Business updates: 14 years of Zerodha – The Pivot?

We turned 14 on August 15th. The past 12 months have been quite volatile for me personally. Nikhil and I lost our dad in December, and I was hit by a stroke immediately after that in January. I am now feeling better and have recovered about 85%, but I’m still struggling with my speech and writing skills and am usually tired by early evenings. The reason for the stroke could be any of the following: the stress of dad passing away, less sleep, dehydration, and possibly contracting COVID during that time. But yeah, I guess, as they say, what doesn’t kill you makes you stronger. 🙂

In last year’s post, I talked about how we had not done enough on content, especially video. This was at a time when the world was shifting, and people were moving to consume content via video, mostly through YouTube. We have made significant progress this year and are producing best-in-class content across various categories. The best part about all of this is that all of this is organic without any hidden agenda.

• Zero1 by Zerodha.
• Varsity on YouTube and Instagram.
• Varsity Live.
• The Daily Brief—this is among the top 5 business podcasts in the country.
• All our product videos on the Zerodha YouTube channel.
• Zero1 Network by Zerodha — a network of channels we are helping.

We understand that most of this content is currently in English, but we have begun production of content in Indian languages as well. We just launched Zero1 and The Daily Brief in Hindi. 

The biggest challenge for the business as we age is to offer the best of both worlds: everything that is helpful for experienced investors and traders while keeping the platform simple enough for first-time users, who also become experienced over time. Making this transition seamless on a single, simple product involves striking a delicate balance between usability and features for large, diverse demographics. It is a business, product, design, and engineering challenge that we enjoy and take seriously.

We have always prioritised quality over quantity with whatever we publish, no matter what the format. That meant that unless it was useful to our customers, we didn’t publish anything. But over the years, many of our posts, which used to rank higher in Google search results, no longer do. In our quest to be spam and junk-free, we may have compromised on basic SEO practices. Good content is of no use to anyone if it isn’t also accessible. We are now working on it, and hopefully, you’ll see our high-quality resources for stock market-related higher in the results. 🙂

Video AMA

Recently, we got together to ponder over questions and challenges like this, in addition to answering questions received on our social media channels from clients. Check out the AMA (Ask Me Anything) video.

Account opening

While our market share of active accounts (clients who traded at least once in the year) is good, it has decreased over the last two years. We think this is due to the fact that we were the only ones to charge account opening fees, which we have now made free. We never induce clients to take a trade by sending push promotional notifications based on random market movements or other things. In fact, we have a policy to only send a maximum of 3 product-related push notifications in a month. A lot of the recent growth in new users has come from tier 2 and tier 3 cities, so we are hoping our educational content and outreach in Indian languages will make it easier for people to discover us and start investing.

Equity and MF under custody

Zerodha’s total current assets under custody, i.e., the total assets held in our demat accounts, stand at Rs 5.66 lakh crores. By the way, this equals ten crore rows of holdings. The credit goes to the roaring bull market, massively increased retail participation, and a super hot IPO market, and the trust of our clients. The exciting bit about this number is that our customers as a whole are sitting on an unrealised profit of more than one lakh crores.

Customer ratings

The customer ratings of interactions with our support team have been largely steady. The dip you see in ticket ratings doesn’t really mean much due to the much smaller sample of data. The number of calls rated is six times higher than the number of tickets rated. You can rate support tickets you have opened directly on the support portal with a single click. We encourage you to rate tickets, which we take very seriously for improving our customer support interactions.

Platform or tech Issues

We are the only broker to transparently publish full disclosures of any technical issues on our website. These include incident reports and full RCA (Root Cause Analysis) reports that we share with the regulators. While improving the stability and reliability of our systems is a 24×7 focus including continuous R&D, in large complex systems like the ones in capital markets, things do go wrong sometimes. However, the way we have architected our systems, any service degradation is contained in specific areas, minimising impact on the overall trading platform where millions of clients are logged in. The above table shows the extent of service degradation issues we have reported to the regulators in the past year. While even the tiniest of issues are extremely unfortunate and regrettable, examining the industry-wide complaints data that the regulators publish monthly reveals that we have some of the highest service records and lowest incident rates in the industry, indicating a different picture than what is generally seen on social media.

Financials

We are in the midst of excess. As they say, it’s good to be in the pick-and-shovel business when everybody is digging for gold.

 

As you can see, we continued our tremendous financial track record, and FY 23/24 was a fabulous year in terms of both revenues (Rs. 8320 crore) and profitability (Rs. 4700 crore). The profits don’t consider the ~Rs 1000 crore of unrealised gain, which will show in our financials. Given the profitability of the last three years, our networth is almost ~40% of the customer funds that we manage. It makes us one of the safest brokers to trade with. 

But as I mentioned in the post last year, many risks were around the corner, and they all seem to be materialising simultaneously. We are already seeing revenue and profit plateau, and we are bracing for a big revenue hit later this year.

1. SEBI’s true-to-label circular will go live on October 1, 2024. We expect a 10% revenue dip.
2. SEBI recently published a consultation paper on index derivatives that was open to public comments. We expect this paper to materialise into regulation sometime in the next quarter. Index derivatives today are a significant portion of our revenue, and any change will impact us. We anticipate a 30% to 50% drop in revenue. Yeah, this is that regulation that I was referring to in last year’s post that can be … 🙂
3. STT goes up from October 1st, 2024. Although the impact on options trading is minimal, we anticipate a significant impact on futures trading.
4. The amount of Annual Maintenance Charges (AMC) we collect changes with the new Basic Services Demat Account (BSDA) thresholds set by the regulator. Essentially, we can charge full AMC from customers with a demat holding of Rs 10 lakhs and more, as opposed to 4 lakhs today. Combined with us removing the account opening fee, this would be a meaningful drop in revenue.
5. We have run a decent-sized partner and referral program from the very beginning relying on customer word of mouth. Customers referred other customers, and we shared a small percentage of the brokerage as a commission. We have had to stop these payouts because the exchanges issued new guidelines saying a payout can be made only to Authorised Persons (AP) registered on the exchanges. Due to this, thousands of people referring will now be reduced to only a few registered APs, affecting growth.

In addition to all of this, the risk of the bull market ending at any time and a significant drawdown from all the activity bumps over the last four years, is ever-looming. We are well covered to get over the lull period with a lean team, efficient expenses and infrastructure and material costs, and a strong networth. Even today, the overall team size stands at 1200, with the core team responsible for running the business being a small fraction of it.

The Pivot

I have been asked numerous times why we haven’t gone public. We could have easily gotten crazy valuations in the last two to three years.

• An IPO is not the end, but rather a new beginning. When retail investors enter the cap table, the company should be able to predict revenue to some extent. In the last 14 years, I have not once been correct in predicting revenue growth and dips. Our business, while it looks good based on financials, can change in a heartbeat due to a change in regulation or markets taking a turn for the worse. We need to do more regarding revenue predictability, and it is impossible to do it just as a brokerage business.
• So, we are building various other bits that can diversify the risk. It is not meaningful today, but maybe in the future.
• Unless we can do something meaningful with the money and build on it, we don’t need to raise it. The question we ask is, what will we do by raising excess money when we have a strong networth built with our own profits?
• Why take on the burden of expectation from investors when there is nothing strategic or material to gain for the business? Once listed, most companies are forced to shift their focus to growing quarter after quarter at all costs. Our core philosophies, culture, and the way of running the organisation are based on long-term customer-centric decisions. Whether it be business or product choices, we make them carefully with the customer at the centre and not by revenue targets. This is a significant edge that we have. It is what has gotten us to where we are today, and unless there is a large pressing need to take a different path, there is no logical reason to do so.

This is how we are diversifying the business:

1. We are developing newer products that aren’t derivatives-focused. For example, we are about to launch Margin Trade Funding (MTF).
2. Public market investments. We hold a portfolio of stocks, bonds, and gold with our proprietary funds.
   Private market Investing through Rainmatter. We own stakes in over 120 companies, with an allocation of Rs 680 crore. We partner with startups working in fintech, climate, health, sports etc.
3. As an extension, we have also committed over Rs 1000 crores to Rainmatter Foundation, the non-profit that we started in 2020 that works on environment and climate action, and livelihoods associated with them, critical issues that are of increasing importance.
4. Zerodha Capital. We provide Loan-Against-Securities (LAS) and currently have a book size of about Rs 300 crores.
5. Zerodha Fund House (our AMC) is India’s only passive AMC, operating as a JV with smallcase. In less than a year, it has over Rs 3000 crores in AUM.
6. Ditto Insurance is a joint venture with the people who run Finshots. It is a spam and push-free health and term insurance provider. It is already the second largest online distributor for the insurance companies it has partnered with.
7. Sensibull, Tijori, Streak, and many other companies that add significant value to the trading and investing experience.

We constantly keep you posted on product, feature, and regulatory updates, and more through this Business updates section on Z-Connect. As I said earlier, our quest is to offer the simplest, and the most seamless product experience across demographics without compromising on features that experienced active traders and investors seek.

Our business has the following risks: regulatory, market, and competition risks. Given the significant rise in the markets over the past four years, we are prepared for the possibility of a market correction, which could lead to a decline in our business. By the way, the markets show no signs of slowing down, and the regulatory risks, all five of which I mentioned earlier, have already surfaced.

Given this, I guess every broker will be affected in terms of revenue, and the business models will need to change. In addition, our profitability numbers have been attracting new competition in the last few years. So, regulation will reduce business, markets could go down, and competition will increase. A perfect storm for us. 🙂

Happy trading,