Zerodha co-founder and CEO Nithin Kamath took to Twitter on Saturday to explain why the brokerage values itself at only $2 billion currently when “smaller players are raising money at far higher valuations".
Explaining the reason behind the low valuation, Kamath said Zerodha does a valuation exercise every year only for its ESOP buyback. He further explained the reason behind this conservative approach in a series of tweets.
Kamath began with explaining how ESOPs are granted at Zerodha. “We don't promise ESOPs for anyone on our team. Frankly, we never thought we were building something that could become so valuable. So we never thought of ESOPs. But around 2017 when the business started growing, we created an ESOP scheme to share the success," he wrote.
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“People who complete 1-year Zerodha get ESOPs. This is to be sure if they are with us for the right reasons. We tell everyone to think of the ESOP scheme as their retirement fund which will compound over the long term if we do well working together as a business," he added.
The Zerodha CEO added that all ESOPs come with zero strike price, which means no cost, and top of the liquidity preference. Also new ESOPs issued every year are more than ESOPs bought back.
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“ESOP buyback is optional. We also have a loan scheme where our team can take loans at around bank FD rates against the vested ESOPs," Kamath said.
To keep the focus on profitability, Zerodha's ESOP buyback is from the profits the company earns and not through external fundraising, Kamath said.
“This is so that everyone can focus on profitability which improves the odds of us being sustainable & resilient in the long run. The ESOPs will then truly be a retirement fund for everyone," he stated.
“I've been in the markets across multiple cycles to know that what happened last 18 months was an outlier. There is no easy money to be made in the markets in the long run. When the going gets tough, greed disappears and with that trading activity and volumes and inflated valuations," Kamath further said.
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“For e.g., if the markets were to remain subdued for a few more weeks, activity for all capital market participants will be down by at least 30 per cent. It doesn't matter even if the product is made in heaven. Our business is cyclical and highly correlated to the markets," he added.
“We want ESOPs to be like a low volatility retirement fund because this would probably be a large chunk of the net worth for many on the team. Valuation ups and downs can be mentally taxing. Since we have no plans to raise external money, we thought approximately 15X PAT was a fair value," Kamath explained.
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Nithin Kamath explains why Zerodha values itself at only $2 billion. See post - Livemint
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