Paytm strategy and business model

Paytm IPO

The largest payment services provider in the country, Paytm, owned by One97 Communication, is planning a $3 billion initial public offering (IPO) . Paytm’s board has approved the offering plans in principle and is finalizing the draft red herring prospectus. The details are not final but the transaction could be pro rata, where all major investors could forgo a part of their stakes proportionally. There is lot of excitement in the market and the Paytm stock has almost doubled in the unlisted market to up to Rs 24,000, according to the people who deal in shares of unlisted companies.

Who owns Paytm ?

Paytm’s major shareholders include Alibaba’s Ant Group (29.71 per cent), Softbank Vision Fund (19.63 per cent), Saif Partners (18.56 per cent), and founder Vijay Shekhar Sharma (14.67 per cent). AGH Holding, T Rowe Price and Discovery Capital, and Warren Buffet’s Berkshire Hathaway hold less than 10 per cent stake in the company.

Why did Berkshire invest in Paytm is still not known, as they are not known to invest in Unicorns or Indian companies. Berkshire had last ventured into India in 2011 in the non-life insurance sector by tying up with Bajaj Allianz as a corporate agent. The partnership broke in 2013.

Paytm Strategy and Business Model

The company started as a payments interface. They have competition from global players including Walmart’s PhonePe, Google Pay, Amazon Pay and Facebook’s WhatsApp Pay in this segment. They have tried different things like e-commerce, gaming etc. Paytm Mall is a mobile-based marketplace where sellers are charged various fees to sell items. Paytm Wallet is a digital payment gateway where the company makes money on interest sitting in user accounts. Paytm also sells digital and physical gold and collects a raft of fees from its personal banking service, Paytm Bank.

Due to stiff competition in e-commerce and payment gateway, company is probably not doing well in these segments. The company is now said to be engaging with BillDesk, PayU and Infibeam Avenues for merger or a tie up to increase its market share in the payment gateway business. Paytm’s ecommerce business under Paytm Mall, which initially tried taking on sector biggies like Amazon India and Walmart-owned Flipkart, but has remained a distant third player. Paytm had also set up a joint venture with Alibaba Group firm AG Tech in 2018 to build a gaming platform, which began life as Gamepind but was later renamed Paytm First Games.

Going forward, the company is now expanding into new areas and entering credit, insurance and wealth tech – and aims to become the ‘superapp’ of financial services. Paytm’s mutual fund distribution and broking business under Paytm Money has also made a solid start, while the company is also looking to acquire a general insurance company to get a foothold in health and vehicle insurance.

Paytm Group has a bank of its own. It has 52 million customers with revenues of ₹1,500 crore. During the last nine months, it has made a profit of ₹100 crore. Our bank has served customers without requiring bank branches. About 60 per cent of our customers are very active. In 2010 we started Paytm. Between 2011 and 2020, we have been a payment company and a bank. This decade will see us as a large financial services company from being an internet company.

– Vijay Shekhar Sharma, Paytm founder

Paytm’s core payments business is growing, and it is also expanding in financial services. The company wants to convert its payments bank into a small finance bank to lend directly to customers but is waiting for the recommendations of a working group of the Reserve Bank of India to be approved by the banking regulator before it proceeds. Probably, it wants to emulate success of SBI YONO. We would write a separate article regarding this.

COVID Impact

Offline merchant payments are still hit because of the ongoing second wave of the pandemic. Verticals like online ticketing for travel and movies also have taken a hit due to the pandemic.

Question of Valuation

The payments company is expected to make losses for an eighth consecutive fiscal year in FY21, though the losses are expected to narrow from the previous financial year. Revenue is also likely to take a hit. In 2019-20, the payment services company reported a net loss of Rs 2,942 crore and burned cash from operations worth Rs 2,385.3 crore. Revenue was Rs 3350 Crore in FY20, with expenditure of Rs 5861 crore.

One97, was last valued at $16 billion according to unicorn tracker CB Insights. Paytm, however is aiming at a valuation of $25-$30 billion. A leading banker has valued Paytm at around $20 billion, higher than its current valuation of $16 billion.

With current revenue of 3350 Crore, and negligible growth in last couple of years, it is valued much higher than it should. We would value it at $9-10 billion.

In the planned IPO, Paytm wants to put 10% of shares on the block, which would be around $1-3 billion.

Should you invest ?

Paytm is coming to the market after 10 years of being around. A part of their growth has been squeezed out because of the private funding even before they go public. Would it experience the same growth as it had in the past ? Probably even more after COVID is over, but would depend largely on Paytm’s competencies, competition, and growth of Indian Economy.

Markets would value the company in their own way. Secondary market stocks are today being driven by either by fundamentals or global liquidity. Fundamentals are still not good for Paytm, future projections of growth is what is driving the valuation. Market is also at an all time high, which could fall if growth numbers are not good for this quarter.

So we would suggest, analyse in detail before investing.

Disclaimer: Strategyboffins.com has used the above figures and numbers from the below mentioned references. Investors are advised to check with certified experts before taking any investment decisions.