Company Name – One 97 Communications Limited (Paytm) Current Share Price – INR 619 (May 23, 2022) Market Cap – INR 40,190 cr |
[Updated for Q4FY22/FY22 results]
1. What is interesting about the stock?
Back in November 2016, among others, there were two terms that the Indian public familiarized itself with – Demonetization and Paytm. That was the time when Paytm saw an exponential increase in its user base and the phrase “Paytm Karo” became a household jargon brand for a category like Xerox. Ever since it has been a part of our lives.
'Paytm' owned by One97 communication is India's leading digital ecosystem for consumers and merchants with a ~65% market share in their Digital Wallet business. The company started its operations in 2010 as a mobile and DTH recharge platform and soon expanded to multiple other business lines such as Payments bank, ticketing, and payments gateway.
Paytm has enabled its consumers and merchants to use its platform for multiple purposes. Be it for mobile recharge or payment for goods/services or even to invest in mutual funds and other financial instruments. Paytm tasted some success when Uber adopted Paytm as a payment method and next when demonetization was announced, Paytm quickly used its infrastructure to promote cashless transactions, thus seeing a huge increase in its active user base. It services over 71 million average monthly transaction users in Q4FY22 and around 2.9 million installed devices, as of 31 March 2022.
It seems Paytm has spread itself too thinly across multiple business lines. Being the first mover, it was able to monopolize the digital space however soon companies such as PhonePe, Google Pay, and Amazon are catching up. Paytm’s payments-based business model has been disrupted by UPI – a real-time retail payment system developed by government-backed NPCI thus reducing their profitability even further. But how?
Company generated 68% of its revenue in Q4FY22 from the payment business – wallet, payment to the merchant (P2M), or other UPI transactions. Paytm is a leading player in the P2M market with ~40% market share but a significant part of the transactions are through the UPI route where the government has mandated zero merchant discount rate (MDR) or the commission charges. UPI as a % of its overall payment business is growing which is creating a situation where the revenue of the company is growing at a slower rate as compared to the GMV and its take rate (effective commission rate) is falling. The take rate for Paytm in Q4FY22 was at 30bps (1 bps = 0.01%) vs. 40bps in Q4FY21. So, the profitability of this business line is very difficult to achieve. It can at best be an acquisition channel for other businesses.
Indian central bank (RBI) barred Paytm Payments Bank, in March 2022, from adding new customers due to likely gaps in its technology systems, potentially denting its small finance bank aspirations and further impacting fintech's ability to boost earnings.
While the core payments business has been in operation since 2014, the company has spun off several verticals in the past 3 years, to cross-sell to its large customer base, including consumer lending (2020), co-branded credit cards (2020), insurance distribution (2020), wealth management (2018) and its mini-app platform (2020). However, none of this has translated into significant revenues or profitability for Paytm. Furthermore, Paytm has not achieved any meaningful market leadership in any of its verticals outside payments, which is worrisome. Leadership, in several verticals, has been in churn which hasn’t helped the case.
We can see high growth in the financial services business driven by loans disbursed. However, the financial services revenue as % of revenue in Q4FY22 is only ~11% and doesn't have good credit metrics (bounce rate of more than 10% and bucket 1 resolution which is a proxy for quality at 85-90%). Loans are underwritten and booked by Paytm's lending partners (NBFCs and Banks) on their balance sheets. Paytm acts as a collection outsourcing partner but it does impact the sustainability of the business.
While Paytm has many competitors overall, according to Credit Suisse, India’s payments market is estimated to be worth USD 1 trillion in the next three years, up from about USD 200 billion last year thus the pie is big enough for players such as PhonePe, Google Pay, Amazon.
2. Key Historical Financials
Paytm saw its revenue from operations grow by 89% Y-o-Y to INR 1,541 cr in Q4FY22, driven by 80% growth in non-UPI payment volumes (GMV) and more than 3 times growth in financial services and other revenue. Meanwhile, monthly transacting users (MTU) in October stood at 71 million in Q4FY22, up 41 percent Y-o-Y, and also up from 64 million in Q3. Paytm also saw a growth in its lending business, with 6.5 million loans disbursed in Q4FY22, while in Q3, the company disbursed 4.4 million loans.
Paytm granted a big round of stock options (ESOP) to its employee before its IPO. A substantial portion of the stock option went to the founder. This is driving a big non-cash expense of INR 390 cr in Q4FY22 factored in EBITDA. ESOP expense is expected to continue for several quarters.
3. What is my view on company valuation?
The stock price of the Company has seen a ~71% downside since the IPO at INR 2,150. With a P/B of ~3x and a Price to revenue (annualized last quarter) multiple of 6.5x, the stock still seems to be overvalued. It is difficult to value the business without a clear path to profitability.
However, if the company were to eCommercefind a way to monetize its UPI transactions or aggressively expand its banking services once it gets the requisite licenses from RBI, the financial metrics would significantly improve, thereby making it an attractive investment.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Government reversing its decision to mandate zero MDR for UPI transactions
Company receiving full banking license which will open channel to monetize the current customer base with attractive lending capabilities. We believe that this is a low probability as the Chinese shareholders own ~31% of its shareholding
The other competitors, Amazon, Google Play, and PhonePe become more aggressive and took away market share from Paytm. New competitors emerge and grow to counter the cross-selling which Paytm benefits from. JioMoney can become a significant competitor given the comprehensive ecosystem that it can benefit from.
About the Author
I have over 8 years of experience across the Technology Sector and other sectors in India and the Middle East. Currently, I am looking after developing a robust supply chain process for a leading conglomerate to support their ecommerce ambitions.
I hold an MBA degree from HEC Paris and an Engineering degree from the Indian Institute of Technology, Madras (IITM).
I am an insignificant public investor and have an avid interest in Blockchain and Cryptocurrencies. I am a hustler and always on the lookout for deriving value.
Disclosure
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.