Warren Buffett’s Paytm bet is actually not that big a deal
As things stand, Paytm looks anything but a value buy for Berkshire Hathaway at a reported valuation of $10-12 billion
Berkshire Hathaway Inc. has invested between $300 million and $400 million for a 3-4% stake in Paytm, according to a Mint report. Both companies confirmed the investment, although they were cagey about details.
For perspective, the amount in question amounts to about 0.3% of Berkshire’s cash balance at the end of the June quarter. And despite this, the investment firm felt the need to clarify that Warren Buffet wasn’t involved in the transaction. So while Paytm has got some bragging rights with the Berkshire Hathaway association, it clearly isn’t a big deal for the investment company.
Besides, the Paytm deal is unlike most of Berkshire Hathaway’s investments, which focus on return ratios and are generally considered as value buys. In fact, with US stocks trading near record highs, Berkshire Hathaway has struggled to find value and its cash levels have reached new records this year.
Against this backdrop, Paytm is clearly fortunate to be able to raise funds from Berkshire, although the relatively small size of the transaction suggests the risks for the US firm are insignificant.
As things stand, Paytm looks anything but a value buy at a reported valuation of between $10 billion and $12 billion. Adjusted for an exceptional income, Paytm’s consolidated loss rose to ₹ 1,259.5 crore ($178 million) in 2016-17, from ₹ 1,177.6 crore in 2015-16. Paytm’s financials are based on holding company One97 Communications Ltd’s filings with the ministry of corporate affairs, sourced from paper.vc.
In 2016-17, the company spent ₹ 969 crore on advertising and promotions to generate revenue of ₹ 829 crore ($118 million). Of course, this was better than the preceding year, when the company spent ₹ 1,347 crore on promotions to generate revenues of ₹ 598 crore. (Read more here)
Still, the fact that revenues continued to trail marketing and promotion spend shows that customer acquisition costs are immense for Paytm. While demonetisation helped the company gain scale, generous cashbacks have continued to ensure customer stickiness. After all, if customers can make payments such as utility bills directly using their credit cards or bank accounts, why would they bother with a digital wallet unless there is an additional incentive to use it?
Of course, two-factor authentication makes the use of credit cards a bit cumbersome, especially for micropayments. To that extent, digital wallets still have a role to play. But when customers load their digital wallets using a credit card, they do so without any fee, which means digital wallet companies are incurring additional costs such as fees paid to credit card companies. Add to that gigantic cashbacks and discounts and it is little wonder Paytm’s total expenses were 2.5 times its revenues in 2016-17.
To make things worse, competition has picked up in India’s digital payments space, with Google Pay, Whatsapp Payments and the government’s own payments services also providing large-scale alternatives.
Despite all this, Paytm is confident about generating sufficient cash flow and living up to the faith reposed by investors. “I can say comfortably that this investment will put to rest all doubts about our ability to make money.... It lends credibility that such a business can make money,” Paytm’s founder and chief executive officer Vijay Shekhar Sharma told Mint in an interview. Cash burn from operations stood at ₹ 1,820 crore in 2016-17 and ₹ 1,520 crore in 2015-16.
Perhaps, Berkshire and other supporters of Paytm can see a gold mine at the end of the tunnel. They may be riding on the hope that the aggressive customer acquisition strategy will eventually pay off when the platform is used for myriad financial services.
But if things don’t turn out that way, Berkshire would have lost about 0.3% of its cash holdings, and about 0.05% of its total assets. Put simply, it doesn’t have a lot riding on the Paytm investment. But who knows, if it likes what it sees and increases its exposure to Indian assets over time, there may be winners all around from this move.
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