A realistic valuations of Zerodha

28 Sep 2023

Every time our financials are out, there is a lot of speculation about Zerodha’s valuation. It might sound counterintuitive for me to say it, but most assumptions, I think, are way higher than reality.😬

All of us on the core team have never thought of notional valuations right from the start because they can go up and down with market conditions. Focussing on ever changing valuations is a distraction. The focus has always been on building a resilient business, which means never having to rely on external capital.

The quantum of profits is the luck of the draw and is based on market conditions. Stockbroking and capital market businesses are cyclical and high-risk. Almost every bull run in the markets creates the illusion that somehow participation and activity will keep going up forever. We keep discussing internally that we could see a 50% dip in activity and revenue if markets fall in no time. None of it is really under our control. And yeah, one circular is also enough to bring down our revenue by more than 50%. 😬

We think that at the scale we are at, we can potentially grow by 10 to 15% in the long run, factoring in the drawdowns that are guaranteed.

We are trying to diversify with everything we are doing in Rainmatter, our public holdings, and with large investments in the AMC business,insurance advisory, and loan against securities. Today, the revenues from these businesses are not significant, but hopefully, they will go up and help us maintain long-term growth.

Why only 10 to 15%? As I mentioned in our post recently, the problem with trying to grow fast is that it is very hard given some of our core philosophies at Zerodha, like no spam, no revenue or sales targets, no tracking customer data to push people to do more, no spending on acquiring customers, etc. I think our moat is the philosophy, and without it, we could lose out in the long run.

So if 10 to 15% is the long-term growth, we value ourselves in the range of 10 to 15 times our earnings (PAT). At the lower end when near bull market highs. This is how we have been valuing ourselves for all buybacks (founders and team) for a while now. So ~Rs 30,000 crores and not the Rs 1 lakh to Rs 2 lakh crores some folks online were guesstimating. 😀

Go to link →