Paytm walks into stock market-IPO alert

One 97 communications Ltd. Which is popularly known as Paytm was started as a payment provider is becoming a financial intermediary. Paytm had 50mn monthly transacting users (MTU), 6mn active merchants, and gross merchandise value (GMV - P2M) of INR4tn for FY21. Recent partnerships to distribute financial services, instead of fees, aims to diversify revenue and earning streams. Valuation of Paytm envisages (USD20-25bn). The user base of 333mn (CAGR 13% over FY19-21), of which 50mn (15%) were monthly active users. The company has onboarded 21mn merchants, 37% CAGR over FY19-21, of which 6mn are active merchants and again of which 51% (3mn) used Paytm's business App in the month of Mar-21. GMV (merchant) was INR4tn for FY21, a CAGR of 33% and 5.9bn merchant transactions took place through its platform. 

Current revenue mix tilt towards payments

Paytm's reported FY21 consolidated revenue of INR28bn, down 15% YoY. Payments and financial services revenue (~75% by mix) grew 11% YoY in FY21, of which revenue from financial services was marginal. Commerce & Cloud business revenue declined 38% YoY in FY21 as high exposure to COVID impacted segments viz. travel & entertainment led to lower GMV (-70% YoY) - nevertheless the decline was non-linear due to better performance of other streams viz. advertising etc. 

Payment spreads improved

Paytm's payments net spread (take rate (Revenue divided by GMV) less processing charges divided by GMV) were negative 25bps/13bps in FY19/20. While the downward trajectory of taking rate continued in FY21 (50bps). Thereafter, a sharp cut in marketing expenses to 6bps of GMV vs. 1.2% in FY19 helped Paytm to report a contribution profit of INR3.6bn for FY21. The spread at which Paytm works is still suboptimal and take rates are low at 50bps for FY21 (reported 64bps for 4QFY21, including from Postpaid). 10bps improvement in non-UPI can boost revenue by 10-12% and net spreads by 6-7bps. The performance here is key to Paytm's valuation. 

IPO offer details  

Issue Size: INR166bn, 2.5x of FY21 Net-worth 
Fresh Issue: INR83bn 
Offer for sale: INR83bn 
Order of subscription: In case of under-subscription first 90% of the proceeds will go 
towards fresh equity, followed by a reduction in stake of Ant Financial to 24.9%, other selling shareholders, and finally towards the remaining 10% of fresh equity. 
Pricing may be in the range of USD20-25bn, based on media reports as compared to 
USD15bn (INR1.1tn) based on the last deal in Feb-20 to DG-PTM (institutional investor). 

Utilization of funds

Fresh raise of money would be utilized to strengthen the financial business and invest in new business/ acquisitions to expand the bouquet of product offerings and other corporate purposes. The company has acquired various other companies for value-added propositions (acquisitions like Little Internet Pvt Ltd, etc.) and expansion of product bouquet (acquisitions like Orbgen Technologies Pvt Ltd, etc.). Also, the company has scaled/commenced various business initiatives including insurance subsidiary, wealth management, etc. 

IPO proceeds to help innovate and invest

Based on its capital history, the company has so far raised INR190bn+, with its FY21 net-worth of INR65bn, implying investments/cash burn of INR128bn of which INR105bn were reported losses over FY18-21. The current proceeds from a fresh issue of INR83bn would provide Paytm capital to augment ammunition to invest/innovate/acquire (INR20bn) and to scale up the profitable revenue drivers.