31 highlights
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After Zomato, two digital payments companies, Paytm and MobiKwik, are all set to go public.
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Paytm’s strategy was driven by two factors: one, copying its largest investor, the Alibaba group, in terms of offerings; and two, if there was any business in the startup space showing some revenue and profitability, the company was ready to try its hand at it. The overarching idea was to build a full-blown financial empire, to justify the funds raised and to raise more funding.
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Paytm enjoyed that dream run for nearly four years, but for the past couple of years, it has been largely stagnant. For the potential IPO investor, it can be difficult to untangle from the company’s draft prospectus just what business it is in and how it makes money.
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That would mean its users account for almost a quarter of India’s population—a more useful figure might be “annual transacting users”, which the company says totalled 114 million in the 2020-21 fiscal year (see below). Average monthly transacting users would be better still, but Paytm hasn’t revealed that.
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Across its digital payments offerings, the company claims a gross merchandise value, or GMV, of Rs 4,03,300 crore; this represents the total value of transactions processed. The company’s cut or revenue from these transactions, however, would vary widely depending on the specific payment service, with UPI generating very little, given that the government doesn’t allow fees to be charged to merchants or users for UPI payments. And collating data from the National Payments Corporation of India, the Paytm app accounted for more than Rs 3,00,000 crore of UPI transactions by volume in 2020-21, so close to three-quarters of the payments GMV is UPI, with little revenue to show for it.
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The wallet business, on the other hand, has been entirely disrupted by UPI, where Paytm is significant, but still a distant No. 3 to market leaders PhonePe and Google Pay.
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According to Reserve Bank of India data, as of May 2021, Paytm has 64.5 million debit cards—which makes it the third largest bank in terms of debit card issuance after State Bank of India (290 million) and Bank of Baroda (65.9 million). But Paytm’s automatically generated virtual debit cards don’t seem to see much use.
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The middling Karur Vysya Bank, with only 4.2 million debit cards, saw 5.2 million transactions (card swipes and ATM withdrawals) worth Rs 2,001 crore in May. Paytm Payments Bank, with its 64.5 million cards, saw only 2.8 million transactions, with a total value of Rs 509 crore.
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Last year, Paytm Bank became the first payments bank to announce profitability. To understand Paytm Payments Bank’s actual revenues, do not miss to check our last story.
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Paytm Payments Bank is still two years away from completing the five years of operations to become eligible for becoming a small finance bank; this would enable it to extend loans (it relies on lending partners currently), which is the biggest factor missing in the payments bank business.
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One thing that probably is working for the company is the FASTag business
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Paytm Payments Bank has issued a cumulative of approximately 9 million FASTags, with a market share of 28%.
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It’s also worth noting that in most of the businesses it runs under the commerce category, including travel and movie/event ticketing, it faces stiff competition from larger companies in those markets.
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Paytm Postpaid is provided on Paytm Wallet, which is part of Paytm Payments Bank. And as per the RBI guidelines a payments bank is not allowed to lend from its own books. Hence, payments banks mostly work with other banks and NBFCs as the actual lenders.
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However, the question with fintech lending partnerships is, who takes the risk?
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“Because they do not own the customer and they will only give balance sheets and provide capital. Even if not 50-100% FLDG model, the minimum FLDG could be somewhere between 5-10%. The entire industry works on FLDG. And ideally this is against the payments bank regulation.”
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FLDG is short for “first loss default guarantee”. Essentially, this is an arrangement between a fintech company and a lender (a bank or NBFC) where the fintech agrees to bear a certain percentage of the loss in case of defaults.
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However, in July last year, Paytm said it was set to acquire general insurance company Raheja QBE for Rs 568 crore, and become an insurer in its own right. However, the acquisition is still awaiting regulatory approval.
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To sum up: You have Paytm Insurance Broking, which has partnered with over 47 insurance firms to sell their policies through Paytm.
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The idea behind Paytm Money, launched in 2018 with just mutual funds at first, has always been to leverage its parent company’s user base in digital wallets and payments.
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Here, Paytm Gold, though, is still the largest digital gold player in the country, according to a person aware of the market.
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“Whenever we invest in a stock, we are looking for three things. 1. Business model—is the company willing to deploy more funds to solve the problems of the future and become more efficient? 2. Promoter integrity—bulk of the tech new-age companies that are coming to public markets have good promoters, so this is another tick mark for us. 3. Valuation—it’s subjective and never a straightforward answer,” says a fund manager who is an anchor investor in Zomato’s public offering and is equally excited about the prospects of Paytm’s IPO.
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The magnitude of gain to be made in Paytm’s IPO is best explained with the example of Reliance Capital. The Anil Ambani-led company in 2018 sold a 1% stake in Paytm for Rs 275 crore after holding onto it for a decade. Had he stayed put for three more years, at the current expected valuation of Paytm’s IPO, the 1% stake would have fetched Ambani a handsome sum of Rs 1,850 crore.
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Of course, this is the expected valuation as the fintech company has not disclosed the percentage of dilution, only the size of the public offer in monetary terms, i.e. Rs 16,600 crore. There is also a pre-IPO allotment of Rs 2,000 crore, the final issue size will be adjusted accordingly.
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Speaking of which, Paytm’s DRHP also reveals an interesting point: Ajay Shekhar Sharma, brother to founder and CEO Vijay Shekhar Sharma, appears under “relatives of Individuals owning interest in the voting power of the Group that gives the control or significant influence”. He owns 13,463 shares in the company.
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According to data available on Zauba Corp, a data provider on Indian corporations, Ajay Shekhar Sharma is director in seven companies. One, Juarez All Solutions Llp, was founded in partnership with Aarti Tankha, in March 2020. Tankha married to Vivek Tankha, who is a former Congress party leader and member of parliament in the Rajya Sabha. Vivek Tankha is also part of the joint parliamentary committee on the Personal Data Protection Bill.
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Ajay Shekhar Sharma’s connections span party lines. Another company he’s listed as a director in, Doron Marketing Pvt. Ltd, which was incorporated in December 2019, has Kalpesh Vijayvargiya as one of the directors. Vijayvargiya is the son of Kailash Vijayvargiya, national general secretary of the Bharatiya Janata Party.
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Ace investor Rakesh Jhunjhunwala who was speaking at Motilal Oswal AMC’s Global Partner Summit yesterday said that he is bullish on all parts of the economy except new internet companies.
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SEBI did try to keep retail investors away earlier, and had announced a separate platform for startups to list; this platform would have allowed only more qualified investors to participate. However, six years on, the platform has been snubbed by startups even though SEBI tweaks its norms for such listings every six months.
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“SEBI needs to come out with some broad valuation norms for pricing of IPOs connected with EBITDA to protect retail investors. It cannot allow super aggressive valuations at 26 times of revenue with no profits in sight,”
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“At this stage, every first timer seems to be getting their ask. This is HOPE. That one day the company will make enough money to enable conventional valuation. The runway seems to be quite long.”