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Zerodha shows David can win

Mudar Patherya 

The last disruptive equity brokerage model transpired in the late nineties when India Infoline slashed rates and transformed a conventional cost-plus business.

The next disruptive discount brokerage model has arrived through a relatively unknown Bengaluru-based company called Zerodha.

Zerodha is possibly the first company in the country to introduce a flat brokerage, which is 0.1 per cent of the traded value or Rs 20, whichever is lower.

Zerodha has differentiated itself in various ways in what is seen as a commodity business.

One, the company scrapped brokerage targets for all employees, resolving what would otherwise have been a conflict between corporate interest and customer welfare.

Two, the company created a transparent brokerage calendar, making it possible to calculate exactly the quantum of margins and brokerage that required to be paid before one trades.

Three, the company selected to charge per executed order (not different trade tranches constituting one large order).

Four, the company selected to grow only through word of mouth; of 50,000-odd clients, not more than five - you read right - came through telephonic persuasion.

Five, the company created analytic software to dissect a client's trades with the objective to suggest what trading style proved most consistently profitable and hence suited the client best.

Six, the company created a 'varsity' that addressed questions related to trading and taxation, educating its clientele.

Seven, the company engaged a back office vendor to process trades at a relatively low cost; thanks to this rich experience, the experienced vendor was eventually bought over by Omnesys for Rs 20 crore.

Eight, as a relationship-building initiative, the company volunteered to refund -can you believe - the brokerage earned within 60 days if the trader reported a profit.

Nine, the company created a blog where successful traders were encouraged to share experiences with the objective to create a like-minded community.

Ten, Zerodha is a low-cost operation covering 10,000 sq ft, paying out a lakh each month in rent and being run by a mere 160 individuals.

You'd think that such a garage operation wouldn't go far.

Zerodha, launched in August 2010, more than broke even in its second quarter, has been profitable every quarter thereafter. It reported 100 per cent revenue growth each year, generates a traded throughput of Rs 7,000 crore a day across 80,000-100,000 trades, which accounts for around three-five per cent of the National Stock Exchange retail turnover and has helped the company emerge among the five leading retail brokerages in the country.

You'd think such an operation would do well when the country's equity cult strengthens. Zerodha considers India's too shallow (!) to be able to raise sizeable volumes; it intends to go global through memberships on the Singapore and Colombo exchanges.

You'd think that a start-up like this would be private equity-funded. Zerodha, started with less than a crore, has not yet drawn a rupee of external capital and is using its cash flows (estimated FY profit before tax of Rs 30-35 crore) to grow its business, thank you very much.

David still wins.

The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where are not headed

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First Published: Mon, March 09 2015. 00:12 IST