Nithin Kamath on Zerodha’s Focus: Building for the future, explains why no IPO yet & more

Nithin Kamath, co-founder and CEO of India's largest trading platform Zerodha, shared reasons why the company has not gone public. In a blogpost highlighting the company's performance and other business updates, Kamath outlined what he called “The Pivot”.

Why No IPO Yet?

Kamath in his post acknowledged that he has been asked “numerous time” why Zerodha has not opted to list publicly and he said that they are focused on “building bits that can diversify risk”.

“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,” he started, adding, “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,” he stated.

‘Nothing to Gain For Business From Investors’

Kamath also feels that Zerodha at present does not need to raise investor money through a listing, stating: “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?” he asked.

He added that once listed, most companies are “forced to shift their focus to growing quarter after quarter at all costs” and this does not necessarily align with their goals for the company.

“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,” he added.

‘Diversifying The Business’

On diversifying the business against future risk, Kamath listed out a host of moves:

• Developing newer products that aren’t derivatives-focused. For example, launch of Margin Trade Funding (MTF).
• Through public market investments. “We hold a portfolio of stocks, bonds, and gold with our proprietary funds,” he shared.
• Through private market Investing through Rainmatter. We own stakes in over 120 companies, with an allocation of ₹680 crore. We partner with startups working in fintech, climate, health, sports etc.
• Committed over ₹1,000 crore to Rainmatter Foundation (non-profit started in 2020) that works on environment and climate action, and livelihoods associated with them, critical issues that are of increasing importance.
• Zerodha Capital — providing Loan-Against-Securities (LAS) and currently have a book size of about ₹300 crore.
• Zerodha Fund House (asset management company) is India’s only passive AMC, operating as a JV with smallcase. In less than a year, it has over ₹3000 crores in AUM, as per Kamath.
• Ditto Insurance, JV with people running 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,” he said.
• Sensibull, Tijori, Streak, and many other companies that add significant value to the trading and investing experience.

‘A Perfect Storm’

“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,” Kamath added.

“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,” he said.