Brokerage major Zerodha continued its tremendous financial track record in the financial year ending March 2024, with the Bengaluru-based company posting a year-on-year revenue surge of 21% at ₹8,320 crore and 62% increase in profit at ₹4,700 crore. These financial numbers make Zerodha one of the most profitable tech startups in the country with an industry-leading operating margin of 57%.
India's second largest stock broker says its profit does not consider the ₹1,000 crore of unrealised gain, which is shown in its FY24 financials.
“Given the profitability of the last three years, our net worth is almost ~40% of the customer funds that we manage. It makes us one of the safest brokers to trade with,” says Zerodha founder and CEO Nithin Kamath.
Zerodha's profit in the previous three fiscal years (FY23, FY22 and FY21) stood at ₹2,907 crore, ₹2,094 crore and ₹1,122 crore, respectively. Its revenue in the same period came in at ₹6,875 crore, ₹4,964 crore and ₹2,729 crore.
Nithin, however, has flagged concerns and imminent potential risks, which could hurt the company’s business in the near term. "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."
Notably, SEBI’s true-to-label circular will go live on October 1, 2024. The Zerodha CEO says his company expects a 10% revenue dip because of that. SEBI's recent consultation paper on index derivatives, which may materialise into regulation in the next quarter, could also impact Zerodha's revenue. "Index derivatives today are a significant portion of our revenue. We anticipate a 30% to 50% drop in revenue." Besides, STT, which will be effective from October 1, 2024, could also have a significant impact on the futures trading business of Zerodha, he says.
The annual maintenance charges (AMC) that brokerages collect change with the SEBI's new basic services demat account (BSDA) thresholds. "Essentially, we can charge full AMC from customers with a demat holding of ₹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," says Nithin.
On SEBI's directions on the payout for referrals by customers, Nithin says due to this, thousands of people referring will now be reduced to only a few registered authorised persons (APs), thus affecting Zerodha's growth.
According to Kamath, there's never been more competition in the broking space. "Then there's the ever-present threat of markets going down. This perfect storm means big hits to the business. The best for the Indian broking industry may well be behind us," he cautions.
Kamath, however, says the company is ready to get through the "lull period" with a lean team, efficient expenses and infra and material costs and a strong net worth. "Even today, the overall team size stands at 1200, with the core team responsible for running the business being a small fraction of it."
On why Zerodha has not gone public so far, despite expectations of "crazy valuations", Nithin says: "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."
As a goal, Nithin says the company wants to reduce the reliance on F&O for revenue. He says the company is developing newer products that aren’t derivatives-focused. "So we will be launching margin trade funding (MTF), public market investments, private market investments through Rainmatter, loans against security with Zerodha Capital, Zerodha AMC JV with smallcase, Ditto Insurance JV with Finshots."
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