crores, but that is not the right way to look at it. A person with ₹1 lakh in his trading account could be transacting for ₹1 crore a day. When you pay option premium of ₹5,000, you can buy option contract worth ₹7 lakh.

We do between 50 lakh and 70 lakh transactions every day. This accounts for 12 to 15 per cent of all retail transactions on Indian exchanges, which would be roughly around 10 per cent of exchange volumes.

Your FY20 revenue was ₹950 crore. What was the profit number and net margin? How was revenue growth?

The net profit was ₹350 crore, the operating margins are between 50 to 60 per cent. We have been growing 100 per cent year-on-year over the last three years, both in topline and bottomline. However, since the base is large, maintaining the same pace of growth is difficult. Also, the performance depends on how the market and the economy perform. If the economy recovers, we can grow at 50 to 60 per cent over the next three years.

Why have you refused PE and VC investors so far? Any idea of listing Zerodha in the future?

I wouldn’t know what to do with the money (PE or VC funds). We started making profits from the second or third year of our operations. We have not spent on marketing, nor given away any freebies. We never found any purpose for raising money.

You need to list to either raise capital, which we don’t need, or give exit to your PE investors. This year, we have been buying back employee stock options at a very decent valuation, to provide exit to our employees.

Businesses can either have deep pockets or they can be nimble. There are too many people with deep pockets, so the edge comes from keeping the nimbleness going. We have said no to some really large cheques. The more you say ‘No’, your attractiveness grows. Robinhood (the American discount brokerage firm) recently raised funding at $11 billion valuation. In terms of revenue, we are almost there.

The problem with PE investors is that they want you to show growth. In Zerodha, not a single employee works with a revenue target. Once you put a revenue target, mis-selling begins. No client of Zerodha can say that they have lost money due to us. We have not pushed any product, the word-of-mouth publicity helps.

What are you trying to do through the intent to launch a mutual fund AMC?

We have applied for an AMC license to launch a mutual fund and this has been delayed due to the corona pandemic. The idea is to launch India’s first passive only AMC.

When you sell active and passive together, there is a conflict of interest. As active funds make more money for AMCs, they are pushed to investors. Our existing distribution network can help in marketing the MF schemes. And there are platforms such as Paytm, Groww, etc that sell funds to customers based on their needs, and not based on the commission earned. So, there is now a market for passive funds. These are also less complicated and easier to understand.

The only problem is that the 20-to-30-year-olds, our customer base, do not have the wealth. A recent Goldman Sachs report showed that 70 per cent of wealth is with people above 50 years. So, it may take time to grow our AUM, but the potential is certainly there.

There is a proposal to allow clients to directly access the exchange. How will that work?

It cannot happen; it’s just someone getting it wrong. For that to happen, the Securities Contract Regulation Act has to change. The main role of a stock broker is to mitigate risk. If exchanges start dealing with clients directly, the risk gets concentrated. If you remember the Emkay fat finger trade or the recent fracas over crude oil futures, brokers had to bear enormous amount of losses. Exchanges will not be able to take that kind of loss on their books.

Is the collection of upfront margin in cash segment a good idea? What’s your view?

I think, it is needed and SEBI has been doing the right thing over the last two to three years. The Karvy episode was the trigger for these changes. To compete, brokers were offering more leverage and taking more risk because of which the Karvy and BMA kind of episodes happened. Now the rules create a level playing field. Customers will get used to the new rules after a while. Though volumes can be impacted in the short term, it will not matter in the long run.

There is a lot of talk about investors shifting from direct stocks to mutual funds over the last six months. Is this correct?

Our experience is quite different. We had the largest number of transactions in mutual funds in the last few months. The MF outflow in equity funds could be due to a few HNIs redeeming due to liquidity problems, but overall, the small investors are buying mutual funds. That said, there is more interest in stocks.

What were investors doing during March 2020 when stock prices were crashing? Were they on a selling spree?

No. Actually something quite strange happened in March. It was the best month for us in terms of customer additions. You see, discount ‘Sales’ have this attraction. I think, a lot of investors sitting on the sidelines, waiting for a correction over the last couple of years, decided to jump in. The work-from-home gave them the time to start doing this too. As the new investors made money with stocks moving higher, they told their friends, and thus the number of new investors kept increasing.

What proportion of market is controlled by discount brokers? What has changed for the broking industry post-Covid-19?

Pricing is no more the differentiator between discount brokers and regular brokers because everyone offers around the same price. We are probably four to five times bigger than the second-largest player in the low-cost space. But if you combine all the online low-cost brokers, the share could be around 20 to 25 per cent of exchange turnover.

Regular brokers also offer a low-cost alternative, but there could be caveats. For instance, some insist on upfront deposit of brokerage. Post-Covid-19, the business has moved from offline old-generation brokers to become concentrated with online tech-first brokers. Business has moved from the tail to the top 15 brokers in the country.

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Published on September 03, 2020
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