Nithin Kamath has a concern about unicorn startups queuing up for IPOs

The edge of many startups on competition is how nimble or agile they are as a business and by listing, they can potentially lose some of the agility, says Nithin Kamath, Founder & CEO, Zerodha in an interview with Nayantara Rai of ETNow. Edited excerpts:


Nayantara Rai: Do you think we are in that era where retail investors are savvy and are also going to enjoy the bull run party?
I think it is stretching it too far to say that all retail investors are savvy and they are going to participate in this. I still remember that in April or May last year, when we had the first big rush in retail investors, I had gone out and said this bounce will not last long and we have been proved wrong. Over the last one year, a lot of retail investors have made money. But I think it is stretching it too far to say that everyone is savvy. It is more about being at the right place at the right time than everyone getting savvy suddenly with their investing skills.

Nayantara Rai: What does the demographic look like for new entrants? Are there more women or younger people, and are they coming from smaller towns?
In terms of men to women, the percentages are the same. There are between 17-20% women. The problem with many of these women accounts is that it is very tough to know how many of them are actually operated by women because in India, a lot of families have women accounts being managed by either the husband or the brother or the father. So that has not really changed in terms of pre-Covid to post Covid.

In terms of age, it has definitely gotten lower because there are a lot more 20 to 30-year olds who are opening an account right now. A lot more 20 to 30-year old folks are opening an account; so the average age of the audience has reduced. There is pickup in terms of client addition from tier-2 and tier-3 cities, but that data is a little skewed for us because a lot of these 20 to 30-year olds move from tier-2, tier-3 cities to larger cities for jobs, but they do not really change their address proof. So if you were to look at your customer base by address proof, it might end up showing us tier-2, tier-3, but if we were to track the users based on the IP address, the majority are still from the top 15-20 cities of the country.

Nayantara Rai: If I were to juxtapose this data with the AMFI data, is the journey with the markets beginning with SIPs?
This last year, there have been a lot of first-time investors and I think almost 55% or 60% of customers who are opening accounts with us are investing for the first time in the market, which means they have never done a mutual fund investment. When you do a KYC for a customer, you get to know if he has already done KYC before or not. So almost 60% of our customers are first time investors in the markets. I think it is really the bull run that is getting people directly into stocks.

Otherwise we would assume that usually the first step is to go to mutual funds and then to equities, but it does not really always work that way because historically for us as well, 50% of our customers are the ones who are doing their KYC for the first time. While the absolute number of demat accounts is six crore, I would say maybe around 2-2.5 crore out of them would be unique demat accounts and maybe half of that would be active demat accounts. So if you look at India’s audience, in terms of the number of people, there is still a large potential to grow that market.

We have five crore Indians who file income tax. Now you could maybe add another two or three crore Indians to it. So potentially the market is at least 8-9 crore in size in terms of target market; folks who have money to invest in the markets.

Nayantara Rai: Something else that must have helped is the fixed deposit rates as that has always been seen as the safest way that Indians like to save. With the way fixed deposit rates have been staying as low as they have been, has that sort of helped as well?

Absolutely. There are a bunch of enablers and of course, one is that the markets are doing well. Two, fixed deposit rates are going nowhere. Three, real estate as an asset class is not as aspirational or attractive in terms of ROI and the returns have plateaued over the last few years. So the stock market is like the only option people have today to put their money in.

And because of the pandemic also, people have not spent as much money, which means they have more money with them to save and invest because their spending has reduced significantly. All of these put together plus the markets doing well has helped. Generally, this is the same phenomenon globally as well and I have my friends who run large brokerage firms in the US and they are seeing very similar behaviour there as well.

Nayantara Rai: Next week we are going to see the beginning of a new era. A slew of IPOs are going to hit the markets. These are very large brands, but they are still loss making. So they are going to have to train investors, maybe do what Amazon did in 1997. But these IPOs by Zomato, Paytm and later on by Nykaa, PolicyBazaar, Delhivery, what can they do for wealth creation and the equity markets in terms of financialisation of asset classes?

The big challenge in India, especially from the time we started Zerodha in 2010, has been that you did not really have brands that millennials aspire to own and one of the reasons why the markets have expanded so fast in the US over the last four or five years is because of the FAANGs; those brands that you aspire to own or what the younger population understands, uses, consumes the product.

In India, maybe a Royal Enfield is something millennials would probably relate to as a brand or aspire to own, but apart from that, there have not been many. So it is very exciting in terms of having all these new-age businesses getting listed. It will definitely help expand the market in terms of participation because younger folks will come and want to own shares in these companies.

In terms of wealth creation, I am still not sure because they are fairly valued and one of the concerns I have with a lot of these start-ups, especially in India listing is a lot of start-ups, including us for example; our edge on competition is really how nimble or agile we are as a business and by listing, you potentially can lose some of the agility and that is really the only concern.

In terms of valuing these businesses based on growth and not really the traditional metrics of price to earnings, Indian investors will get used to it because a lot of companies in the US have not been making money and they have still gone ahead and created a lot of value and wealth for investors. The concern here though is, this is India and will CEOs, founders of these companies take as much risk as they did in the past after listing? That is a question to ask because to achieve the kind of growth that they have been, you have to kind of take a decent amount of risk and you cannot shy away from taking risk. So that is really the only concern I have with this.