Paytm: Just three months after the Indian government removed 86 per cent of cash (by value) circulation by declaring high-value currency notes invalid, the chief of the country’s most valuable private sector bank said, Digital Wallets ( Digital wallets have no future.
Aditya Puri, the then CEO of HDFC Bank, said, you cannot run a business that talks like Rs 250 cashback on a bill of Rs 500.
Five years later, Puri’s prediction may turn out to be correct; Digital wallets today account for less than 1 per cent of retail payments. But India’s largest digital wallet company Paytm has done a great job of transforming itself into a one stop shop for all financial products, but there is still a lot of work to be done in terms of profitability.
The company is struggling to convince investors about the value of its business. The stock has continued to decline steadily since its listing in November. For a company that is more than a decade old, there is a need to achieve return on capital employed by investors. It can no longer function like an aggressive cash-pushing startup.
how much capital
Paytm was established in 2009, but its business achieved strong growth after demonetization was implemented in November 2016. Founder Vijay Shekhar Sharma’s timely marketing helped him woo Indians to the Paytm app, who at that time lined up outside banks for cash.
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Paytm received capital in multiple rounds from leading investors such as Ant Financial, SoftBank, Blackstone, Berkshire Hathaway and SAIF Partners. According to Macquarie, Paytm has raised a total of Rs 19,000 crore since its inception till FY21 and has incurred a total loss of Rs 13,200 crore.
Certainly some investors got an opportunity to sell their stake through IPO. Of the Rs 18,000 crore raised through the IPO, half went to investors who had opted to sell.
Why is there pressure on revenue
Paytm’s payments and financial services business still contributes 80 per cent to revenue, through which it enables online transactions and delivers third party financial products.
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The company’s revenue declined by 7 per cent and 6 per cent, respectively, in both FY20 and 2021. Its total revenue in the first nine months of FY22 stood at Rs 3,424 crore, which is 22 per cent higher than the previous financial year. At the same time, the payment business revenue is 25 percent higher. This shows that the payments business is improving. However, his past performance does not inspire confidence.
Payment gateways, wallets, UPI and merchant payment services are reducing payments. UPI accounts for more than half of Paytm’s GMV, the company said. The government had reduced the merchant discount rate (MDR) on UPI to zero in 2019.
Anand Dama, Head (BFSI Research), Emkay Global Financial Services said, “New business is growing on UPI. So no revenue is coming from the incremental business.”
Macquarie Capital Securities (India) Pvt. Ltd., a big critic of Paytm. Ltd. Matches with Dama’s opinion. Macquarie said that higher GMV and higher growth potential as UPI is a major contributor, hence Paytm’s revenue may come down.
paytm cost
When there are difficulties on the revenue front, a company can cut costs to reduce its losses. In Paytm’s case, cost reduction doesn’t seem to help much. Paytm’s biggest cost is the payment processing fee it has to pay to card networks like Visa, banks and other financial institutions for processing their transactions.
The next big expense is the expenditure on employee benefits after marketing and promotional costs. Before the IPO, the company had cut these expenses significantly in FY 2021.
Due to rising costs, Paytm’s losses widened in the April-December period of FY22. Morgan Stanley expects Paytm to be EBITDA positive by FY2025. Macquarie expects the company to reach a state of operating profitability no earlier than 2030.
An analyst at a foreign brokerage said, the market is still assessing the valuation.
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