That profit warning comes after a year of stellar gains when the company saw a ‘substantial’ rise in revenues and profit thanks to the influx of millions of new investors and an unusual spike in trading volumes fuelled in part by people, who were working from home amid Covid restriction. The numbers for the year are yet to be made public. Zerodha is entirely privately held.
“Fiscal 2021 was an exceptional year because. One, there was a lot of user growth, and two, the market was very volatile. Volatility increases trading volume significantly. Trading volumes have dropped over the past 2-3 weeks as volatility has become lesser than the average of the first 8-9 months of fiscal 2021,” said Nithin Kamath, Chief Executive Officer.
Zerodha had nearly 70 lakh customers as of last available data, out of whom 33 lakh are said to be active investors and traders. The company added over 2 lakh new customers every month last year, as mobile technology and ease of trading drew a whole host of young people into equity trading in India; a trend observed in other markets too.
In FY20, the broker reported Rs 1,093.64 crore revenue, up 15 per cent from Rs 950 crore earned in FY19. Profit after tax stood at Rs 442 crore.
Zerodha’s internal projections are gloomier than the external projections for broking industry’s revenue growth.
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Crisil Ratings estimates overall broking revenue to have grown by 65-70 per cent in fiscal 2021 against 7 per cent in fiscal 2020, but market volatility and a phased implementation of new margin regulations may act as a drag on incremental volume growth, resulting in marginal revenue growth in fiscal 2022.
One reason for the gloomy projections are the twin margin rules that markets regulator Sebi introduced last year.
Kamath said there was a 20 per cent drop in trading volume due to twin margin rules introduced last year. “Traders are now shifting towards the options segment, but that is not going to add volumes.” He expects a 30 per cent drop in volumes by September, when traders will require to offer 100 per cent margin on intraday positions.
Discount brokers like Zerodha have traditionally worked on lesser margins than bank-based brokers. This has helped them draw new clients. They have captured more than 75 per cent of incremental client acquisitions and now command 45 per cent market share in terms of active clients.
Crisil Ratings estimates show the average revenue per user for bank-led brokerages was Rs 10,000-12,000 during the first half of fiscal 2021, while it was Rs 4,000-8,000 for the discount brokers.
“Considering reduced intraday leverages, assuming lesser volatility and assuming lesser number of new customer additions in 2022, we are looking at a 25-30 per cent degrowth in revenues,” Kamath said.
Crisil says the slowdown has already begun to tell as broking revenue fell by 1-8 per cent in the third quarter of FY21 on a sequential basis. This indicates that client additions are not translating into higher broking revenue of late.
“With equity markets turning volatile since January 2021 and revised regulations with higher margin requirements kicking in, sustainability of trading volumes in fiscal 2022 may be a challenge, thereby impacting revenue,” said Krishnan Sitaraman, Senior Director, CRISIL Ratings.