Paytm on track for India’s biggest IPO, but beware of the bumps ahead

Paytm, formerly known as One97 Communications Pvt. Ltd, evolved into a full financial products platform from a digital wallet provider within a few years. His plans to go public by the end of this year, if followed, would add serious credit to the company as a market leader in the fintech space.

Media reports say Paytm is looking to launch an Initial Public Offering (IPO) worth a staggering $ 3 billion ( 21,700 crore) by November. That would value the company at $ 24 billion ( 1.74 trillion). In its previous $ 1 billion funding round in November 2019, the company was valued at $ 16 billion.

While the motivation behind the IPO is not known, it’s likely not just for fundraising, but also to give long-term investors in the company a chance to monetize holdings. SoftBank, Alibaba Group, and Berkshire Hathaway are among the company’s renowned investors.

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Cost of growth

Several factors can give Paytm a smooth path to listing. The fintech space has attracted a lot of attention with the entry of big players coinciding with rapid technological changes. Combined with dynamic stock markets, the company can easily find willing investors.

What has worked for Paytm is that it is a pioneer in the fintech space and it has reached scale. And given a full stack of products, from payments to digital loans, getting a customer and retaining them can be a business benefit.

Paytm’s strength lies in its market integration. According to a Credit Suisse report in March, the company had the biggest ties to merchants for UPI payments. Bernstein analysts believe that, along with credit, will fuel its next phase of growth. “We believe the next stage of growth will be led by financial services, particularly the provision of integrated credit technology products to consumers and merchants,” Bernstein analysts wrote in a May 27 note. Paytm has a market base of $ 20 million, and Bernstein estimates the gross transaction value of the total peer-to-peer franchise to be $ 52 billion in FY21.

Paytm also applied for a small financial bank license after the regulator said payment banks could convert to such banks. Paytm Payments Bank Ltd cannot lend, but parent company Paytm offers lending products through links with non-bank lenders and banks. He also applied for an NBFC license. Indeed, credit offers the meatier side of income. “Retail digital loans have generated a 43% CAGR over the past seven years, reaching $ 110 billion by 2019, mainly differentiated by faster disbursements,” Credit Suisse analysts wrote in a note from the March 23. “(These companies) are using alternative data sources for underwriting. and reach out to clients, who have so far been outside of formal credit due to the lack of office records. They have gained over 40% market share in new personal loans and 20% + in unsecured retail loans, ”the brokerage said. Paytm’s boom came when the Center demonetized 86% of banknotes in November 2016. Indeed, digital payments took off and the company was a big beneficiary. He even managed to reduce his net loss for FY17 from the previous year. But demonetization also gave rise to Unified Payment Interface (UPI), which saw the entry of Google and Flipkart into the payments space. Over the next three years, UPI captured 34% of total digital payments in India, and within the UPI ecosystem, Google Pay and PhonePe became leaders. Paytm fumbled on two points. First, UPI competes with its flagship product, the digital wallet. Second, Paytm has been unable to increase its share of UPI transactions, although adding UPI to its cache has been a good idea to blunt the competition in its wallet somewhat. But its share in the UPI transaction space is only 7.5%.

Additionally, Paytm’s various businesses, ranging from insurance brokerage to e-commerce, didn’t add much to revenue. Beyond its core product, the payments, it hasn’t really made waves. “They have tried everything, but beyond P2M (person-to-traders), there is not much progress,” said an analyst from an institutional brokerage, requesting anonymity.

Paytm’s plan to enter general insurance has not yet caught the regulator’s attention.

The autonomous revenues of Paytm amounted to 3.115 crore in fiscal year 20, while the consolidated turnover amounted to 3281 crore, according to data gathered by VCCEdge. He reported a consolidated loss of 2597 crore before taxes and exceptional items. This brings us to profitability. Paytm was able to reduce its loss in FY17 after demonetization. It also led branded investor SoftBank to inject $ 1.4 billion in May 2017. But its efforts to gain market share did not yield any big gains during covid, although digital payments did have significant gains. again increased. UPI seems to be winning this time. Paytm must not only solve this problem, but must also evolve into a profitable business.

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