Groww's valuation relative to exchanges is not enticing
Billionbrains Garage Ventures’ (Groww) net profit failed to increase sequentially in the September quarter (Q2FY27) despite having tailwinds of five more trading days and no Indian Premier League (IPL)-related marketing costs.
While Groww’s net profit fall may be marginal at 1.3% quarter-on-quarter to ₹725 crore, even as marketing costs fell by almost 29% to ₹105 crore, it highlights the company’s high dependence on equity derivatives. Further, a nearly 5% rise in stock active users to 12.7 million might not matter much unless they trade more.
Groww’s commodity brokerage income and equity cash brokerage income increased by 26% and 7.5% on-quarter in Q2FY27 to ₹95 crore and ₹268 crore, respectively. Yet overall brokerage income fell by 6.6% to ₹1,054 crore, as equity derivatives brokerage, which contributed 65.5% of brokerage income, fell 14% to ₹690 crore. Broking orders fell by 7.7% to 517.3 million, with the closing auction session (CAS) mechanism exacerbating already weak sentiment in equities.
To be sure, recent activity suggests the trading community already seems to have adjusted to CAS changes. Trading activity in the most important segment of equity derivatives, i.e., options and its most important parameter, i.e., premium turnover, has already recovered from ₹7.4 trillion in August to ₹9.4 trillion in September, data from National Stock Exchange showed. So, more than the CAS-related changes, it is crucial that the general sentiment for equities revives.
Growing non-equity segments
Groww is taking steps to lower its reliance on equity derivatives, reflected in the more than doubling of other operating income to ₹73.9 crore. While details of other operating income are not available, growth seems to be aided by wealth management, as Groww AMC's revenue was just ₹4 crore. However, it is still too small to move the needle meaningfully. Fund-based income, comprising interest income on loans under various heads such as margin trading facility (MTF), loans against shares (LAS), and personal loans (PL), grew 7% on-quarter to ₹415 crore. MTF and LAS generate both brokerage and interest income.
Cash market turnover contribution from MTF is slightly above 5% in Q2FY27. Note that an increase in MTF value may not necessarily mean higher brokerage income, as Groww charges fixed brokerage per order (irrespective of value), capped at ₹20 per order, so to boost brokerage income, order volumes need to grow.
Groww is also working on providing access to trading in the US stock markets, but the timeline is not yet finalized. The brokerage for US stocks is likely to be a percentage of the value rather than a fixed brokerage per order.
Brokers, including Groww, also face another challenge if the merchant discount rate (MDR) is introduced on Unified Payments Interface (UPI) transactions. MDR has been capped at ₹300 per transaction (minimum is 0.02% of value). Note that if a trader transfers funds to a broker but chooses not to trade and later withdraws the funds, the broker still has to bear MDR without earning any brokerage revenue.
Investors have assigned a rich price-to-earnings multiple of 40 to Groww based on Bloomberg consensus FY27 estimates, which is closer to the multiples enjoyed by exchanges such as BSE and NSE. Exchanges operate in an almost duopoly structure, while Groww has multiple rivals. Groww must maintain its faster growth to prevent the Street from dragging down its valuation multiple to that of comparable peers, such as Angel One, which trades at a 21 price-to-earnings multiple.