As India’s largest brokerage firm Zerodha turns ten, it is looking at unlocking liquidity for some of its senior and long-serving employees in the absence of any plans to raise funds or go public.
Nithin Kamath, founder and CEO of Zerodha, in a chat with ET’s Alnoor Peermohamed and Ashwin Manikandan, breaks down the company’s future, its self-certified $1 billion valuation and his take on the highly volatile capital markets.
Tell us about Zerodha’s ESOP buyback programme and the rationale behind it?
It’s been a decade since we started. We have not raised any capital and don’t have any intention to raise for the next few years. So, we thought this was a good time to give liquidity to people who have been around with us for a while. It is expected to pay-out around Rs 60-65 crores to 700 employees. While 700 will benefit, 50-60 of these employees will benefit more. It also gives our people more confidence.
How did you arrive at the $1 billion valuation?
With our current profitability and price-to-equity margins we arrived at this valuation which we feel is conservative and fair. We looked at ICICI Direct which is our closest publicly-listed competitor and thought we should be valued on similar lines. Potentially, we could be valued a lot more than this, but since we are putting our own money into this buyback, we had to be conservative.
What does investor sentiment look like after coming out of a two-month lockdown?
Right now is the most active the Indian stock market has been since 2007. Sure, the sentiment of people who were holding stocks is down, but we are seeing a new breed of first-time investors entering the market. There is less panic because the fall wasn’t as bad as it was first expected. Even when the ‘big-fall’ happened, the leverage on the economy was not bad. Back in 2008, every single person was leveraged double or triple their margins and hence it was a double whammy. There has been at least a 40-50% bump in investment activity in the first quarter of the fiscal compared to last year.
How is this surge in investment activity reflected in user engagement on Zerodha’s platform?
Until January, we were seeing anywhere between 70,000 to 100,000 customers signing up on our platform every month. In March we opened 300,000 new accounts. Right now, we are opening between 150,000 to 200,000 for April, May, and June. Most of these users are first-time investors, we know this as we have done their KYC for the first time. The average age on our platform which was 32 last year has dropped to 28. This crowd is not coming in and putting a load of money, the average trade size for equity investment has dropped down to Rs 15,000 down from Rs 25000. But it is good for the ecosystem, we feel.
What are some of the factors that are driving up investments in capital markets and can this sustain?
One of the enablers has been fixed deposit rates, which have fallen quite a bit. It’s triggering people to ask, what’s the point of keeping money in the bank? I think that those interest rates are going to stay low for a while and that’s pushing people to look at stock markets as an alternate way to invest.
The problem is that out of 130 crore Indians, there are only 5 crore who file income tax and 2-3 crores who make more than Rs 40,000 per month. So, if your audience is just 2-3 crore Indians, it’s hard to see how the industry can keep adding 2 or 3 lakh new users every month.
Competition in the stock trading space is heating up with new players like Groww also targeting the first-time investor? Will Zerodha eye more seasoned investors?
One place we haven’t been very successful is in attracting the 40-45-year-old crowd. This crowd is already used to investing, but with a known name like ICICI or an HDFC where the credibility factor is high. You can’t change that with marketing or advertisements. But building a stock trading platform is a complex business, unlike say building a mutual fund platform, and that’s why a lot of people who have been talking about entering the market are not able to. Our product has been here since 2014 and we have a 6-7-year advantage over competitors.
What are some key upgrades in the works for Zerodha’s platform?
I think one of the moral issues I have with the platform is that people come and do stupid things and they lose money. Today if you come and buy a penny stock on Zerodha, we slow you down. We say that you know this is a penny stock and they are risky and can lose you a lot of money. So more of that will happen.
Is an IPO the eventual goal for Zerodha?
Other than providing liquidity for the team, which we’ve now decided we’ll anyway do by carving that out from the profits we make, an IPO wouldn’t solve anything for our business. Once you IPO, you just have this huge compliance burden, and that generally slows businesses down. I generally spend one hour every week or every fortnight with my chartered accountants to figure out what’s happening, but if I IPO, my life will become just about that.
When you applied for the asset management company (AMC) license, you said mutual fund products need to be reimagined. What did you mean by that?
If you’re a layman and decide to buy a mutual fund, what do you get to see? You see large-cap, mid-cap, small-cap, some platforms show you a star rating, but I don’t think it’s helping people decide. There’s an opportunity in India to be a passive-only fund. Like right now I know a retirement fund is a good idea to have. We will have to think through and come up with such ideas.