Groww took the growth out of Zerodha. But can it really take it on?

(From left) Neeraj Singh, Harsh Jain, Lalit Keshre, Ishan Bansal, co-founders, Groww.

Last week, India’s investing community was in for a surprise.  
 
Not because of the turmoil caused by the ongoing Israel-Hamas war, or due to tax demands by the Indian government on certain companies. This time, it was for an entirely different reason. Groww, a seven-year-old financial services platform, usurped Bengaluru-headquartered Zerodha to become the largest brokerage in India in terms of the number of active investors.   
 

An active investor is someone who performs at least one trade in a year. Zerodha, founded by brothers Nithin and Nikhil Kamath, had long remained India’s poster boy for bootstrapped startups and is credited with revolutionising discount broking in India. At last count, according to data from the NSE, Groww had 6.63 million active investors on its platform, the highest number of users on any stock broking platform in the country. Zerodha had 6.48 million active users as of September.  
 
The change in pecking order is significant, considering how Groww built up its business seven years after Zerodha started operations, and particularly over the past two years. In just a year, Groww’s active user clientele jumped 35 percent from 4.9 million to 6.63 million in September. The Peak XV-backed startup ventured into stock broking in 2020 at a time when Zerodha had already been leading the race.
 
Together, the two companies control almost 40 percent of the Indian stock broking industry, dominated by discount broking firms. Discount brokers carry out buy and sell orders at reduced commission rates compared to a full-service broker.  The race to the top also assumes significance as India remains an under-penetrated stock market and everybody from banks to financial institutions are looking to fill that gap.   
 
“We had seen how technology and high-customer centricity disrupted the ecommerce industry,” Lalit Keshre, CEO of Groww, had told Forbes India in 2021. “This is exactly what Groww does.” Groww started out as a platform for mutual funds in 2017 and has since become an online investment powerhouse offering everything from stocks, IPOs, ETF, Gold, NFO, futures and options to fixed deposits and US equities. The fintech startup offers zero-commission investing in direct mutual funds and offers a flat Rs20 or 0.05 percent of the trade value as brokerage charges for stock investing.
 
Still, Zerodha is miles ahead when it comes to revenues. In FY23, Zerodha saw its net profit surge by 39 percent to Rs2,900 crore from Rs2,094 crore while its revenue grew by a staggering 35.5 percent to Rs6,875 crore in FY23 from Rs4,694 crore in the year-ago period. In contrast, Nextbillion Technology Private Limited, the parent company of Groww, posted revenues of Rs1,294 crore in FY23, compared to Rs367 crore in FY22. Groww’s net profit stood at Rs73 crore. 


 
The sizeable difference in revenue is mostly due to Zerodha’s dominance in the futures & options trading, a highly profitable segment. In addition, Zerodha also charges for demat account opening as well as maintenance, unlike Groww. “There’s still phenomenal interest in the markets, especially in futures and options,” Nithin Kamath, CEO of Zerodha, wrote in a blog post in September. “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 FY22/23. That said, the business has plateaued in terms of revenue and profitability this financial year until now.”
 
Digital or discount brokers such as Zerodha had disrupted the industry by charging a flat fee of Rs20 or between 0.03 percent and 0.05 percent, whichever is lower for intraday and F&O trades. That had also forced traditional brokers to slash rates to compete with newcomers. And, with Covid-19 giving a thrust to investing in the stock markets, activity in F&O had skyrocketed in the country. From about 7.1 lakh unique individual traders in F&O in 2019, that number stood at around 45.24 lakh in FY22.  
 
“One of our key strengths has been educating our customers and demystifying the financial services sector,” a senior executive at Groww says. The company is active on YouTube where it has over 2.11 million subscribers. Zerodha has less than 600,000 followers on YouTube. “We focus on regional language and helping people take control of their finances and make well-informed decisions. That had helped with increasing our user base.”

(L to R) Nikhil Kamath and Nithin Kamath , the cofounders of Zerodha. Image: Nishant Ratnakar
 
Also read: The curious case study of Zerodha's blue ocean strategy

Taking on the challenge  

Groww was founded by four former Flipkart employees.  
 
In 2017, Lalit Keshre along with three friends from Flipkart, Harsh Jain, Neeraj Singh and Ishan Bansal, started Groww as a direct mutual fund distribution platform. Keshre, an IIT graduate had earlier built an edtech startup before shutting it down.  
 
Groww began by raising an undisclosed seed round in January 2018, led by CureFit founders Mukesh Bansal and Ankit Nagori along with Y Combinator. The next—pre-Series A of $1.1 million—happened in six months. Next year again, there were two quick rounds. Series A of $6.2 million in January 2019, and Series B of $21.4 million in September. The pandemic year (2020) saw just one round of $30 million in September, and then came the unicorn round in April 2021 when the company raised $83 million in a round led by Tiger Global.  
 
By October 2021, Groww raised Series E funding of $251 million at a valuation of $3 billion, led by ICONIQ Growth along with other investors, including Alkeon, Lone Pine Capital and Steadfast. All that has meant that Groww is flush with funds to acquire customers. 


 
In contrast, Zerodha has been entirely bootstrapped and is currently valued at some Rs30,000 crore, according to its founder Nithin Kamath. “If 10 to 15 percent is the long-term growth, we value ourselves in the range of 10 to 15 times our earnings (PAT),” Kamath had written in a post last month. “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 Rs30,000 crore and not the Rs1 lakh to Rs2 lakh crore some folks online were guesstimating.”
 
It currently plays in Zerodha’s favour that NSE, the country's largest stock exchange, is planning to increase the F&O trading hours, especially since the category remains the most active among the trading community, even though it remains loss-making for many.  
 
India’s market regulator had recently said that nine out of 10 traders in the F&O segment were making losses in the country with the average loss at Rs1.1 lakh in 2022. Meanwhile, the total number of demat accounts increased to 130 million in September. The number of new account additions remained stable on a month-on-month basis at 3.1 million in September, with an average of 2.1 million monthly additions this fiscal.  
 
“While the trading activity in F&O has increased significantly, the total number of people trading F&O is still not that large,” Kamath said in his post. “Around 45 lakh Indians (unique) traded once a year last year in F&O. To set this in context, we have 12 crore demat accounts (non-unique) in India, and NSE active client data indicates around three crore Indians who traded once a year (unique) on the exchange. So approximately 3 percent of everyone with a demat account and around 15 percent who traded the market traded in F&O last year. However, this subset of users would have contributed to the majority of revenues for all brokerage firms and even the exchanges.”
 
Still, Zerodha’s active clients shrunk 3 percent in September compared to the year ago period, while Groww saw a staggering jump of 1.2 million users since the financial year began. In all, at the end of September, NSE had 33.3 million active users, adding 6 lakh new investors in the month. However, the pace of new active users has slowed down from July even as the benchmark indices Sensex and Nifty had hit record highs multiple times in September.
 
"We continue to be the only broker in the country to charge an account opening fee (Rs200). There is an actual cost (for KYC, documentation, eSign, human verification, etc) that is incurred while opening an account,” Kamath had written. “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."


 
Also read: I wonder why there are only a few businesses like us that are built to generate profits and not raise venture capital: Nithin Kamath

Where can it go from here?   

India’s brokerages are currently undergoing a structural shift from aggressive client addition to maintaining profitability amid rising compliance cost, through improvement in unit economics. The broking segment, especially retail broking, has become increasingly dynamic. The entry of new players, digitisation and disruption, and regulations have changed the way business has been shaping up.  
 
That means brokers are also now restructuring their business strategy to diversify revenue streams. Value added services, including wealth management, research, advisory, AMC and financial planning, have been the focus to ensure maximum customers’ engagement and enrich the wealth creation journey of clients. It has also been helped by Covid-19, which led to a substantial surge in client accretion competitive pricing, increased marketing and digital offerings. Active clients increased from 10 million in FY20 to 18 million in FY21 and 35 million in FY22.
 
That had also been led by substantial participation from new to market customers from Tier II/III and beyond. However, after reaching a peak of 36.6 million in June 2022, active clients have declined due to a large number of clients onboarded earlier being inactive. In addition, market regulator, the Securities and Exchange Board of India (Sebi), has been tightening regulations amid increase in derivative volume, which is likely to increase compliance cost for intermediaries and may eventually also lead to a rise in brokerage rates.

Also read: I'm proud that at Zerodha we don't have growth targets: Nithin Kamath
 
For Groww, that means the opportunity is nevertheless a massive one, especially since it has already found to the top. “NBT’s earnings profile remained constrained till FY22, given its limited vintage in the equity broking space,” ratings agency, ICRA said in a report. “The earnings profile improved thereafter as the company made significant client additions during FY22-23. Nonetheless, it is noted that the profitability at NBT’s standalone level remains constrained by an elevated cost-to-income ratio. A sizeable portion of the operating expenses is on account of software, server and technology services provided by the parent (BGV). Going forward, a sustained improvement in NBT’s revenues and profitability will remain imperative from a credit perspective.”

All that means is that the stage is set for some intense competition as financial markets become more accessible to millions. That has also meant following each other rather closely, and in some cases, even replicating them. For instance, Zerodha is already ramping up on video content, much like Groww.  
 
“One area we slacked off over the last few years was our video content, as we continued to focus on everything we shared in the text on Varsity, TradingQnA and ZConnect,” Kamath wrote in a post. “While we have already started with educational content on the Varsity YouTube channel, we are now focusing on discussing current affairs and relevant industry updates that can potentially affect traders and investors on the Zerodha YouTube channel.”  
 
For Groww, the path to the top was an easy one. It’s all about making it sustainable now.