Zerodha: Discount broking pioneer Zerodha says concept no longer relevant

Mumbai: Zerodha, which pioneered discount broking in the country a decade ago and has gone on to become the largest player with over 6 million customers, has said the concept of discount broking does not mean anything today as everybody is playing the same card and the only differrentiators are the product and services. The Bengaluru-based brokerage that began operations in August 2010 selling the no/low brokerage card has more than doubled its net income and revenue to Rs 1,000 crore and Rs 2,500 crore, respectively in FY21, a top official has said.

The bootstrapped startup, which was launched by brothers Nithin and Nikhil Kamath with their own funds and has zero debt, had Rs 1,093 crore in revenue and earned a profit of Rs 442 crore in FY20; its net income in FY19 was Rs 350 crore and Rs 250 crore the year before — a rare feat in the startup universe where promoters burn cash like there is no tomorrow.

Of the over 6 million customers, more than 3.7 million were added in FY21 alone, when the market was on a song, rallying over 68 per cent since the March 2020 bloodbath wrecked by the pandemic.

The record market rally from the second half of the year, after taking over 33 per cent in March alone, had over 20 million investors entering the market, of which more than three-fourths are first time investors.

In 10 years, Zerodha Broking leads the industry by a wide margin with over 6 million customers, of which 3.7 million were on-boarded in FY21 alone, while another discount brokerage Upstox has a little over 4 million customers.

Among the bank-led and traditional players,

still leads with 5.4 million customers, followed by Angel Broking (5 million plus), HDFC Securities (2.72 million), and Kotak Securities (2.26 million).

“The term discount broking doesn’t mean anything anymore. Today, pretty much all brokerages have some kind of a discount pricing model and the model on its own isn’t important,” Nithin Kamath, the founder and chief executive of Zerodha, told in an interview.

According to him, the reason why the discount model works is because of the cost efficiencies — something any other startup founder would love to do but cant do. Also, while all others are heavily debt or equity funded, Zerodha has none of it and the three promoters — brothers Nikhil, Nithin and Nithin’s wife Seema — will be taking home more than Rs 300 crore this year in salaries, allowances and bonuses, according to media reports.

“One of the biggest advantages is that we don’t need to have a physical presence across the country and hire people to man those branches. And being fully digital also brings in tremendous cost and operational efficiencies,” Nithin said.

On the success of the digital model, he said his biggest learning is the need for making things easier for investors and maintain absolute transparency. Another big realisation is that in spite of all this digital adoption, just about 20 million invest in the markets, Nithin added.

He also attributed the success of the fully digital brokerage model, which dethroned their traditional peers, to the simplification of investing and making it more accessible to everyone.

The availability of cheaper smartphones and cheap mobile has also been a tailwind and with people working from home, they’ve had more time on their hands in general, he said. People have used this time to take stock of their personal finances and start saving, investing, buying insurance etc and then icing on the cake was the markets doing well, he noted.

On the revenue and profitability part, Nithin said, “We closed FY21 with a revenue of around Rs 2,500 crore on which we earned a net income of Rs 1,000 crore.”

But he is not ready to proffer an outlook for the current on both the numbers saying that “our fortunes are completely dependent on how well the markets do. So, the revenue will depend on whether this bull run continues. We are quite sanguine about this but we don’t expect to do as well as we did last year”.

On being the largest player in such a short span, he said the brokerage has opened close to 3.7 million accounts in FY21, taking the overall numbers to over 6 million. Around 4 millions of them have securities in their demat accounts and the active clients of June 30 were 4.3 million, he said.

The customer on-boarding trends continued somewhat in Q1, opening close to 1 million new accounts.

He said 70-80 per cent of the 3.7 million new customers are in the 25-35 age bracket.

According to the data from the National Securities Depository, and Central Depository Services, a record 14.2 million new demat accounts were opened in FY21, a near three-fold rise from the previous year’s 4.9 million, while there were also millions of new investors into mutual funds.