Zerodha, India’s leading online stock broker, has once again made headlines with its stellar financial performance in FY24, ending March 31, 2024. The Bengaluru-based firm reported an impressive 21% YoY increase in its operating revenue, reaching an all-time high of ₹8,320 crore during the last fiscal year. While this growth is commendable, it’s important to note that Zerodha’s yearly revenue growth has been slowing over the years, plummeting from 81.9% in FY22 to 38.5% in FY23, and now settling at just 21% in FY24.
Despite the deceleration in revenue growth, Zerodha’s financial prowess continues to shine, particularly in terms of profitability. The net profit for FY24 surged a mind-boggling 62% YoY to a new high of ₹4,700 crore. What truly grabs attention is their operating margin of 57%, and if unrealized gains from investments in gold and equities are factored in, their margins could leap to an astonishing 69%.
To put this in a global context, even tech titans like Microsoft (44%), Apple (29%), Google (31%), and Amazon Web Services (37%) fall short of Zerodha’s operating margins, with only Nvidia (64%) coming close.
Surprising, isn’t it?
Unrealized gains are profits from Zerodha’s investment portfolio that have yet to be booked in their financials. These gains, amounting to nearly ₹1,000 crore, will eventually be reflected, adding further strength to their already impressive financial standing.
Despite its financial dominance, Zerodha has been feeling the heat from competitors. Rival platforms like Groww and Angel One have fiercely expanded their customer base. In particular, Groww has already surpassed Zerodha in terms of active clients in September 2023.
Losing the title of India’s largest stockbroker by active clients is undoubtedly a setback for Zerodha, a company that has long been a trailblazer in the brokerage sector.
However, while these newer entrants may be winning the race in client growth, it is unlikely they will outshine Zerodha in terms of revenue or profitability, even in the near future.
Zerodha’s lean operational model, zero dependency on external investors, and strong financial foundation put it ahead of the curve. Many experts believe that all these factors would also make Zerodha one of the most favourite companies of retail investors once it’s listed. Besides the increasing profit margin, promoters’ total control allows the company to be in the game for a very long period.
The Regulatory Storm
Looking ahead, the ongoing fiscal year FY25 may not be as smooth as it has been for Zerodha. This potential turbulence is largely due to upcoming regulatory changes from the Securities and Exchange Board of India (SEBI).
On July 1, 2024, SEBI issued a circular aptly titled “True to Label,” which will significantly alter the revenue structure and potentially dampen the rise of zero-brokerage intermediaries in India. This directive mandates that market infrastructure institutions, such as stock exchanges, depositories, and clearing corporations, disclose the exact charges imposed on stockbrokers and pass these costs directly to customers without additional fees.
SEBI has also prohibited the volume-based slab structure for brokers, replacing it with a uniform flat charge structure.
These regulatory changes are expected to create headwinds for Zerodha, potentially reducing revenue by as much as 10%.
Eliminating volume-based rebates, traditionally relied upon by brokers like Zerodha, poses a substantial challenge to their financial model.
Additionally, SEBI’s new rules affecting referral programs have forced Zerodha to adapt. Exchanges now require referral payouts to be made only to Authorized Persons (APs). This shift has drastically reduced the size of Zerodha’s once-thriving referral network, which was crucial for attracting new clients and fostering organic growth.
In addition, the anticipated changes in futures and options (F&O) trading regulations could further impact Zerodha’s topline revenue by as much as 30% to 50%. Given that most brokers derive between 65% and 85% of their revenue from F&O trading, any regulatory restrictions in this area are particularly concerning, as they threaten to undermine the financial stability and growth prospects of the brokerage.
Nithin Kamath, Zerodha’s co-founder, highlighted the uncertainty surrounding these developments as a key reason for the company’s decision against pursuing an IPO, despite the attractive valuations it could command in a bull market.
Kamath also acknowledged the revenue drops, which could be attributed to factors like removing the account opening fee and newly introduced limits for basic demat accounts (BSDAs). Previously, these accounts could hold only ₹4 lakh worth of securities, but this limit has increased to ₹10 lakh, leading to a loss of account maintenance charge (AMC) revenue from a broader base of investors.
Additionally, the increase in the securities transaction tax (STT) effective from October 1 is anticipated to have a minimal impact on options trading but a significant effect on futures trading.
A Solid Foundation for Future Growth
Despite the looming challenges, Nithin Kamath remains transparent and pragmatic about the future.
With a workforce of just 1,200 employees, Zerodha focuses on careful spending and operational efficiency. Kamath also emphasized that Zerodha’s net worth is now equivalent to 40% of the customer funds it manages, further solidifying its position as one of the safest brokers to trade with in India.
It is noteworthy that traders on Zerodha are currently sitting on unrealized profits exceeding ₹1 lakh crore.
Zerodha’s total assets under custody – reflecting the value of all holdings in its demat accounts – have reached an impressive ₹5.66 lakh crore, which translates to a staggering ten crore rows of holdings. Kamath attributes this remarkable growth to the booming bull market, a significant rise in retail participation, a vibrant IPO landscape, and the strong trust placed in Zerodha by its clients.
As Zerodha faces regulatory pressures and increased competition, the pressing question is: Can it maintain its leadership in the brokerage space while continuing to achieve robust revenue and profit growth in the future? Regardless of the outcome, one thing is certain: SEBI’s new regulations will significantly influence the future of India’s stock brokerage industry.
