Zerodha's Nithin Kamath Sets the Record Straight on Valuation Speculations

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Zerodha, a prominent player in the stockbroking industry, has recently reported a remarkable 39% surge in both net profit and revenue for FY23. This outstanding performance has stirred conversations across various social media platforms, prompting speculation about the company's valuation. In response to these speculations, Nithin Kamath, the CEO of Zerodha, took to X platform (formerly Twitter) and dismissed these assumptions, emphasizing that they significantly exceed reality.

Kamath stressed that Zerodha's core team has consistently disregarded the concept of "notional valuations," recognizing their dependence on the unpredictable fluctuations of market conditions. Instead, their unwavering focus has been on establishing a resilient business model that doesn't rely on external capital. Notably, Zerodha has never sought funding from venture capital firms, a strategic decision that has proven beneficial, according to many experts.

Contrary to common perceptions, Kamath underscored the inherent cyclicality and high-risk nature of the broking industry. He pointed out that market bull runs often create an illusion of perpetual growth in participation and activity, which can be misleading. Zerodha's FY23 revenue reached Rs 6,875 crore, up from Rs 4,964 crore in FY22, while its profit for FY23 rose to Rs 2,907 crore compared to Rs 2,094 crore in the preceding year.

Kamath articulated, "Stockbroking and capital market businesses are cyclical and high-risk." He also humorously mentioned that the Zerodha team often contemplates the possibility of a "50% dip in activity and revenue if markets take a sudden downturn." He even jokingly remarked that a single regulatory circular could have a similar impact on their revenue.

In terms of growth, Kamath indicated that they foresee potential growth in the range of 10% to 15% in the long run, factoring in the inevitable market drawdowns. Zerodha is actively diversifying its portfolio through initiatives like Rainmatter, public holdings, and substantial investments in businesses such as AMC (@ZerodhaAMC), insurance advisory (@joinditto), and loan against securities (@zerodhacapital). While these endeavors currently contribute modestly to revenues, Kamath is optimistic that they will bolster long-term growth.

Kamath asserted that surpassing the 10%-15% growth threshold would contradict the core principles at Zerodha, such as maintaining a no-spam approach, eschewing revenue or sales targets, refraining from tracking customer data to drive engagement, and avoiding customer acquisition expenditures. He views these principles as the foundation of their competitive advantage and is reluctant to compromise them.

Therefore, Kamath suggested a more reasonable valuation for Zerodha at around Rs 30,000 crore, which translates to 10-15 times the company's profit after tax (PAT), rather than the inflated estimates of Rs 1 lakh to Rs 2 lakh crore circulating online.

Kamath expressed pride in Zerodha's role in the financialization of India, citing that their customers collectively hold over Rs 3 lakh crore worth of securities in their demat accounts. He also highlighted the company's financial stability, with their net worth accounting for 30% of customer funds and zero debt, making them one of the safest brokerage firms in India and potentially globally.

Acknowledging the risks posed by emerging competitors with superior products and changing market dynamics, Kamath affirmed that Zerodha possesses the agility and adaptability needed to pivot as necessary. Despite the concentration of revenue from F&O (Futures and Options), he remains confident in their ability to respond effectively to challenges and changes in the industry landscape.