In a free-wheeling conversation with Moneycontrol, Nithin Kamath, Founder and CEO, Zerodha, talks about the broking industry, the challenges India's biggest stock broking firm faces, how his competitors may deal with funding crunch, his plans or a lack of them, his experiences in dealing with Sebi and more.
You recently hit 1 crore clients. Congratulations! You pointed out that those brokers having no account opening charges can pile up inactive accounts. Can you please tell me the ratio of inactive accounts at Zerodha?
We've 70 lakh customers who traded at least once last year. So yeah, that's 70 percent active accounts. We have around 50 lakh-plus accounts where people hold stocks in demat accounts.
Can you tell us where they are based? How many of them are from Tier-II or Tier III cities, and what has been the growth there? This is to know your client profile.
Tracking customers by address proof, like a bunch of people do, is not a smart way to track users. What we've seen is that a lot of people whose address proof might be, say, Tier II or III cities, are actually living in larger cities. If I were to look at Google Analytics and see from which cities people visit our website, they are concentrated in the top 10 cities of the country.
Now, with a larger base and fierce competition, do you think growth will slow down? What is your expectation of CAGR in the next five years or the near term?
See, the thing is, the growth in the industry is completely dependent on how markets will perform. If you can predict what Nifty will do, you can kind of predict how a broking business will do. Now, it's really hard to predict what Nifty will do over the next three, four or five years.
Nonetheless, I think the industry can go up to a 20 percent year-on-year (YoY) growth in terms of new users over the next five years, assuming Nifty will do well.
Will you grow in line with market growth or outperform the industry?
While there's a lot of competition, we still believe we have a better product. We will continue to outperform our peers is what I would say.
Do you have institutional clients? If not, why and any plan to onboard them?
No, only retail. Institutions require research, liquidity, and access to key management of companies. We don’t have the skillset for this. Moreover, it's a very competitive market and there isn't money. The overall market size isn't too big either. For these reasons, we decided to stay away from them.
You have a good foothold in India now. So, are you planning to expand to other countries?
No, not really. Back in 2018-19, I spent some time trying to figure out if there is a way to replicate whatever we built here in some other country. But every country is different in terms of regulations, backend technologies, etc. It's not like Facebook and Google where the same platform can work seamlessly across different countries. That is why you don't see global broking firms.
In the past, when the market went down, trading volumes took a hit. How much downside do you see in volumes in the next one year?
Everything depends on how the markets behave. So, for sure, if markets go down, trading volumes will go down, user on-boarding will go down.
If you compare with October last year when markets hit new highs, what has been the volume drop since?
If you look at equity trading volumes, especially, you know, they were also down 30-40 percent. It picked up from last month onwards. Now, trading volumes didn't really drop as much because of volatility. In choppy markets as well, very active traders come and participate. And it is a small subset in the entire country, probably 10-15 lakh people, who contribute to a majority of trading volumes.
In the fintech space, some big names like Upstox or Groww have built their business on PE funding, now that funding crunch is here. Do you see such business models struggling?
Both of them are profitable. So, in a sense, I don't think they would have burnt the money they've raised in the last one-two years. I don't think there'll be any crunch at least in the short term. But if markets were to go down, and say these companies are not any more profitable, they could potentially have issues. But again, these two companies, and even others have reduced their advertising spending, etc. They're also becoming a lot more frugal about how to acquire customers.
Traders repeatedly report trading glitches at Zerodha. Is it because there is some issue with tech or you are overwhelmed by volumes?
The most recent issue is with the price ticks in the first five minutes of opening. There are no issues with order placement. If you keep logging out in the period, it will not tick. But if you stay and wait for 20-30 seconds, it would start ticking. What happens with most people is they don't see price ticking, they just force-close the app and re-launch.
Our customers are active in social media, they're living in metros, and they're English-speaking. We have the largest Twitter crowd, so we get more complaints compared to bank-based brokers who face more tech glitches. We track our uptime versus a competition, not just locally, but globally. I think, over the last 12 months, we have had less downtime.
When you hit the position limit at the broker level, clients have complained they are unable to execute their orders. How big is this issue for Zerodha? How can traders be assured they are able to trade without opening multiple broker accounts?
There is always an option. Any trader can actually open a custodian account. What happens with a custodial account is that the open interest doesn't get assigned to the broker. It remains with the trader. A customer can open a custodial account and map it to us and then use the custodian account to create options. We bear the cost of the custodian charges, etc. So, in a sense, there is no additional cost on the customer as well.
What are the new growth areas for Zerodha? Is there any new business model emerging for you?
Not really. We have applied for an AMC licence. We are awaiting approval. The final approval is still pending.
When are you launching the MF business?
When you apply for an AMC licence, Sebi first gives you what is called an in-principle approval. Once they give an in-principle approval, you have to set up the board, hire custodians, set the entire operational planning and then go back to them for final approval.
We've done that and we've gone to them for a final approval. Within three months of receiving the final approval, we'll be able to launch the business.
Is there a timeline for the final approval?
No. Getting an AMC licence in this country is quite hard. After licences for banks and stock exchanges, an AMC licence is probably the toughest to get.
So, that is why a lot of people are going for the acquisition route in this space…
Even when they acquire, the approval is not straightforward. I mean, even in Navi’s case, it took a long time for the approvals. So yeah, it (acquisition) saves you six-eight months at least.
Can you share your portfolio of companies under Rainmatter? What are some of the most promising names there?
There are 20-plus startups in that portfolio. I think the most popular is Smallcase, of course. And there is Finshots. We have now partnered with them to build the insured distribution platform, Ditto.
So, right now, if you ask me which firm I am looking forward to the most in the next 12 months, it would be Ditto. There we are selling health insurance and term policies. And we are selling them more like an advisory first, in a very conflict-free kind of way. So, we are trying to see if we can scale it over the next year.
How much stake do you hold in Ditto?
We are holding 15-20 percent. That's really where we entered. In the case of Ditto and Finshots, there haven't been any external investors.
Recently, there was a circular saying you cannot use funds in a trading account to buy MF units. You adapted very well to that. However, this added one additional step in using Coin. Have you seen a drop in Coin transactions since that notification?
There was a drop in July. August onwards, it's back to normal.
Let’s talk about markets. The Fed’s hawkish commentary has started another round of selling. Do you see the market erasing the gains it had since mid-June?
This is a really hard question. It's almost kind of impossible right for anyone to guess. There's a lot of interest in India. So, every time the market falls, in India, it is not falling as much because there is almost no leverage in the Indian capital market ecosystem, compared to the US, which is a very highly leveraged market. When one bout of selling happens in the US, there'll be margin calls, and then there is another bout of selling.
The second thing is,a lot of capital is chasing India right now—not just retail money but foreign capital as well.
India is now like one of the last few countries around the world where you have growth, you have a stable government, and you have the right demographics of people, like a high number of 20-30-year olds. So, these are all factors that create a lot of interest in India globally.So, we are outperforming, given the fact we don't have the pain of leverage and there's buying interest every time the market falls. What I can say is that India will continue to outperform other markets. But calling the direction is really hard.