Nithin Kamath explains why Zerodha is conservative about its valuation

Saying that ups and downs in company's valuation can be mentally taxing, broking firm Zerodha's founder and CEO Nithin Kamath on Saturday explained why the company is conservative about its valuation.

In a series of tweets, Kamath said Zerodha does a valuation exercise every year only for its employee stock ownership plan (ESOP) buyback, and went on to explain why the company values itself at only $2 billion currently when smaller players are raising money at much higher valuations.

Kamath said Zerodha started its ESOP scheme in 2017 to share the company's success, and employees who complete one-year with it can get ESOPs. However, he said, the company advises its employees to consider the ESOP scheme as their retirement fund which will compound over the long term.

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The ESOPs are free of cost and buyback is optional. Every year, the new ESOPs issued by the company are higher than those bought back. "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.

Zerodha's business is cyclical and highly correlated to markets, Kamath said, adding that there is no easy money to be made in the markets and what happened in the last 18 months was an outlier.

"...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%. It doesn't matter even if the product is made in heaven," he said.

Kamath said Zerodha wants ESOPs to be like a low-volatility retirement fund as they would form a large chunk of the networth for many employees. Explaining the rationale for its $2 billion valuation, he said the company thought that a valuation of 15 times of its profit after tax (PAT) was fair. Besides, valuation ups and downs can be mentally taxing, he added.

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