Zerodha was offered blank cheques last year: Founder-CEO Nithin Kamath

Kamath says the right way to value online brokerage is 15-20 times earnings which would peg the bootstrapped start-up's valuation at over $3 billion

Zerodha is an outlier among tech unicorns in the country as it has recorded 2.6X growth in net profit to Rs 1,122 crore in FY21 even as revenue grew 3X to Rs 2,728 crore – at a time when most other technology start-ups are far way off from profitability. Founder and CEO Nithin Kamath told Deepsekhar Choudhury in a conversation about defining choices that the company made in its early years, the perils of PE/VC funding for start-ups, and the road ahead for the company. Edited excerpts:

Looking back, what was the defining choice that has helped you cross this profit benchmark  of Rs 1,000 crore – first mover’s advantage, right business or being bootstrapped?

I would say it was all of those things. But most importantly, if we spent as much as our competitors do in acquiring a customer, we would not have been a profitable business – nine million customers multiplied by customer acquisition cost would have been equal to all the profits we have made to date. 

Has the 3X revenue jump of FY21 been sustained in FY22?

As is the case in any other business, I think 20 per cent of users account for around 80 per cent of revenues for us. We make money when active traders make a lot of trades in a volatile market. We would probably grow only 25-30 per cent in FY22 because of multiple factors – the markets were much more volatile in FY21, the surge of new users has flattened in the last year or so and we are a much bigger business now.

With the market sentiment worsening, it might also turn out that we grow slower in FY23. This is something that I have been always saying – we do not have any control over the most critical element in our business i.e. how the market performs.

It is well-known that you have turned away venture capital investors in the past. Don’t you think funding could help you grow even faster or expand other verticals quickly?

From 2014-15, every year the cheque sizes being offered by investors have only increased. But the reason there are so few profitable tech start-ups is that they are always trying to grow – not only in their core offering but also in parallel businesses which consume a lot of capital. It is rewarded in the VC world. 

Last year, we were also offered blank cheque investments. While it is tempting to take the money, you will then have to build the business in a very different way. We have never had any revenue or growth targets which you are obligated to chase once you take external funding.

How would you value Zerodha given that a few loss-making tech start-ups were being valued at 80X or 100X revenues until recently?

I think a good thumb rule to value Zerodha would be 15 or 20 times earnings. We followed that both in 2020 and 2021 while doing our employee stock option plan (ESOP) buybacks and valued the company at around $1 billion and $2 billion, respectively. Following the same rule, we might be valued at over $3 billion now.

What is the plan for the next 5 or 10 years for Zerodha?

Until now, the problems we have solved mostly are giving a good platform to people with an intent to buy or sell securities and also around investor education. But that is only a small piece of the overall problem. We still have to get people to do better with their money and that has not been solved fully yet. 

The Nudge feature, which we use to alert people against bad trading behaviour, may take the shape of an advisory platform some time in the future. With our asset management company (AMC) which is still awaiting some approvals, we would like to offer passive products that are more bang for the buck. 

Don’t you have any plans to offer loan products like buy now, pay later or other forms of unsecured credit – like most fintechs are doing?

Philosophically, the core team here does not believe in lending people so that they can buy something they don’t need to have. While it is very important for the economy in a capitalist world, it is not very good for the individual himself.

Everyone’s ambition to become a bank at some point is because of the low cost deposits which can then be used to lend. The reason everyone is getting into lending is they are not able to make money from their highly-discounted core businesses. 

We do have the loan against securities product up and running, but we try not to talk about it much or push it to our customers. It is only when they ask about it or seek to transfer their account to another platform for a similar product that we offer it.

Some of the new-age companies that went public last year are getting battered. Do you think they are hitting irrational lows after achieving irrational highs?

It is very difficult to call out a bottom in a market like this when people are concerned about what impacts the Fed rate hikes or bond markets will have. The fundamental problem with those businesses remains – they still need more capital to grow and sustain. However, they seem to be still doing well on their growth story which might mean that it could be a good idea to buy on dips.