Fundamental Analysis of Paytm | Paytm IPO Review

Dear friends, on 8th November we will witness the biggest IPO in the history of the Indian stock market which is the Paytm IPO. The last biggest IPO was in 2010 when Coal India was listed on Indian exchanges, but Paytm will surpass Coal India IPO with a valuation of 1.4 lakh crore, and that will position Paytm as among the top 35 companies in India in terms of market cap. In this article, we will discuss the business of Paytm, it will only help those who really want to understand how Paytm earns money? Paytm's history, its business, its future growth prospect, competitors, key risk, and financials and then have explained the IPO details along with valuation. Finally, we will conclude if Paytm is a fundamentally strong company or not, and whether it is available at the right valuations or not. I will tell you my verdict on the IPO and whether I will apply for the IPO or not. Alright, let's get started.

Fundamental Analysis of Paytm
Source by Google

Company Profile & Its Business

We have all known Paytm for the last 5-6 years, but Paytm parent company One97 existed for more than 20 years. Over the last more than 20 years, One97 has tried various business models. It started as a mobile value-added service company and later started mobile and utility payment along with e-commerce. However, in the last few years Paytm has transformed itself into a complete financial service company. In this journey, Paytm has attracted investment from the likes of SoftBank Group of Jack Ma and Berkshire Hathaway of Warren Buffett. In fact, Paytm is the first and the only Indian company founded by Warren Buffett Berkshire Hathaway. Berkshire invested $300 million in Paytm in 2018 at a valuation of around $10 billion. Now that Paytm is launching its IPO at a $20 billion valuation, Berkshire Hathaway's investment value would double in 3 years. Today, when we use Paytm to recharge our phones, it doesn't look like any extraordinary service, but Paytm was the first company to offer this service in 2010 when consumers were used to recharging their phones from nearby local stores. Later Paytm added a lot of other payment options like your electricity bill payment, bus payment, water payment, and so on. However, the real game-changer was when Paytm received the PPI license from RBI that allowed Paytm to create a wallet where users can move money from their bank account to Paytm wallet. Later, Paytm partnered with Uber to provide a wallet where consumers can pay to Uber using Paytm wallet. Later, Paytm launched a marketplace where merchants could sell their products. Slowly, the marketplace grew to be one of the biggest online marketplaces in India. And then Paytm started rolling the payment business to the offline market. Although there were a lot of challenges in the offline market as the local merchants were used to cash model and internet connectivity was a challenge. You can't simply replace the thousands of year old cash model with a digital payment model. But then, one move from the Indian government literally changed the Paytm business forever. While Paytm was struggling to launch its digital payment among local merchants. The government announced demonetization in November 2016. Overnight Paytm became a new thing to have a must-have thing. In the weeks that followed Paytm acquired 20 million new users. Although later government announced the competitor to the Paytm payment system by introducing UPI payment that literally transformed the way Indian transact before Paytm could come up with its own UPI system. The market was captured by PhonePe and Google Pay. Although Paytm is very clear about its business, its founder Vijay Sharma says "Paytm wants to be the champion of merchant payments; Paytm wants to be the champion of payment that drives economic commercial value. We are totally clear about that. Person-to-person money transfer does not drive any economic commercial value. We call it money transfer..."

Now if you look at the business breakup of Paytm it is bifurcated under three categories, 

1. Payment Services

Paytm enables both consumers and merchants to make payments and receive payment with a few clicks. According to a research firm Paytm is the largest payment platform in India with a gross merchandise value of 4 lakh crore in FY 21, which is 40% of total payment transaction volume. Paytm has launched the all in One QR Code in 2020 that gives merchants the power to seamlessly access payments from Paytm payment instruments, then third party and all UPI instruments directly into their bank account. In 2020, It also launched the Paytm soundbox that provides real-time audio confirmation for payment completion. Then, consumers can use Paytm payment to make online bill payments, mobile top-ups, and money transfers using the Paytm app. And then make online payments on a third-party app and in-store payments through your QR codes. 

2. Commerce and Cloud Services

Such as your ticket booking, travel, entertainment, gaming, food delivery, ride-hailing, and so on. It also provides merchants with software and cloud services for various aspects of their business, such as your billing, ledger, vendor management, customer promotion, catalog and inventory management, and so on. 

3. Financial Services

The third category is financial services, which are the latest Services launched in the last 2-3 years. and I think it can grow exponentially in the future. It includes your mobile banking, lending, insurance, and wealth management services for consumers and merchants. For example, within mobile banking Paytm has launched Paytm payment bank, where Paytm has around 49% equity that provides an option to open saving account, current account, salary account, FD, and debit card. As of March 21, Paytm payment bank had 64 million savings accounts. Then Paytm has collaborated with financial institutions to improve their distribution, underwriting, and collection and aim to drive to increase the credit in India. Then its subsidiary Paytm insurance broking was launched to offer an insurance marketplace similar to policybazaar. Then Paytm has launched multiple services within the wealth management category via the Paytm app and Paytm Money App that includes services like a mutual fund investment, stock investment platform, gold investment, and so on. So basically Paytm earns money when a user transacts using Paytm to make bill payments, recharge phones, book tickets, and so on. Since Paytm, has a network of 33.3 Crore users, and 2.1 Crore merchants. Paytm is uniquely placed to provide loans to the underserved sections of society. Both consumers and merchants can apply for the loans with a few clicks and can get instant disbursal. I think the scale and business that Paytm operates are just insane. The reason Paytm has been able to launch so many services is because it has created a flywheel that attracts both the consumer and the merchant with services like your bill payments, money transfers, in-store payments, etc. Due to that more and more, consumers and merchants have joined the platform, and Paytm is now leveraging that to create a launch more and more services. No wonder why Paytm is the only company in India, where Warren Buffett Berkshire Hathaway has invested their money. 


Promoter

If we look at the promoter's  Paytm founder and CEO is Mr. Vijay Shekar Sharma, I am sure the majority of you would know him. He has been an entrepreneur since his college days. In 1997, he built a website when the internet was in its initial phase and sold it for $1 million, which is around 7.5 crore in today's terms and that was in 1997. Then in 2000, he started One97 which is the parent company of Paytm. After trying different businesses in the digital and telecom field, he launched Paytm in 2010. And in the last 11 years, Paytm has become a household name in India. 


Future Growth Prospects

Now, as far as future growth is concerned, the future is digital. India has been a cash-driven economy where the majority of transactions used to happen in unorganized markets where the government could not keep track of those transactions. Due to that very few people in India used to pay taxes. On top of that, the rural part of the country did not have access to proper lending for their business. However, the Indian government has made some big reforms to transform India into a digital economy. For example, it launched the Aadhaar Initiative, where every resident now has a unique identity number. Now, this aadhar card is the core of every digital activity where the government can keep a track of all transactions. On top of this, the rising Internet penetration and smartphone usage ensured that even the rural part of the country can access digital services. Now, this was a big game-changer. 

Then, the government launched UPI payments where you can transfer money from one person to another within a few seconds. The popularity of UPI payment can be gauged with the fact that it's been 5 years since the launch of UPI payment and it has crossed the transaction volume of $100 billion in the month of October that is around rupees 7.7 lakh crore in just 1 month. In fact, we can also look around and see that a few years ago, we used to transact in cash. But now even the local Kirana store or vegetable vendor is accepting UPI payments. That's a huge transformation. This digital transformation has been led by Paytm, where it has its presence in every nook and corner of our country. The demonetization in 2016 literally fired up Paytm growth. I think Paytm was the biggest beneficiary of demonetization, where Paytm moved from being an option to a must-have thing. This has created an immense opportunity for Paytm to grow. Today Paytm is earning a majority of its revenue from transaction fees collected from merchants for its payment service. Just to give you an idea, in 2021 Paytm 75.3% revenue was from merchant payments services. However, going forward Paytm will leverage its consumer and merchant network of both online and offline space to become a full stake financial service provider. Just imagine, today Paytm has access to even the rural villages where it can offer microloans and credit facilities. I think that this financial service business is a huge opportunity for Paytm to grow in the next 20-30 years. The reason why Paytm is different from other tech-based companies is because the majority of tech companies only have online presence. But you can't just grow with online presence. You also need physical presence and Paytm has its physical presence in every part of the country that makes it very unique.


Competitors & Key risks 

Now that we have discussed the future that looks very bright, let us discuss the competition and key risks. As far as competition is concerned. Paytm has cut-throat competition. If you look at the merchant payment space Paytm is competing with PhonePe, Google Pay, and Amazon Pay. As per the latest data, the leader in Indian UPI payment is PhonePe with 47% share in total transaction value that is followed by Google Pay with 38% Share, and Paytm is at third position with 9% Share. Not only this, but recently, WhatsApp has also entered into this payment space, and considering the share size of WhatsApp, it will grow quickly. So Paytm will face crazy competition in the future. Now here, please understand that UPI payment is not really a money-making business, it is only a way to acquire the consumers. Going forward, every company would try to become a one-stop financial service provider because that's where you earn money. For example, PhonePe is already entered into the insurance category. I am sure every other company would get into the financial service segment in the future. In addition, Paytm has strong competition from all the major banks and NBFCs like your HDFC Bank, ICICI Bank, Kotak Mahindra, Bajaj finance, and so on. As every bank and NBFC is providing both offline and online financial solutions. On top of this Paytm is competing with a lot of other FinTech startups and established player in the category like ZERODHA, Grow, Policybazaar, and so on. The reason for such cut-throat competition is because of immense potential in India, especially in the financial space. For India to become the third-largest economy, Indian consumers and business owners would need more access to easy lending and credit facilities and there is a huge scope for financial service, especially in the rural part of the country. 

  • On top of this, there are a lot of other growth drivers like 
  • India has the youngest workforce in the world, 
  • The income levels are rising, Spending are rising, and 
  • Consumption would be a big theme in India. 

But I think that the brand name and trust that Paytm has built over the years would give them a competitive edge over others. However, competition would be the biggest risk for Paytm. Moreover, Paytm has already cleared in its filing document that we have incurred net losses for the last 3 years, we expect to continue to incur net losses for the foreseeable future, and we may not achieve or maintain profitability in the future. Because the market for our platform products and services is evolving, it is difficult for us to predict our future results of operations or the limits of our market opportunity. Any failure by us to achieve or sustain profitability on a consistent basis could cause the value of equity shares to decline. 


Company Financials

Revenue

If we look at the financials Paytm revenue has shrunk in the last 2 years. In FY 19 It was 3597 Crore and in FY 21 It stood at 3186 Crore. 

Profit

It has been in losses for the last 3 years. In FY 19 The loss was 4230 crore, in FY 20 It was 2942 crores, and in FY 21 It was 1701 crore. 

Now, the reason for the reduction in revenue is due to the fact that Paytm has waived off charges on merchant payments using UPI. On top of this, the intense competition in UPI payment has resulted in a shrinkage in revenue. Although the loss gap has reduced in the last 2 years.

Debt to Equity Ratio

The company has a debt to equity of 0.08 which is negligible. So, Paytm is almost a debt-free company.

Cash flow

As far as cash flow is concerned company had negative cash flow from operation in the last 3 years. Overall the last 3 financials are not very impressive. 


IPO Details

Paytm IPO window is between 8th November to 10th November 2021, its IPO price band is between Rs 2082-2150, the shares are available at a face value of Rs 1, and the lot size is 6 shares. So, the total investment for one lot would be Rs 12,900, and the issue size is Rs 18,300 crores out of this there is fresh equity of Rs 8300 crore and the remaining Rs 10,000 crore is Offered for Sale where promoters are diluting their stakes.

This 10,000 Crore raised from the IPO would be used for growing and strengthening the Paytm ecosystem through acquisitions and retention of consumers and merchants and providing them with greater access to technology and financial services. Then, investing in the new business initiative, acquisitions and strategic partnerships, and general corporate purposes. Now, out of this issue size of 18,300 Crore Paytm has already raised 8235 Crore that is around 45% from the anchor investors, it has got a stellar response from the anchor investors. In terms of market cap at an upper price band of Rs, 2150 Paytm would be valued at Rs 1.41 lakh crore. So, after the listing, it would be among the top 35 companies in India in terms of market cap. 


Valuation

As far as valuation is concerned, since it is a loss-making company, we can't look at the PE ratio. However, if we look at the price to sales ratio Paytm price to sales ratio for FY 21 is 51 which is quite high. Also, the fact that revenues have been stagnant in the last 2 years. 


Conclusion

Finally, if you conclude Paytm is in the business of payment and financial services and it is among the leader in the category. Paytm has created a huge ecosystem for consumers and merchants to use its platform and today it has 33.3 Crore consumers and 2.1 Crore merchants using its platform for payment and other financial services. As far as the future is concerned, the future is very bright, where Paytm is diversifying into a one-stop solution for all financial-related requirements. However, Paytm is facing very strong competition in the payment and financial category from both established banks and NBFC to new Aage FinTech companies. The company has been making losses in the last 3 years to gain market share. Overall, fundamentally Paytm is very strong with a huge online and offline presence and a very popular brand name in India. Hence on fundamentals, I would rate it 4-star out of 5. I have detected 1-star due to intense competition and consistent losses to gain market share. As far as valuation is concerned Paytm clocked revenue of 3100 crores in FY 21 and is asking for a 1.4 lakh crore valuation. Now, that's a lot of premium for the number of sales it has generated. Hence, in spite of bright growth prospects, I think that the valuations are pretty high. Also, fact that the company is not expecting to become profitable in the near future. Overall on valuations, I would rate it 2.5-stars out of 5-star. Now the question is, should you apply for this IPO? Well, considering the fact that all tech-based companies are launching their IPO at premium valuation among all I particularly like Paytm as it has a strong presence in both online and offline space in both consumer and merchant categories, and it has a huge market to cater to in the next 10 to 20 years. But remember that it is already a large-cap company with a valuation of 1.4 lakh crore. So I don't see a very huge return on investment in the short term. Even the current gray market premium for Paytm is just 5%. So I would say that if you are someone who has a high risk-taking ability and looking to invest for the long term, then only you should consider investing a small part of your money in Paytm.  I would recommend staying away from its IPO at this issue price band. Now tell me in the comments, are you going to apply for this IPO or not?

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