Why Zerodha will sit pretty at top

Zerodha’s user base remained stagnant at around 65 lakh in the previous fiscal year and has since decreased to 64 lakh, as of August this year. Meanwhile, Groww has seen its user base grow from around 41 lakh early last financial year to 62 lakh by August this year and could likely cross Zerodha over the next couple of months, The Economic Times reported early this week.

Zerodha’s impressive figures have drawn the attention of formidable competitors. HDFC Bank, the country’s largest private sector bank, earlier this week introduced its own discount broking app called Sky, trying to attract the same trading community with an offer of free account opening and maintenance charges for the first year. Venture Capital-backed firms like Groww and Upstox do not charge any of these and is one of the reasons why they have been popular with new investors and traders over the last couple of years. PhonePe with over 200 million active payment customers recently entered the investment space with Share.Market platform.

On September 26, Zerodha, which completed 13 years of operations, the company co-founder and CEO Nithin Kamath wrote on the company’s website that despite intense competition from newer discount broking firms, the company will continue to charge onboarding and maintenance charges.

“Trading the markets is a serious business with serious risks involved. Collecting an account opening fee right at the start also, in a way, helps set this expectation with a potential customer, filtering out users who may not be serious about trading or investing with us,” Kamath said.

User growth versus revenue growth

For Zerodha, the account opening and annual maintenance charges from its 64 lakh active customers will net the firm only Rs 200 crore during a financial year. While there are around 12 crore demat accounts in India, only around 30-45 lakh are those of active users who trade in intra-day equity as well as in Futures and Options. Most discount brokers make close to two-thirds of their income from these traders. In the case of Zerodha, it is 90 percent as it does not charge for equity delivery.

While the FY23 numbers for Groww and Upstox are not available yet, the FY22 revenue of these companies is only one-tenth and one-fifth of Zerodha. In FY22, the companies had reported revenue of Rs 427 crore and Rs 766 crore, respectively, indicating a large gap between the user base and revenue.

NSE, the country’s largest stock exchange, is planning to increase the F&O trading hours as it provides most income and profits to the markets as well as brokers. This could help Zerodha to widen the gap.

“We continue to be the only broker in the country to charge an account opening fee (Rs 200). There is an actual cost (for KYC, documentation, eSign, human verification, etc.) that is incurred while opening an account. If there was no account opening fee to recover the cost, the business could implicitly be pressured to get a customer to transact to recover that cost. This isn’t good for the customer or the business in the long run, if a customer transacts due to a push from the broker, which causes the customer to lose money,” Kamath said.

In fact, the closest rival to Zerodha is Angel One, which had reported a consolidated revenue of Rs 3,021 crore for FY23 and a net profit of Rs 1,192 crore.

Ratan Tata and Tiger Global-backed Upstox, early last year, had around 58 lakh active customers but had dropped to around 20 lakh this year. While it attracted a lot of new traders and investors, the non-serious ones dropped off soon after and hence the sudden decline in users.

“Over the past year, our business strategy has evolved. After reaching optimal scale, we are now focused on profitable growth. This timely change aligned with the market’s transition from prioritising growth to profitability. We achieved break even in FY2023, generating revenues exceeding Rs 1,000 crore,” Ravi Kumar, co-founder and CEO of Upstox, said in an email statement to Moneycontrol.

Zerodha and Groww did not respond to Moneycontrol’s queries on their strategy. Angel One and HDFC Securities also did not comment on their market strategies or of their competitors.

“Groww has a good product and there is no denying that but their growth has come mostly due to aggressive marketing and zero onboarding/maintenance charges. Has this growth revenue accretive and added to the bottom line? I don’t think so. Zerodha and Angel One are still the ones serious traders look at while Groww’s customers are more investors,” says the CEO of a large private bank’s trading division.

Different target audience and philosophies

“It is about how you want to go about building the business. Groww started as a platform that focussed on attracting new customers with long term investment products mutual funds, especially systematic investment plan (SIPs) and then moved on to direct equity investment on its broking platform. Its entire customer acquisition and marketing strategy is anchored on this premise. But there is no money in that. Meanwhile Zerodha had a razor sharp focus on the F & O products, and was able to attract users who actively carry out F & O trades – that is where the industry’s revenue pool lies, and this probably explains the differences in average revenue per user (ARPUs) between the two players,” says Shishir Mankad, head of financial services at consultancy firm Praxis Global Alliance.

A senior executive with one of the broking firms said that Groww’s approach to education and investment helped them stand out from the trading-focused competitors. The company also consistently asked its existing users what products and features they wanted to see on the platform and developed those rather than a top-down approach.

According to Mankad, Groww has managed to keep the loyalty of its customers with a seamless customer experience. It has also managed to keep it simple for even the new investors apart from attracting users with aggressive digital marketing. “This is a high engagement but low turnover/ revenue segment. And even today, Groww has maintained its focus on this profile of users,” he adds.

A founder of a stock broking firm said that Upstox went after quantity rather than quality whereas traditional broking houses like Angel One and Motilal Oswal always focused on traders coming to them through physical network and sub-brokers even when they started offering free equity delivery and digitalised operations. “Even though these are F&O traders, their sub-brokers and advisory facilities meant that they had higher retention than new-age discount brokers,” the founder added.

Angel One, which is listed on the stock market, in its monthly disclosure, has said that it has a retail turnover market share of 26 percent in equity trading and in F&O. While this is not an exchange or regulator-recognised market share figure, it shows why these companies perform better than Groww in terms of revenue.

The regulator has been clamping down on sub-brokers owing to misappropriation of customer funds and the space is gradually declining. As some of the physical customers shifted to digital owing to the structural shift, Zerodha had managed to capture the market during the COVID period.

The growth plateau

If the decline in the number of users on the NSE is any indication, the punt on F&O will likely hurt the market leader a bit during the current financial year. “Over the last 18 months, the tide is slowly turning against F & O trading after 90 percent of them suffered losses. This could be one of the reasons why active user count has stagnated for several players,” says Mankad.

In fact, every time a Zerodha user opens the app, they are shown this warning about F&O losses.

“The F & O market is cyclical and some of the users who lost the money they had allocated for the trading might be still hanging on to recoup the losses, but eventually many of they will suspend or discontinue trading. There is a lag in how this will have an impact on the user count and trading volume,” Mankad adds.

Zerodha also acknowledged that the business has plateaued for the firm during the current fiscal despite a heavy interest from the trading community.

“There’s still phenomenal interest in the markets, especially in futures and options. This has been the primary reason for the increase in revenue and profitability over the last three years. We continued to see phenomenal growth even in FY 22/23. That said, the business has plateaued in terms of revenue and profitability this financial year until now,” Kamath added.

Zerodha and other trading-focused apps also face the challenge of rising returns from fixed-income products such as bonds, government securities, gold and fixed deposits. When the interest rates are high, the opportunity cost of trading losses becomes much higher. RBI is also sucking out the excess liquidity from the market through multiple measures.

This is also one of the reasons why a lot of brokerage houses, including Zerodha and Groww, are trying to launch Asset Management Company (AMC) products with a passive investment approach, which will reduce the operating expenses of the fund while the returns will not be much different. Though this will generate revenue unlike the equity investment product, it will not be as good as F&O trading.

But where does Groww stand?

If the company wants to grow its revenue like Zerodha, it will have to wait until the next boom cycle in F&O.

(With inputs from Bhavya Dilipkumar)