With stockbroking major Zerodha posting nearly 39% jump in net profit and revenue in FY23, social media platforms have been abuzz with speculations about its valuation. On the X platform (formerly Twitter), Zerodha CEO Nithin Kamath on Thursday brushed aside the speculations and said the assumptions "are way higher than reality".
He said Zerodha's core team never really bothered about "notional valuations" because they are based on the vagaries of the market conditions. He said the focus at Zerodha "has always been on building a resilient business, which means never having to rely on external capital". Zerodha has never taken funding from venture capital firms, which many experts said has kept it in good stead.
Kamath said contrary to common perception, broking industry is "cyclical and high-risk". Bengaluru-based Zerodha on Tuesday reported revenue of Rs 6,875 crore in FY23 as compared to Rs 4,964 crore in FY22. Its FY23 profit rose to Rs 2,907 crore as against Rs 2,094 crore in the year-ago period.
"Stockbroking and capital market businesses are cyclical and high-risk. Almost every bull run in the markets creates the illusion that somehow participation and activity will keep going up forever," he wrote on X.
Zerodha has been a massive beneficiary of the surge in retail participation in 2020 when markets crashed to multi-year lows due to fears over Covid pandemic. On Thursday, Kamath said Zerodha's team keep discussing that they could see a "50% dip in activity and revenue if markets fall in no time".
"And yeah, one circular is also enough to bring down our revenue by more than 50%," joked Kamath.
"We think that at the scale we are at, we can potentially grow by 10 to 15% in the long run, factoring in the drawdowns that are guaranteed," Kamath added.
"We are trying to diversify with everything we are doing in Rainmatter, our public holdings, and with large investments in the AMC business (@ZerodhaAMC), insurance advisory (@joinditto), and loan against securities (@zerodhacapital). Today, the revenues from these businesses are not significant, but hopefully, they will go up and help us maintain long-term growth," he said.
Kamath said growing faster than 10%-15% will mean going against "core philosophies at Zerodha".
"Why only 10 to 15%? As I mentioned in our post recently, the problem with trying to grow fast is that it is very hard given some of our core philosophies at Zerodha, like no spam, no revenue or sales targets, no tracking customer data to push people to do more, no spending on acquiring customers, etc. I think our moat is the philosophy, and without it, we could lose out in the long run," he said.
Thus, he said valuation of Zerodha could be Rs 30,000 crore, which is 10-15 times of PAT, and "not the Rs 1 lakh to Rs 2 lakh crores some folks online were guesstimating".
"We are incredibly proud of the fact that our customers hold over Rs 3 lakh crores of securities in their demat accounts. We are happy that we are playing a role in the financialization of India," posted Nithin Kamath on X on Tuesday while announcing the firm's results.
"Our net worth (our own capital), which comes up to 30% of customer funds, in addition to the zero debt that we have as a business, would make us one of the safest brokerage firms to deal with in India and maybe even globally," wrote Kamath in a blog post.
He also said that Zerodha is prone to risks like newer competitors with better products, change in market conditions but said the firm is nimble enough to 'pivot'.
"The biggest risk is that the concentration of revenue from F&O also means that any regulation or change in market conditions or newer competitors with better products can reduce retail trading activity in F&O at Zerodha and significantly impact the revenue. But given our net worth, frugal operations, customer trust, and agility as a business, we are well placed to pivot whenever required," wrote Kamath.