In today’s Finshots, we discuss what could be India’s biggest IPO
Let’s be clear that this isn’t a review of the PayTM IPO. Rather, it’s an explainer of how PayTM’s business has changed over the years and what its future may look like.
In 2010, PayTM started as a platform to let people top up their mobile phone balance. By 2014, it became a digital wallet platform. You could load money into the wallet and make payments to utility companies. For instance, you could pay your electricity bills. And in 2016, a surprise move by the Indian government (Demonetisation) gave a fillip to digital payments, and through it PayTM.
But, what does the company do really — Are they a digital wallet? Payments bank? E-commerce company (a bet that didn’t quite pan out)? Fantasy sports? Ticketing (part of their commerce and cloud segment)? Mutual funds? Stockbroking? Insurance?
Well, almost everything. So, perhaps PayTM is in some ways what many people would call a “super-app.”
You can find everything if you wanted to. But if you had to parse through the super app, and look at the big verticals that bring in money, you’d have to start with UPI— the Unified Payments Interface (UPI), India’s instant payments mechanism.
Now PayTM has a share of 13% in overall UPI payments. But it’s the peer-to-merchant segment (P2M) where it’s truly dominant with a 50% share. P2M is when you visit a store and make a payment to the store owner. The value transacted on its P2M segment has grown by 33% year-on-year for the past 2 years and the total number of merchants have exploded — from 7 million to over 20 million. And that’s the segment that matters.
Because UPI doesn’t make anyone money. When you transfer money to a friend, no intermediary makes money. When you transfer money to a merchant, no one makes money either — at least not anymore.
But by capturing the P2M segment, PayTM has the opportunity to offer value-added services.
Think merchant loans through partnerships with banks and non-banking financial companies like Clix Capital. If you were a merchant whose transactions were routed through PayTM’s gateway, the company knows a lot about your business. This could help them gauge your creditworthiness. In fact, this could be the only place where you could get yourself a quick loan. And by facilitating the loan, PayTM takes home a nice cut.
Now ideally, they’d want to do the lending themselves and keep the whole pie. Not rely on intermediaries. But they only set up their Payments bank in 2017 and these banks come with a whole set of restrictions — a cap on deposits, no lending, stuff like that.
Having said that, however, the Payments bank could have a big role to play soon enough.
According to current regulations, you could convert a payments bank to a small finance bank after 5 years of operation. And small finance banks can lend money and do a whole host of other things. So it seems like that lending business could come alive very soon. But in the meantime, PayTM has captured a large share of the UPI market as we described earlier and this could bode really well for them.
Think of it this way. When UPI payments are made, money travels from the sender’s bank — called the remitter bank — to the receiver’s bank– called the beneficiary bank. And guess who’s leading the pack on the beneficiary bank front? PayTM.
And this fact shouldn't be all that surprising — They offer payments gateways, soundbox, current account facilities, QR Codes, PoS terminals for credit and debit card transactions. They make life so much easier which is why so many merchants sign up. All in all, the payments bank currently has 60 million users (including retail users) and hosts over $700 million in deposits. And if they get that SFB license in the future, it could potentially be a gamechanger.
Alright then, we’ve spoken at length about its relationship with merchants. But what about all the retail users? People like you and me — 330 million users and 50 million monthly active users who commit to at least one transaction a month. What does it do with this captive user base you ask?
Well for starters, you have the lending products. There’s PayTM PostPaid which is like a Buy-Now-Pay-Later thing and they also dole out some old fashioned loans on the side. But its future in retail probably lies in the mutual fund, insurance and the stock broking segments. They’re highly lucrative and there’s definitely a lot of untapped potential here. So as it stands, PayTM’s flywheel starts with wallets and payments, then lending, and finally money management. The aim is to keep users locked in inside the super app and hope that this strategy pays off dividends.
All this sounds like a fantastic story. But what are the risks involved?
- Let’s start with its valuation. While the final pricing isn’t out, early reports indicate that it’s expecting a valuation of $25–30 billion from this IPO. For context, they made operating revenue of $375.4 million in 2021. And with that kind of financials, that’s a lot to expect. Also remember, PayTM is still a loss-making company whose income has dipped 6% year-on-year since FY19.
- Typically, companies conduct a pre-IPO placement. What this means is that the company gets some big investors on board, and offers them shares at a discount. Other investors will think, “oh, big investors see potential, so we should buy too.” But, PayTM doesn’t seem to be going ahead with the pre-IPO fundraise of $268 million. The rumour is that PayTM wanted a high valuation and get pre-IPO investors to pay more, but PayTM’s advisors recommended a lower valuation. That won’t make investors comfortable either.
- Then there’s something called the take rate. It’s basically like a commission it earns from the transactions it handles. This has dropped from 2.18% in 2016–17 to 0.79% in 2020–21. Possibly hinting that the company may still be on a user acquisition spree as opposed to working out the route to profitability.
- And the biggest risk is whether PayTM can execute all its monetisation plans. Because, as Aswath Damodaran, a professor of finance at the Stern School of Business, NYU wrote:
“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. Using the corporate life cycle framework to assess PayTM, it resembles an adolescent with attention deficit issues, in its scattershot approach to growth and absence of attention to business details, and if you are an investor, you have to hope that going public will cause it to grow up quickly.”
So there you have it. The PayTM IPO will be another monumental event for the country’s fintech ecosystem. There’s a possibility that PayTM could become a trendsetter or it could waste away tons of potential. We will probably know soon enough. Until then, we hope that the company has a solid showing and the IPO (when it does happen) is a runaway success.
PS: Did you know that PayTM stands for Pay Through Mobile?