Decoding stunning rise of broking Goliath Zerodha | The Financial Express

Decoding stunning rise of broking Goliath Zerodha

Despite the numbers, Zerodha has warned that it will be unable to match the current revenues and profitability for a few more years

Goliath Zerodha , market
Out of the 45 players in the listed space, only two — ICICI Securities and Motilal Oswal — had profits of more than Rs 1,000 crore. (IE)

By Siddhant Mishra

Bootstrapped stock brokerage firm Zerodha’s remarkable growth could, perhaps, be a case study. Soaring revenues and profits of the discount brokerage firm would make its competitors see red, or turn green with envy.

Sample this: The 45-strong listed broking industry’s net profits in FY22 stood at Rs 3,660 crore. Zerodha, though unlisted, had a net profit of Rs 2,094 crore in the previous fiscal — almost 60% of the entire industry. It clocked revenues of Rs 4,964 crore in FY22 while the entire listed industry reported revenues of Rs 16,890 crore.

The listed broking space includes players who have spent decades in the business, such as Motilal Oswal and subsidiaries of big banks such as ICICI Bank and Kotak Bank. Out of the 45 players in the listed space, only two — ICICI Securities and Motilal Oswal — had profits of more than Rs 1,000 crore.

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Zerodha’s direct competitors in the online broking space have had it worse. Rival Groww’s losses in FY22 stood at Rs 350 crore. While another competitor 5Paisa (listed) is profitable, it reported a profit of just Rs 13.74 crore.

So, what makes new-age brokers more profitable? The obvious answer is leaner set-up and little/no physical infrastructure. Said Prakarsh Gagdani, CEO of 5Paisa: “Bigger players charge 3x the brokerage for the same ticket size. Given that newer players have majority of clients on-boarded in the last two-three years, they have a higher proportion of active clients.”

What makes Zerodha even more special? The company says it has a “lean tech infrastructure, built on top of high-quality free and open source software that we adopt and maintain in-house. We avoid external SaaS/vendor dependencies and lock-ins and self-host systems”.

A senior executive of a brokerage, who did not wish to be named, said despite the fall in new account openings, Zerodha’s growth has been organic and it spends nothing on marketing. On the contrary, Groww and Upstox have had huge marketing spends, which massively increase the cost of customer addition. Besides, Zerodha is a bootstrapped firm with no debt on its books.

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He added that Zerodha charges to onboard new customers, and its prop business contributes 10% to its revenue. Further, close to 35% of the income is treasury income. According to Zerodha, its portfolio has a 33% exposure to bank FDs, 32% to stocks, 13% to G-Secs, 9% to tax-free bonds, and 13% to gold bonds.

Sougata Basu, founder of investment app CashRich, pointed out that Zerodha’s overall salary expenses are lower than those of its competitors. “If you remove founders’ salaries, then the true cost of operations can be seen.”

He added that professional traders with much higher trading volumes prefer Zerodha because of its technology platform and risk management practices. The new stock trading apps have mostly millennials with less capital for trading.

A senior executive of a traditional broking house said: “Let’s say a person wishes to buy Rs 1 crore worth of shares of a company. They could pay the Rs 1 crore upfront, or pay Rs 20 lakh and get the balance Rs 80 lakh from the brokerage, for which the broker will charge interest. The third aspect is demat transaction charges,” said the executive.

“These are charged based on the percentage of the value sold or bought. For example, if you’ve bought Rs 5 crore worth of shares of a firm, they could charge Rs 3.5 as demat charges on that trade. Even though it’s a small percentage of the Rs 5 crore, it’s still higher than what you are paying to maintain the demat account,” he said, adding that while the ‘Rs 20 per executed order on trades’ is what is marketed, what we don’t see is the demat account transaction charges, which are like hidden ones.

Despite the numbers, Zerodha has warned that it will be unable to match the current revenues and profitability for a few more years, owing to a dip in new account openings, drop in the bull market momentum, and also because the firm has temporarily hit a plateau in terms of the target market, customers who have sufficient savings to invest in the markets and an ability to generate revenue for the brokerage. The business will also most likely to get impacted by the changing regulatory landscape, thanks to which inter alia the working capital requirements are rising.

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First published on: 01-02-2023 at 04:00 IST