Can The 6-Year-Old Groww Make The Cut Against Rival Zerodha In FY24

Lately, more and more industry experts are seen questioning the viability of the valuations of the Indian unicorns versus their revenue. This is particularly true in the fintech sector, where 61% of the total 23 unicorns entered the $1 Bn valuation club between 2020 and the first half of 2022. 

Surprisingly, most of these companies took less than five years to touch, or cross, the $1 Bn valuation mark. However, the major area of concern is that despite hefty valuations, less than 10% of these companies are profitable.   

Among these high-valuation startups, Kamath brothers-led investment tech unicorn Zerodha is the only company that has so far led its way to success through bootstrapping and has been profitable since its inception in 2010. 

For the year ending March 31, 2022, the stock broking platform’s revenue from operations rose 82% year-on-year (YoY) to INR 4,963.7 Cr against INR 2,728.9 Cr in FY21. According to Nithin Kamath, Zerodha’s customers, revenue, and profits have grown 5X since the onset of the pandemic, while its competitors continue to bleed in losses.

“At 30% of our own capital as a percentage of total client funds being handled, we are probably among the safest brokers around the world in terms of capitalisation. We have also been a zero-debt business from the very beginning,” Kamath wrote in a blog post shared on December 15, 2022.

Can Groww & Upstox Reach Closer To Zerodha?

In comparison, Zerodha’s counterparts, both new and old, lag by a vast difference in terms of financial performance. In FY22, the total revenue of Tiger Global and Sequoia Capital India-backed Groww, one of Zerodha’s closest competitors, stood at just INR 427 Cr, a whopping INR 4,537 Cr less than Zerodha’s total revenue.

While Zerodha’s total profit in FY22 stood at INR 2,094 Cr, up 87% YoY, Groww incurred a loss of INR 239 Cr in FY22, after concluding a profitable FY21. 

Zerodha faces competition from another key player in the investment tech space, Upstox. Launched in 2009, the company is yet to file its FY22 financials. However, data shows that Upstox registered a loss of INR 72 Cr in FY21, 89% more than the INR 38 Cr loss incurred in FY20.  

Compared to Zerodha, Groww, despite being young, has been able to make significant strides to stay ahead in the investment tech race and give a tough competition to its counterparts in the industry, which have been in the market for more than a decade now.

In October 2021, Groww raised $251 Mn at a valuation of $3 Bn to expand across geographies and strengthen its team. As of now, the company is flushed with investors’ money and has a runway for at least 12-18 months. 

Here is a brief comparison between Zerodha, Groww and Upstox, highlighting their competitive advantage in the investment tech space.

Zerodha Leads In Customer Count

According to Motilal Oswal’s recent report on top discount brokers in India, Zerodha, Groww and Upstox secure the top three spots in terms of the number of active clients. Zerodha currently has around 6.6 Mn active clients on the NSE, followed by Groww at 5 Mn, and Upstox at 4.1 Mn. Interestingly, Groww’s active clients rose 31.5% between FY21 and FY22, surpassing Zerodha at 6.45% in the same period. Not only this, a survey by Chittorgarh.com, a stock market discussion forum, reveals that with a score of 4.1 out of 5, Groww beats Zerodha (3.7/5) in terms of popularity.

Zerodha Vs. Groww Vs. Upstox: Comparing The Key Metrics

As indicated in the table below, Groww is clearly trying to lead by lowering the barriers of entry such as the initial cost of opening the account. Upstox, on the other hand, is a bit on the higher end in terms of the entry charges, compared to both Zerodha and Groww. Also, both Zerodha and Groww are now focusing on spreading financial education and awareness. This is expected to help them tap the rising new user base of retail investors in India.

Zerodha Vs Groww: Digging Deeper Into FY22 Financials

The total revenue split indicates that there is a large gap in terms of operating revenues generated by the top two investment tech companies – Zerodha and Groww.

However, their expense statement shows that both are spending a fortune on employee benefits. While Zerodha’s expense on employee benefits accounted for 21% of its total expense in FY22, Groww’s employee benefit expense comprised 34.63% of its total expense in the same period.  Further, Zerodha’s FY22 P&L statement shows an increase of 45% in salaries and wages to its employees. For Groww, the same stood at a whopping 214%. 

While Zerodha’s managerial expenses increased by almost 100% in FY22, a major chunk of Groww’s FY22 employee benefit expense went towards settling employee’s equity-based payments. 

While Kamath is bearish about the next financial year, experts believe that it is the right time for Groww to focus on increasing the monthly account opening rate and add more products and services to its offerings to serve the rising number of new retail investors in India. 

Analysts expect mutual funds to be the key theme for the new retail investors looking to enter the capital markets. Having acquired its AMC licence through the acquisition of IndiaBulls Asset Management Company in 2021, Groww looks well-positioned to reap its benefits in the long term.

However, the founders need to first strengthen their core products and revenue model to reduce losses and continue being profitable, while gradually increasing their market share amid competition.

Delayed IPOs And Profitability Concerns: What’s Next For Investment Techs

For the investment tech sector, FY22 remained successful primarily due to the high number of tech IPOs in the market, with a total of 11 companies going public. At the same time, customer sentiment was at an all-time high after the capital markets fell in 2020. 

However, things changed last year. Overall, the number of IPOs on the Indian stock market took a backseat. In the tech domain, only three Indian startups went ahead with their IPOs — Delhivery, Tracxn, and DroneAcharya. 

Many tech startups that filed their draft red herring prospectus (DRHP) in 2021 and had the best chance to go public in 2022 either shelved their IPO plans, withdrew their DRHPs or are still waiting to receive the approval from market regulator SEBI. 

Going further, although analysts expect an uptick in the investor sentiment, the rising number of Covid cases in China, geopolitical tensions, and fears of an impending recession cannot be ignored. These could potentially slow down the investment sentiment, thereby impacting the revenues of the discount brokers in India. 

“We have already seen an almost 50% fall in monthly new account openings from January this year, and this trend has been similar across the industry. We have temporarily hit a plateau in terms of the target market, customers who have sufficient savings to invest in the markets and an ability to generate revenue for the brokerage firm,” Kamath said in his blog.

Also, while in India it is expected that overall fintech will reach to a market size of $1 Tn, during a fireside chat at Inc42’s Fintech Summit 2022, Kamath said that Indian fintech startups only have a total addressable market (TAM) of around 10 to 15 Cr people. According to him, the TAM for investment tech startups currently stands at only 3 Cr, with the potential to rise to 7-8 Cr in next 3-4 years.

However, SEBI’s vigorous efforts towards safeguarding the interests of retail investors will only infuse more investor trust in the capital markets, which, in turn, will work in the favour of investment tech companies.