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Home / Markets / Mark To Market /  Paytm is mounting India’s biggest IPO but beware of bumps ahead

Paytm, formally known as One97 Communications Pvt. Ltd, has morphed into a full-stack financial products platform from a digital wallet provider within a few years. Its plans to go public by the end of this year, if followed through, would add credence to the company’s seriousness in being a market leader in the fintech space.

According to media reports, Paytm is looking to float an initial public offering (IPO) worth a staggering $3 billion ( 21,700 crore) by November. This would value the firm at $24 billion ( 1.74 trillion). In its previous funding round of $1 billion in November 2019, the firm was valued at $16 billion.

While the motivation behind the IPO is not known, it is likely to be not just for fund-raising but also to give a chance to the company’s long-term investors to monetize holdings. SoftBank, Alibaba Group and Berkshire Hathaway are some of the marquee investors in the firm.

Cost of growth
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Cost of growth

There are several factors that may give Paytm a smooth road towards listing. The fintech space has garnered a lot of attention with the entry of large players coinciding with speedy technological changes. Coupled with buoyant equity markets, the company may find willing investors easily.

What has worked for Paytm is that it is an early mover in the fintech space and has achieved scale. And given a full stack of products from payments to digital lending, getting a customer and keeping them loyal can be an advantage for the company.

Paytm’s strength lies in its merchant integration. According to a Credit Suisse report in March, the firm had the largest tie-ups with merchants for UPI payments. Analysts at Bernstein believe this, along with credit, will power its next growth phase. “We believe the next stage of growth will be led by financial services, particularly delivering seamless credit tech products to consumers and merchants," the analysts at Bernstein wrote in a 27 May note. Paytm has a merchant base of 20 million, and Bernstein estimates that the gross transaction value of the total people-to-merchant franchise was $52 billion in FY21.

Paytm has also applied for a small finance bank licence after the regulator indicated payment banks can convert themselves into such. Paytm Payments Bank Ltd cannot lend, but parent Paytm offers loan products via tie-ups with non-bank lenders and banks. It has applied for an NBFC licence too. Indeed, credit offers the meatiest side of income. “Retail digital lending has delivered 43% CAGR in the past seven years, reaching $110 billion by 2019, differentiated mainly by faster disbursements," wrote analysts at Credit Suisse in a 23 March note. “(These firms) use alternative data sources for underwriting and reach to customers, who were hitherto outside formal credit due to lack of bureau records. They have gained more than a 40% market share in new personal loans and 20%+ in unsecured retail loans," the brokerage said. Paytm’s surge came when the Centre demonetized 86% of currency notes in November 2016. Indeed, digital payments took off, and the firm was a big beneficiary. It even managed to narrow its net loss for FY17 from the previous year. But demonetization also gave rise to Unified Payment Interface (UPI), which saw the entry of Google and Flipkart into the payment space. In the next three years, UPI grabbed 34% of total digital payments in India, and within the UPI ecosystem, Google Pay and PhonePe emerged as leaders. Paytm fumbled on two counts. First, UPI is giving tough competition to its core product, the digital wallet. Second, Paytm has not been able to scale up its share of UPI transactions, although adding UPI to its cache was smart to blunt the competition to its wallet somewhat. But its share in UPI transaction space is just 7.5%.

What’s more, is that Paytm’s various businesses ranging from insurance broking to e-commerce, have not added much to revenue. Beyond its core product of payments, it hasn’t really made a wave. “They have tried everything, but beyond P2M (person-to-merchants), there isn’t much progress," an analyst at an institutional brokerage said, requesting anonymity.

Paytm’s plan to enter the general insurance space has still to get the regulator’s attention.

Paytm’s standalone revenue stood at 3,115 crore in FY20, whereas consolidated revenue stood at 3,281 crore, according to data collated by VCCEdge. It reported a consolidated loss of 2,597 crore before tax and exceptional items. That brings us to profitability. Paytm was able to narrow its loss in FY17 following demonetization. That also led marque investor SoftBank to infuse $1.4 billion in May 2017. But its efforts to garner market share have not yielded sharp gains during covid though digital payments have again surged. UPI seems to be winning this time. Paytm not only needs to address this but must also progress into a profitable venture.

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