Ali Hasan
Zerodha’s journey to Success
Introduction – Have you ever used a stock broking firm for trading and investing in the stock market? If you say yes, chances are that it would have been a Full-Service firm offering full trading and investing services like Sharekhan and Angel Broking.
But as time went on, more and more people have shifted towards discount brokerage firms as they’re more affordable. Same is the case with Zerodha that is a discount brokerage firm which offers many trading and investing services at a fraction of the price charged by full service firms.
Today Zerodha is the biggest discounted brokerage firm in India. How did it rise to prominence? Today we will be answering this question and will try to explore how much it has gained since its start in August 2010. As of December 2020, Zerodha was the largest retail stockbroker in India by active client base and contributes upwards of 15% of daily retail volumes across Indian stock exchanges.
Zerodha offers retail and institutional broking services, currencies and commodities trading, mutual funds, and bonds. Its story is unique and interesting. Today we will be talking about all the aspects of the firm and find out how did it manage to become no. 1 as a discounted stock brokerage firm.
Early Days – Zerodha was started in August 2010 by brothers Nikhil and Nithin Kamath. The firm is headquartered in Bangalore, India but has presence in several Indian cities. Recently both of the brothers were featured in the Forbes India list of billionaires where they had a combined net worth of $1.55 billion. The firm was the result of Nikhil Kamath having strong interest in stock trading.
Brothers Nikhil and Nithin Kamath
When he was just 17 years old, he began trading after he was inspired by his elder brother. He wasn’t good in that but he taught himself trading on the go and became better at it. Since he was a school dropout, he knew no one was going to hire him without a college degree.
Hence, he decided to do something else with his life and stock trading became his profession. He’s not just a good stock trader but a great chess player as well. He has played the game at an international level but he fell short of a professional chess career.
If you connect the dots of being a school dropout, not being able to make as an international chess player and his growing interest in stock trading, you get a discounted brokerage firm named Zerodha. That’s how the firm came into existence.
“The problem back in the day, I’m talking about 11 or 12 years ago, is cost was very high. Brokerage fees were incredibly high in India,” Kamath said. “And for a full-time trader, there were many barricades or barriers one had to cross before he could actually be profitable in any consistent kind of manner.”
So the Bangalore-born brothers set to work, using their savings to build a simple and affordable brokerage platform for everyday investors. The founders named their company because the word “Zerodha” was a combination of “Zero” & “Rodha”, the Sanskrit word for barrier. They clearly meant that there’s zero barrier to stock trading and investing if you choose Zerodha.
Marketing Strategy – Their marketing strategy was very simple. They emphasized upon the fact that trading is quite confusing and risky if you don’t have adequate knowledge and support. It was one thing that they wanted to change in the Indian market.
They positioned themselves as an online platform which would help users to have the necessary technology, at an affordable cost along with the necessary support. They promised that their platform will provide a lot of historical data of the stock market where users will get access to 80 indicators and 10 types of charts to make accurate, informed and wise decisions.
They will also have the facility of automated expert advisor bots to get guidance. They integrated “Quant” in their platform which was a personal behavior analysis tool that gave you feedback of your own trading habits to know your style and personality.
They have claimed to have no brokerage fees or a very low brokerage fees per trade irrespective of the amount. Their tagline was “Effective, Efficient and Economical”. According to the founders Zerodha has never relied heavily on any marketing or paid promotional activities. Their organic growth worked in their favour because they didn’t have to spend huge amounts of money on marketing. Their customer’s word of mouth was the best marketing for them.
User Base & Valuation – Zerodha has more than 26 lakh active clients by September 2020 but their client base rose to 40 lakhs as of December 2020. They are the no. 1 discounted brokerage firm in India. In 2020, the average age of an investor using the Zerodha platform fell from 32 to 30 years old which means they’re targeting a younger audience.
In June 2020, Zerodha entered the unicorn club with a self-assessed valuation of about $1 billion. This valuation was based on the ESOP buyback exercise the company undertook valuing each share at more than four times of the book value of ₹700 per share. To be clear, the valuation number needn’t even have been $1 billion, says Nithin, who has often made it apparent in the past that turning a unicorn is not the goal Zerodha is chasing.
Funding – While startups turn to investor money for growth, throughout their journey, Zerodha has never raised money. But as their journey grew, investors have come knocking their doors. “Yes, we have been approached for being funded multiple times but today, we don’t really have any need for external funding.
The need to raise huge sums of money arises when there is a requirement to spend on marketing etc., which we feel that there is currently no need to do so. Also, not having any external board of investors, allows us to be nimble and move fast which is an edge in itself,” Kamath said.
Revenues – Zerodha quoted over Rs 1,000 crore revenues in FY20. It has already surged to Rs 1,058.55 crores as of September-end. Profit before tax that stood at Rs 592 crores in FY20 has surged to Rs 627 crores in 6 months into FY21.
Controversies – There have been multiple reports of technical issues including glitches, system outages and connectivity problems on Zerodha’s Kite platform, especially on days with high market volatility and F&O expiry days.
In November 2020, Livemint reported that some of Zerodha’s traders complained of not being able to sign into its Kite platform due to a technical issue. Several users took to twitter to report log-in problem. Zerodha, in an official statement, admitted the same.
Present Conditions & Future Goals – Zerodha keeps innovating and launched a trading platform KITE, followed by a mutual fund platform COIN. Zerodha Varsity has become one of the largest capital market education portals that are free of cost. The broking firm’s KITE Connect API helps financial start-ups build an investment or a trading platform.
Zerodha is foregoing its earlier plan of doing an initial public offering (IPO), given the market uncertainty caused by the COVID-19 pandemic and the shareholder responsibility a company must bear once it raises public money. So as of now, they will not be launching an IPO in the near future.
Indian brokerage firm Zerodha is planning to offer US stocks on its trading platform. However, the timeline for the services is yet to be determined. “We have been working internally on offering US stocks on the Zerodha platform, by partnering with a US-based stockbroker,” Nithin Kamath. He also added that their will likely be no minimum investment required.
He did not reveal the brokerage firm they have tied-up within the US. Kamath said that for the offering to be a success they need a proper remittance mechanism.
Conclusion – Zerodha which started out in 2010 has gained good traction and is all set to disrupt the market by offering affordable trading and investing services. With no external funding, they’re quite free to make their own decisions such as where to expand next or when to have an IPO.
With a decade in operations, strong revenues, young customer base, zero external funding and a promising future, they look quite strong and focused on their journey to be the next big thing in their respective journey.
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