11 highlights
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Paytm, formally called One97 Communications Ltd., is targeting a valuation of around $25 billion to $30 billion. If successful, Paytm’s initial share sale would surpass Coal India Ltd.’s offering, which raised more than 150 billion rupees in 2010 in the country’s largest IPO so far.
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Important and urgent questions on the company which should have been asked got sidestepped in the din of euphoria. Questions like, how exactly does Paytm make money, who are the company’s customers and has the company been doing all that well lately? And then the really big one: Why is Paytm coming to the public markets this year?
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Up until 2016, everything used to be simple, all entities were under one umbrella, that of One97 Communications, the primary legal entity. But after that, several entities were created and related-party transactions became the norm for reporting income and expenses.
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On a standalone basis, Paytm’s revenue has declined year on year. In the fiscal year ended 31 March 2021, One97 Communications recorded operating income of Rs 2,667 crore, as against Rs 3,115 crore in the previous year. One97’s income came from two sources: payments and financial services, which amounted to Rs 2,100 crore, and commerce and cloud services of Rs 567 crore.
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Paytm’s revenue shows a year-on-year decline because of an exceptional item labelled “recovery of marketing expense”, which amounted to Rs 255 crore in 2019-20. The money was recovered from Paytm E-commerce Pvt. Ltd, the company that runs the Paytm Mall online marketplace, and a large customer of One97 Communications.
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One97 Communications and Paytm Payments Bank work at an arm’s length distance relationship. This is something that the company needs to do to keep the Reserve Bank of India happy.
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There are two reasons for us to be fixated on Paytm Payments Bank. One, despite not being a subsidiary, this is the largest business for One97 Communications. Two, the big question that we were wrestling with is that in the past Paytm Payments Bank has been celebrated in the media as a company that has turned in a profit and a business that’s a shining beacon built by Paytm founder Vijay Shekhar Sharma. What that analysis misses is the income from the digital wallet business, which both companies seem to be recording as income, and that more than 50% of Paytm Payments Bank’s income actually comes from One97 Communications.
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One thing seems to have gone largely unnoticed about Paytm. The fact that its e-commerce dalliance, its most ambitious expansion strategy of the last five years, where it lost millions of dollars of investor money, is not even a part of Paytm anymore.
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Instead of giving tough competition to Flipkart and Amazon India, Paytm Mall scaled down its business significantly within the first two years of operations
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One, why is Paytm coming to the public markets? We believe the answer to this question is in the company’s increasing love for debt. In 2020-21, Paytm borrowed by way of an overdraft facility Rs 500 crore and a Rs 300 crore bank guarantee from ICICI Bank, in addition to a working capital facility of Rs 1,400 crore. Also, raising money through equity hasn’t been easy for the company in recent times, so getting to the public markets is the only way forward.
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Also, One97 Communications does not have a majority stake in the payments bank (it holds 49%). As a result, the payments bank’s accounts are not consolidated into One97 Communications’s consolidated financial statements. However, all of One97’s wallets business resides in Paytm Payments Bank.