The 11-year-old Paytm, a financial technology giant with majority investment from Chinese Alibaba Group and Japanese Soft Bank, is now valued at Rs 1.17 lakh crore which is more than the market capitalisation of some of the well-established private banks like IndusInd, Federal and RBL Bank.
Vijay Shekhar Sharma founded One 97 Communications, the holding company for Paytm, is enjoying a respectable valuation despite making consistent losses. But the stock market could even drag the valuation down in future. The company has made Rs 1,701 crore losses on a revenue of Rs 3,186 crore in 2020-21. In the first quarter of 2021-22, the company has reported revenues of Rs 890 crore and a loss of Rs 381 crore. Sharma has the ambition to build Paytm as a USD$ 100 billion company.
Let’s study the five big challenges and hurdles that will come in the way of Paytm as it starts its stock market journey.
THE HIGHLY COMPETITIVE AND LOW MARGINS PAYMENTS BUSINESS
Paytm is creating a financial services tech powerhouse on top of its payments business. This is something like ICICI, State Bank of India and Kotak Group’s universal banking model of banking, insurance, mutual fund, brokerage etc.
This Noida headquartered company is moving from a low-margin payments business to areas like lending, investments, broking, wealth management, and insurance. It has also built a network of merchants across the country by providing QR Codes, POS solutions, and payments gateway for digital transactions. Paytm earns a transaction fee from its merchants based on a percentage of GMV or gross merchandise value.
There is also a recurring subscription fee model where the merchant pays for using Paytm Soundbox and POS. In addition, the consumer convenience charges also bring additional revenues. Currently, the majority of the company’s revenues is contributed by payment services, which has also been a cash burn business because of cash backs.
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The payments business is also a customer acquisition channel to cross-sell other products by using data analytics and other tools once the company creates a payments history of a customer. But it is also a fact that payments have now become a highly competitive business with global giants like Google Pay and WhatsApp.
The big banks with a large network of customers are also spreading their wings by tying up with fintech firms and promoting their apps. SBI YONO is a good example of a super app, which is already generating a lot of volumes in the market. In addition, the retail body National Payments Corporation of India or NPCI is innovating a lot on the payments side. The path-breaking innovations like UPI and Bharat Bill Pay, which is available to all the market players as a public utility, is empowering even a small bank or NBFC to offer digital services to its customer.
NO BALANCE SHEET OR STRENGTH IN THE PAYTM LENDING BUSINESS
The real value for Paytm shareholders in the years to come will come from the lending business. The banks with low-cost current and savings account or CASA make a good margin by lending for mortgages and car or personal loans. Paytm doesn’t have the balance sheet strength to scale up the lending book.
The company is already into lending products like buy-now-pay-later or BNPL, and the co-branded credit card business. But the company is not lending from its books instead it has tie-ups with non-banking finance companies and banks. Its revenue model on the lending side is like a distributor though it has data analytics capabilities and low acquisition cost. Paytm’s margins in the lending business are also nowhere near the banks and NBFCs. The next logical step for Paytm would be to take direct lending exposure.
Paytm Payments Bank, a differentiated bank that accepts deposits but is not allowed to lend, is eligible to apply for a small finance bank license after completing 5 years of operations. The company, however, would probably need a full-scale banking license as there are higher priority sector obligations in a small finance banking license. And, even if the company succeeds in securing a banking license, there are inherent risks in the lending business.
The recent debacle of Yes Bank, PMC Bank and Lakshmi Vilas Bank shows that any reckless lending and asset-liability mismatches have the potential to make the business model unviable. The risk in lending is also much higher than in the payments business or selling third-party products. This week, RBI Governor Shaktikanta Das had said that “the central bank is closely monitoring the business models and strategies of banks.” He was probably hinting at banks taking higher risk in the unsecured segment and relying on wholesale deposits on the liabilities side.
UP AGAINST MARKET SAVVY ZERODHA AND UPSTOX IN THE INVESTMENT SPACE
Armed with a million customers in its payments business via Paytm Money, the investments and wealth advisory arm has a ready customer base to cross-sell investment products. The company, with almost zero acquisition costs, is offering easy to use online platform for investors to buy equity, play in futures & options, do mutual funds’ investments, pension, and wealth management plans. But this space is also dominated by banks promoted platforms like ICICI Direct and HDFC Securities. In addition, there are traditional non-bank entities like Edelweiss, Motilal Oswal, JM Financial etc.
Paytm is also up against new-age players like Zerodha, Upstox, and 5paisa, which have the first-mover advantage as some of them have innovated a lending model of margin trading over the top of zero brokerage. So, these players are making more money in margin lending than brokerage.
Also read: ‘Thank you for taking away our money’, say netizens after Paytm’s lukewarm listing at bourses
Similarly, Paytm is also into insurance broking as an aggregator of insurance products from auto to health, but margins are not very high. Players like Policybazaar and BankBazaar are dominating the market. Most of the insurance companies are also using the bancassurance model, which is very cost-effective as banks have ready customers to sell. In addition, private insurers including LIC are building their digital capabilities to sell insurance directly through apps.
There are also pure-play digital models like Digit and Acko Insurance which are creating a paperless and seamless insurance experience in the general insurance industry.
THE BIG PROMOTER RISK AS FOUNDER HOLDS VERY LOW EQUITY
There is also a promoter risk in terms of founder Sharma’s low equity shareholding. Founder Sharma, who built Paytm from scratch, holds a 14.8 per cent stake and is no longer identified as a promoter. Given the future growth potential, equity dilution, if any, is likely to reduce Sharma’s stake in the near future.
Many digital players reason that the new age players globally have seen low promoter holdings and losses in the initial years. But the actual story is quite different. Let’s take Amazon. Two and a half decades ago, when six-year-old Amazon came out with its IPO, it was indeed making losses since its inception. But over the years, Jeff Bezos founded an online retailer that delighted customers and kept pushing new products from hardcover books to AI-powered Alexa.
Google, founded by Larry Page and Sergey Brin, made its public market debut exactly five years later and the founders had conveyed a terse message to Wall Street investors that Google was not a conventional company. “We do not intend to become one.” Those days in early 2000, it was a struggle to explain the market potential of a search engine. Nearly a decade ago, when Mark Zuckerberg’s Facebook Inc went public after 8-years of existence, investors had matured.
Also read: Paytm crosses milestone of Rs 1 lakh crore market cap despite weak listing
The social media company got a big thumbs up by becoming the third-largest IPO ever in US history, next to payments giant Visa and automaker General Motors. FANG as they are now called for Facebook, Amazon, Netflix, and Alphabet (Google) today occupy the top slot in the world’s market cap rankings.
Interestingly, the founders in these global giants still hold more than a 10 per cent stake in the company even after two decades. The business model of Paytm, however, is yet to mature as it is consistently making losses. In a new public listing set up, Paytm’s board has got all the powers to make critical decisions and not Sharma.
This pertains to decisions like raising additional debt capital, setting up new subsidiaries, approval of the business plan, inter-company financial transactions beyond a particular monetary threshold, and also appointment and removal of the key management team. This kind of framework tomorrow leaves the scope for disagreements and also possibilities of mergers and acquisitions. The private equity investors, who now have a majority stake, will be guided by the maximization of returns as they have to eventually exit the company to pay back their investors.
GUIDANCE ON THE PATH TO PROFITABILITY
There is a big difference between the private markets versus the public markets. The private market always values a business based on the disruption potential of an idea, the market size, potential for scale, the people behind the company etc. Private equity and venture capital firms also have a time horizon of 7 to 12 years to wait patiently for the returns. But the public market is very different as it gives higher importance to break-even guidance and the path to profitability.
Institutional investors including one million retail investors need certainty. They don’t like over-promising and under-delivering. The market cap rise from hereon will depend on what the Paytm management guides about the future growth and profitability. The public market will closely watch quarter to quarter performance and performance guidance. The current public listing is certainly going to put a lot of performance pressure on Paytm.
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