Paytm IPO Financial Analysis (Subscribe for Long Term)

Key Business Highlights

Paytm was launched in the year 2009 and has become the largest digital payments platform in India to enable cashless payments through mobile phones. Paytm is available across the country with “Paytm Karo” evolving into a verb for hundreds of millions of Indian consumers, shopkeepers, merchants, and small businesses.

The company offers payment services, commerce and cloud services, and financial services to 333 million consumers and over 21 million merchants registered with the Paytm app, as of March 31, 2021. Its key partners are banks with escrow services, hotels, insurance companies, movie theatres, and shopping centers.

The App enables consumers to transact at in-store merchants, pay their bills, make mobile top-ups, transfer money digitally, create and manage their Paytm Payment Instruments, check linked account balances, service city challans and municipal payments, buy travel and entertainment tickets play games online, access digital banking services, borrow money, buy insurance, make investments and more.

Service Offerings of Paytm:

Paytm Payment Instruments- it allows consumers to use digital wallets, sub-wallets, bank accounts, buy-now-pay-later and wealth management accounts, major third-party instruments, such as debit and credit cards, and net banking.
Commerce and Cloud services - provides consumer-facing offerings such as ticketing, mini-apps, and advertising, that allows merchants to offer their products and services to relevant customers. These services on the Paytm app allow customers to use the app to access a wider range of lifestyle use cases, which reinforces the payments business also. As a result, cloud and commerce businesses increase consumer and merchant engagement.
Financial Services- various financial services products are offered through associates and financial partners. Consumers can use Paytm Postpaid, which is a buy-now-pay-later product offered in collaboration with Paytm’s financial partners. Equity broking is also facilitated through wealth management offerings.
Paytm Mall- it attracts many sellers to its wide-ranging goods like shoes, clothes, etc. on its website.
Paytm has launched “Digital Gold”, owing to its partnership with MMTC-PAMP the well-known gold refiner.

Paytm earns money through transaction fees and take-rates charged to merchants based on the percentage of GMV, which is a key revenue driver for the company. Paytm earns revenue in the form of commission per recharge. Money stored in Paytm wallet is saved in another bank and it earns float on the same.

Issue Details

Paytm IPO amounting to Rs 18300 crore (Rs 8300 crore is a fresh issue) opens on November 8, 2021, with a price band of Rs 2080-2150 per share. The offer concludes on 10^th Nov. BRLM of the offer is Morgan Stanely, Goldman Sachs, Axis Capital, ICICI Securities, JP Morgan, Citigroup, and HDFC Bank. IPO proceeds would be used to grow its business lines and acquire new merchants and customers.

Financial Review of Paytm

The total income of the Issuer decreased by 10% to Rs 3186.8 crore in FY21 from Rs 3540.7 crore in FY20. Though there was an increase in the revenues from payment and financial services this increase was offset by a decrease in income from commerce and cloud services impacted by the pandemic. The losses after tax were reduced to Rs (1701) crore during FY21 from Rs (2942.40) crore in FY20. The losses were reduced due to a reduction in various expenses. The revenues are showing a decreasing trend in the last three fiscals.

GMV (rupee value of total payments made to merchants through transactions on the app, through Paytm Payment Instruments or through payment solutions, over a period. It excludes any consumer-to-consumer payment service such as money transfers.) growth has been 110.6 % for Q1FY22. The contribution margin has turned positive for the first time in FY21 being 12.9% from (7.2%) and (61.8%) for FY20 and FY19 respectively. The contribution margin was 27.4% for Q1FY22. (Contribution profit is revenue from operations less payment processing charges, promotional cashback and incentives expenses, connectivity and content fees, contest, ticketing, and FASTag expenses and logistic, deployment & collection cost of the businesses. Contribution margin is the percentage margin derived by dividing contribution profit by revenue from operations.)

Return on net worth has been (6.1%), (26%), (35%), and (73%) for Q1FY22, FY21, FY20, and FY19 respectively.

Valuation and peer comparison

The P/E of Paytm is not ascertainable due to the negative EPS for the last three fiscals. The issue is priced 20x at NAV of Rs 104 per share calculated at the upper price band of Rs 2150 per share. The upper price band implies a valuation of Rs 1.48 lakh crore. There are no peers of the Issuer as per the RHP. However, there are many new tech payment start-ups comparable to Paytm like Amazonpay, Razorpay, Google pay, and Phonepe among others.

Conclusion and Investment Strategy

The market in India across payment services, commerce and cloud services, and financial services have a massive scale and growth. This market is significantly underpenetrated and has the potential of technology to grow. There are millions of small businesses in India that would benefit from having increased access to affordable software, technology, and financial services. This creates an immense market opportunity for this sector. However, Paytm faces challenges in the form of competition from various payment apps like Amazonpay, Google pay, Phonepe that have emerged lately and have garnered quite a good market share.

Paytm has been in operation since the year 2009 but is yet to turn profitable. The management has said that it may take some more years to be a profitable entity; hence it appears to be another challenge for the Issuer. The Issue has created a lot of fancy in the market since its announcement but it should also be taken into account that tech IPOs are a mixed bag of high risks and returns and some of them (tech IPOs) have seen an average response from the investors, after the launch of IPO. Looking at all the above factors, risk-savvy investors may consider an investment with a long-term horizon in the IPO.

Reviewer recommends Subscribe for Long Term to the issue.

Review By CA Priyanka Choudhary on 17th Jul 2021

Review Author

About CA Priyanka Choudhary

CA Priyanka Choudhary, a freelance chartered accountant

Priyanka Choudhary Jain is a Chartered Accountant and an experienced credit analyst. She has worked with CRISIL as Senior Credit Analyst on ratings assignments including business and financial analysis in Corporates as well as the Public Finance Sector.

Email: [email protected]

DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at own risk. Investors should bear in mind that any investment in stock markets are subject to unpredictable market related risks. Above information is based on RHP and other documents available as of date coupled with market perception. Author has no plans to invest in this offer.