Zerodha’s Nithin Kamath says revenues may fall 40% in FY24

Arc Notes

• India’s largest stockbroker is bracing for a sharp revenue drop in the new financial year, 2023-24, as investors switch to safer assets like bonds and gold, founder Nithin Kamath tells The Economic Times.
• Kamath said new account openings were down 50-60% from their peak, with March 2023 being the slowest month since March 2020.
• Zerodha’s unaudited numbers peg its revenues and net profit for FY23 going up 20% to Rs 5,957 crore and Rs 2,513 crore, respectively.
• In March 2020, the company reported operating revenues of Rs 938 crore. The figure has increased about 6 times since then.
• Zerodha has 6.4 million active users and an overall base of 11.2 million.

Arc Analysis

Online brokerage Zerodha, whose revenues and net profits surged over six times following Covid-19, believes the good times may end if the market doesn’t snap out of its funk.

“It is hard to say what will happen. But if the market continues like this, there will be a 30-40% dip in revenues. New account openings are already down 50-60% from all-time highs,” founder Nithin Kamath told The Economic Times.

He gave a nod to one of the investment industry’s oldest rules: “Past performance is no guarantee of future results.”?

This is not the first time Kamath has projected lower revenues or a slowdown. In April 2021, he said the company’s income would fall by 30% for the financial year ended March 2022. It, however, soared by 82%.?

Industry watchers also believe that the financial year 2023-24 may be rocky. But they cite another factor weighing on Zerodha’s numbers: increasing competition. Platforms such as Groww and AngelOne are among its main rivals. New VC-funded startups like wealth platform Dezerv and stockbroking app Dhan are also capturing a slice of the market.

AngelOne had 12.5 million clients as of December 2022, more than Zerodha. Its revenues for the nine-month period ended December 2022 were Rs 2,190 crore, much lower than Zerodha. AngelOne, though, grew faster at 36%.?

Zerodha’s count of active clients on the National Stock Exchange has declined marginally from 6.6 million in June 2022 to 6.5 million in January 2023. Groww’s numbers have shot up from 4.4 million to 5.2 million. AngelOne has 4.2 million active users instead of the 4 million earlier, according to a recent report by investment group CLSA.

“But the clients of these platforms are different. While Zerodha has more active market participants who trade a lot more, Groww has more new-to-investing users, who can be sold mutual funds and loans,” said an industry executive.

An Enviable Position

Zerodha can afford to signal a slowdown. Unlike the founders of Tiger Global-backed Upstox and Sequoia-funded Groww, Kamath doesn’t need to answer to private investors. As the owner of a bootstrapped business, he can keep expectations around growth subdued.

There is no pressure on Zerodha to justify a valuation for the next funding round or give investors an exit.?

Groww is valued at $3 billion and Upstox at $3.4 billion. Zerodha has kept its internal valuation at a conservative $2 billion, even though its revenues are 10X higher than those of its two competitors.?

“They (Zerodha) have set a bit of a pessimistic outlook for the industry over the years. This makes it difficult for venture-funded companies to raise money,” said another industry executive.

Kamath’s comments come as more players, like PhonePe, prepare to enter stockbroking. Payments unicorn PhonePe is in the process of raising $1 billion.

Global Snapshot

Globally, prominent discount brokers are facing significant challenges after the pandemic-time boom. Robinhood, for instance, saw its topline fall by 25% to $1.36 billion for the year ended December 2022. It listed on Nasdaq in July 2021 at a valuation of $32 billion. The current figure is $9 billion, a plunge of about 75%.

“If Robinhood is trading at eight times the revenues, then it will be hard for Indian companies to justify a higher valuation multiple, given the level of competition in the market. This also means that they will have to boost their revenues at least four to five times to grow into their valuations,” said a venture-capital investor in the fintech space.

Written by Madhav Chanchani