After building the country’s largest and most-profitable pure-play brokerage, Nithin Kamath, founder and CEO of Zerodha has to stave off pressure from investors who want a piece of the company.
Nithin and his brother Nikhil Kamath can take home a salary of up to Rs 100 crore each and every, according to a special resolution passed by the company’s board that was once reported lasted final week. Seema Patil, Nithin’s wife who has been promoted to whole-time director, can expect the same salary deal as polite.
Nithin, in an interview to Samie Modak, explained why he doesn’t need to take private fairness (PE) money and why Zerodha isn’t being aggressive in relation to acquiring new clients. Edited excerpts:
Did the broking industry anticipate final year’s big boom?
When the lockdown first hit, in our internal meetings we discussed the wish to spend the year as a monk and that we wish to be frugal. Then the tap just opened up. I don’t think anyone could have predicted what happened final year. Everyone caught off guard.
We were fortunate that we had scaled up before the lockdown. Other folks, who had to scale up, couldn’t do it right through the lockdown as procuring servers, getting lease lines up took extremely long.
Eventually, everyone figured a way out. There were not too many naughty moments wherein a broker was once down for more than one days. Some large brokers were down for a day or two but it potentially could have been a lot worse.
Final year, the industry added 50 million demat accounts. How much market share did Zerodha seize?
Yes. These are non-unique accounts. We added approximately three million plus, which could be 10-12 per cent of the (unique) market share.
Isn’t that fairly less ?
As an ideology we don’t offer any cashback or free stuff. The trade of trading is a serious trade and cashback isn’t something that are meant to lure people into trading or making an investment. Whether we had to let go of our account opening fees or offered some cashback, we potentially could have grabbed a much bigger market share. But the crowd, which isn’t serious, brings in numerous burden with regards to compliance and improve. And at the end of the day would possibly not even add anything meaningful with regards to revenues.
In a regulated trade, you’ll be able to’t be a one-horse show. We have a vested interest in having our competition also turn into big. Like how the RBI has kept this restriction of 33 per cent on UPI transactions. In a similar fashion, in derivatives there are restrictions that no unmarried broker will also be more than 15 per cent of the open interest. There are such rules already built in. So you’ll be able to’t be the only broker in the country. It can’t work like that.
Is that a reason why you aren’t going all out with regards to acquiring new customers?
The strategy has been the same from day one. That we can cater to serious folks. You don’t want people who find themselves clueless and not serious approximately trading or making an investment as then your improve costs go up significantly. Then it is vitally hard to work as a zero-brokerage.
All of the underwriting that happens in today’s world is to acquire new customers. In the broking trade, the customer acquisition cost is Rs 2,500-3,000 per customer. So whether you open a million accounts that’s Rs 300 crore. Whether these customers don’t generate any revenue, you are losing money as a trade immediately. It then doesn’t make any trade sense. Unless you are in the trade of raising valuations. We have consciously taken a call of not taking that path. So there’s no point increasing the user base whether they don’t seem to be adding any revenue. For us, not giving cashback right through account opening is a great check to see whether the person is serious or not.
What could be the active client base for Zerodha and the industry?
For us, the active base is 3.7 million out of the complete of 5.5 million. It is going to be much less for the industry. Perhaps unmarried digits with regards to percentage. For the newer players it is going to be 20-30 per cent of the complete client base. Over 80 per cent of the trade comes from active traders. The activity picks up when the market is volatile. So revenues are driven by volatility and the new account opening more by market behaviour or right through large IPOs.
Is cost still a differentiating factor?
Today each and every broker is a reduction broker technically. For us, the first six years, it was once approximately products and transparency. At that time, brokers weren’t translucent. Final four years is just the superior product that is helping us score over others. So long as we will care for some distance we will continue to do polite. The day the distance disappears, we too might have to spend money in acquiring new customers.
The only reason we will get absent by not spending money on customers is because the product does the talking. Like Tesla doesn’t have to market, as this can be a superior electric car. But the day when others make a similar car, then they are going to be forced to go and start marketing. As then it is going to turn into who markets better wins the race.
Do you then raise costs in the close future?
That option is on the table. The new peak margin norms are going to have an effect on the industry with regards to trading volumes. For us to make up for the dip the only way to us is possibly increase the cost a little. Today, it is probably not required as we are doing polite. The next day to come, whether there’s a further draw down because of some regulation, we potentially should increase the cost by a little. This low-cost trade makes sense at a sure scale. Just not in broking but in aviation or e-commerce. You want to be at a sure scale to make money. That scale is achieved by only one or two players in any industry. We will be able to generate profits as we have crossed that barrier. At the current cost of Rs 20 per business there is space for only three or four inventory brokers to be ecocnomic. So whether we were to increase, I am certain the competition would increase too.
After a stellar FY21, what sort of growth can one expect this year?
It is going to in large part depend on volatility. Will this year be as volatile as final year? My answer is no. So you want to see a big dip in volumes. So long as the market continues to go up, more people will come and open accounts. Revenue wise, this year will be at-best flat as in comparison to final year or we could even see a 20-30 per cent dip.
Robinhood in the USA is valued at $40 billion. You function precisely in the same space and are probably valued at $2 billion. Do you ever wonder why I didn’t develop this product in the USA?
While people look at the trading app, the underlying aspects are a lot more complex. What powers all this—the speed, consistency and having the ability to scale. The reason Google is Google is because the underlying tech that powers the search box. India is much more complex than the USA for building that tech. In the USA, there’s no concept of demat accounts, settlement etc. All of that is internal. A broker isn’t dependent on a third-party. In India, we are dependent on exchange infrastructure.
The United States with regards to tech is a much simpler trade. Whether we were to compare Zerodha to say Robinhood, the tech that has taken us to build the product might look similar user interface wise but our underlying tech is much more complex
Whether we were in the USA, we could have done better than these guys. It’s all approximately ‘the correct place and correct time’. Today, there are five other brokers in the USA who have a better having a look platform than Robinhood. But Rohinhood was once there when it mattered. Building a trade has such a lot of different aspects. We were fortunate to be at the correct place, correct time in India. They were fortunate to be at the correct place, correct time in the USA.
In the USA when you hit it–because it is the sort of large addressable market with regards to revenue pool– your valuations also go up significantly. While India has numerous population they people with money aren’t in reality not too many. As a broking trade you’ll be able to only make money whether there is enough money with people.
Also, we have been doing this trade out of ardour. Valuations have never been a driving factor. Whether it was once, we would have taken that journey of raising capital at ridiculous valuations and all of that. So that you could answer your question, it doesn’t in reality bother me.
I am certain you will have to be getting numerous offers. What do you do to stave them off?
I have met each and every unmarried large investor. We have told them that we don’t need the money for our trade. You’ll’t just raise money because someone is giving you. We don’t need money as we don’t have customer acquisition costs like some of our peers. The other selling point for private equities (PEs) is why don’t you are taking some money off the table. For us, we don’t have large ambitions. None of us need to fly in a private jet or own a yacht. There isn’t anything we will do with too a lot more money. Whether you ask people who realize me, nothing has changed in the final three years. I drive the same car, and stay in the same house. The money incrementally isn’t something that excites us.
Is it something to do with Bengaluru that the entrepreneurs are so modest?
I used to business the market. A inventory trader is as money chasing a guy as you’ll be able to find on the earth. I had my fabric goals in life. Once I achieved them, I realised there’s no end to this. There is all the time a better watch, there is all the time a better car. Personally, I have reached that stage where I think fabric things can’t provide you with any satisfaction. Wealth concentration is a problem. So we wish to find ways to hand out wealth and make a difference. That’s why we are giving most back through the Rainmatter Foundation. We are all accidental businessmen. We aren’t in reality business-business like.
Where do you see Zerodha say 5-10 years down the line?
We have bigger problems in the country. We wish to figure out ways to generate employment. There are just a few people where wealth is concentrated and only some people in this country make money. While there is all this talk approximately India’s per capita going to $4,000 in 10 years, in the short term I am pessimistic. With the way our assets are being valued while the economy is nearly in a stand still. I think the markets are at elevated levels. The short term is going to be a problem. But in the longer run growth is conceivable as there’s a large millennial population. But one has to determine how the millennials find jobs. Unless there are jobs for them it is hard for the country to grow.
Your tweet questioning the market rally drew numerous flak
That day I used to be disturbed. Someone I knew died. I used to be being dull. I regretted it after writing it. We all imagine in conscious capitalism. Unfortunately, the mode of capitalism on the earth isn’t that. It is rather unconscious. Do we need growth at any costs is the question one needs to ask, which isn’t being asked
Your salary move has created numerous stir. But you have elucidated the rationale
This one was once a proper blow up. It roughly reached all parts of the country. The idea isn’t to take as much. Just have a resolution in place. That clarification, then again, will go to a small group of people.