Markets
Is Paytm worth what its owners are asking for?
Summary
- Paytm has a 40% market share in mobile transactions, dwarfing most large competitors
- But mere volume growth won’t cut it; Paytm must get more bang for its buck with every transaction
Paytm’s initial public offering (IPO) comes at a time when the frenzy in startup IPOs is showing signs of fatigue. Indeed, even the excitement towards the fintech company’s offer has dimmed a bit as well from that witnessed a few weeks ago.
That said, Paytm’s IPO would still get a strong response from investors, and one only has to look at its anchor book list for confidence. Bluechip investors such as BlackRock and long-term ones such as Canada’s pension fund and Singapore’s GIC have picked up stakes in the company. The anchor book garnered ₹8,235 crore in total. There is no doubt that its ₹18,300 crore IPO would be oversubscribed many times too, despite the size.
What do investors get with an exposure to Paytm? Formally known as One97 Communications Ltd, Paytm started as a mobile wallet company and has morphed into a one-stop shop for all digital payments. Its platform has 337 million registered customers and 21.8 million merchants. It is a market leader in mobile payments, wallets and its merchant base. Analysts believe that Paytm’s strength is its ability to keep up the pace of customer and merchant acquisition over the past several years. Perhaps it is this growth that big investors are betting on.
To be sure, the company leapfrogged in digital payments after the government rendered 86% of currency notes worthless through demonetization in November 2016. But demonetization resulted in an explosion of digital payments providers in India. “Paytm is the only payments company in India that, together with their affiliates, owns each layer of the payment stack," said analysts at Axis Capital Ltd in a note. This gives the company an edge, according to analysts. Paytm’s ticket to digital glory lies in its relentless growth of transaction volume. The company has 40% market share in mobile transactions, dwarfing most large competitors.
But volumes growth gives less benefits when the service offered is a cheap commodity in an intensely competitive market. As mentioned earlier, India’s digital space has exploded after 2016. What’s more, Unified Payments Interface (UPI), introduced in 2016, has brought down transaction costs for Indians, making digital payments the cheap commodity they are. This means that mere volume growth won’t cut it. Paytm must get more bang for its buck with every transaction, which is easier said than done.
The company earns money by charging fees from its customers and merchants for every digital transaction they make on its platform. To elaborate, Paytm gets a cut every time a consumer does a money transfer, or pays through the app for purchases or utility bills. Other revenue sources are selling third-party products and the new line of buy now, pay later (BNPL) credit.
It also gets a cut from merchants in addition to charges on using its point-of-sale (PoS) machines. But Paytm’s revenues dropped in FY21, resulting in a net loss of ₹1,701 crore. To be sure, the revenue drop was driven by its commerce and cloud vertical, while revenues from payments and financial services grew 10.6%. Even so, revenues from payments and financial services which houses its entire gamut of digital offerings have hardly grown in the past five years. During the same period, the company’s gross merchandise value (GMV) has jumped to ₹4.03 trillion in FY21 from just ₹35,000 crore in FY17. Aswath Damodaran, professor of finance at the Stern School of Business, pointed out in a 4 October blog post that revenue as a percentage to GMV (take rate) has dropped sharply in FY21. “The picture that emerges of Paytm is that of a management that is too focused on racking up user numbers, and too distracted to care about converting those into revenues and profits, while making grandiose statements about its future," he wrote.
It is this niggling trouble over revenues and profits that makes it challenging for analysts to justify Paytm’s valuation at its IPO. The company is selling shares at ₹2,080-2,150 per share. This puts its valuation at ₹1.39 trillion post issue at the upper end of the price band, making it the eighth largest Indian company by market capitalization. Damodaran has put Paytm’s fair valuation at $20 billion, close to what the company has indicated in its IPO. But for that to happen, the company needs to consistently improve its take rate.
