‘Valuations have never been our driving factor’

“NONE OF US WANTS TO FLY IN PRIVATE JETS OR OWN YACHTS. THE MONEY INCREMENTALLY IS NOT SOMETHING THAT EXCITES US. WE ARE ALL ACCIDENTAL BUSINESSMEN”

After building the country’s largest and most-profitable pure-play brokerage, NITHIN KAMATH, founder and chief executive officer of Zerodha, has to stave off pressure from investors who want a piece of the company. In conversation with Samie Modak , he explains why he doesn't want to take private equity (PE) money and why Zerodha is not being aggressive when it comes to acquiring new clients. Edited excerpts: Did the broking industry anticipate last year’s big boom?

When the lockdown first hit, in our internal meetings we discussed the need to spend the year as a monk and be frugal. Then the tap just opened up. I don’t think anyone could have predicted what happened last year. Everyone was caught off guard. We were lucky we had scaled up before the lockdown.

Last year, the industry added 50 million demat accounts. How much market share did Zerodha grab?

These are non-unique accounts. We added about 3 million-plus, which could be 10-12 per cent of the (unique) market share.

Isn’t that less?

As an ideology we don’t offer any cashback or free stuff. Trading is a serious business and cashback isn’t something that should lure people into trading or investing. If we had to let go of our account opening fee or offered some cashback, we potentially could have grabbed a much bigger market share. But the crowd, which of burden is not in serious, terms of brings compliance in a lot and support. In a regulated environment, it can’t be a one-horse race. For derivatives, there are restrictions that no single broker can be more than 15 per cent of the open interest. There are such rules already built in. You can’t be the only broker in the country. It doesn’t work like that.

Is that the reason why you are not going all out in terms of acquiring new customers?

All the funding that happens in today's world is to acquire new

today’s customers. All the funding world In is the that to broking acquire happens new in business, the customer acquisition cost is ~3,000 per customer. If you open 1 million accounts, that’s ~300 crore. If these customers don’t generate any revenue, you are losing money as a business (unless you are in the business of raising valuations). We have consciously avoided taking that path.

NITHIN KAMATH, founder and CEO of Zerodha, tells Samie Modak the option to raise costs is on the table. Edited excerpts:

Is cost still a differentiating factor?

Today every broker is a discount broker. For us, the first six years was about products and transparency. Brokers weren’t transparent then. The last four years is just the superior product that is helping us score over others. As long as we maintain some distance, we will continue to do well. The day that distance disappears, we might have to spend money on acquiring new customers.

Do you then raise costs in the near future?

That option is on the table. The new peak margin norms are going to impact the industry in terms of trading volumes. Today, we may not be required to increase cost since we are doing well. Tomorrow, if there is a further draw-down due to some regulation, we will have to increase costs. At the current cost of ~20 per trade, there is room for only three-four stockbrokers to be profitable. If we are to increase, I am sure the competition will increase as well.

After a stellar 2020-21, what kind of growth can one expect this year?

As long as the market continues to go up, more people will open accounts. Revenuewise, this year will be at best flat, compared with last year, or we could even see a 20-30per cent dip.

Robinhood in the US is valued at $40 billion. You operate in the same space and are probably valued at $2 billion. Do you ever wonder why you didn’t develop this product in the US?

If we were to compare Zerodha to Robinhood, the technology that has taken us to build the product might look similar, but is far more complex. If we were in the US, we could have done better than these guys. But Rohinhood was there when it mattered. Building a business has so many different aspects. We were lucky to be in the right place and at the right time.

Because the US is such a large addressable market in terms of revenue pool, your valuations also go up significantly. We have been doing this business out of passion. Valuations have never been a driving factor. If they mattered, we would have taken that journey of raising capital at ridiculous valuations.

You must be getting a lot of offers. What do you do to stave them off ?

I have met every single large investor. We have told them we don’t need the money for our business as we don’t have customer acquisition costs like some of our peers. The other selling point for PES is why don’t you take some money off the table. For us, we don’t have large ambitions. None of us wants to fly in private jets or own yachts. There isn’t anything we can do with too much money. If you ask people who know me, nothing has changed in the past three years. I drive the same car, stay in the same house. The money incrementally is not something that excites us. Personally, I have reached a stage where I think material things can’t give you any satisfaction. We are all accidental businessmen.

Where do you see Zerodha 5-10 years hence?

The short term is going to be a problem. But in the longer run, growth is possible as there is a large millennial population. But one has to figure out how the millennials find jobs. Unless there are jobs for them, it is tough for the country to grow. The wealth is concentrated in this country as only a few people make money.

Your salary move has created a lot of stir.

This one was a blow-up. That clarification, however, will go to a small group of people.