Key takeaways from Paytm meeting with group of analysts

In a recent meeting with a group of analysts in Mumbai, Paytm’s top management including Vijay Shekhar Sharma, Founder, MD and CEO, Madhur Deora, President and Group CFO, and Bhavesh Gupta, Chief Operating Officer, came together to provide deeper insights of the business model. The management not only highlighted the key margin drivers of the business but also elaborated on the future growth roadmap.

Before we dive in, let us take a brief look at key revenue metrics:

Payments Services to Consumers: Revenue from payments made by consumers on Paytm App (Consumers pay platform fee for certain use cases and merchants pay MDR)

Payments Services to Merchants: Revenue from processing payment in a merchant store or app or website, and subscriptions from merchants for payments devices including Soundbox and POS machines (Merchants pay MDR for cards, wallet and net banking payments whereas devices merchants also pay a subscription fee. For UPI Peer-to-Merchant transactions, the Government pays out incentives)

Financial Services and Others: The revenue from Financial Services and Others business primarily comes from loan distribution. It also includes revenue from Paytm Money, the equity trading service, as well as revenue from other services offered by Paytm

Commerce and Cloud Services to Merchants: Revenue from enabling commerce for merchants is generated through various offerings, including advertising, ticketing, and deal vouchers. Credit card services are also included in this category.

Here is the detailed management commentary as discussed at the meeting: 

Paytm payments business is an important customer acquisition tool, which in turn is also an attractive funnel for its credit distribution business. The firm defines a transacting user as someone who completes a successful payment transaction, not just someone who visits the site/app or signs up for an account. This approach is taken in order to remain conservative and provide a more accurate representation of the company’s user base and their level of engagement with the platform. For consumers, it enables payments for a variety of purposes like mobile recharges, utility bills, rent, education, adding funds to the wallet, and money transfers.

On the merchant side of the platform, the company helps its partners grow their businesses by providing solutions that allow them to seamlessly accept payments through a variety of instruments and by deploying devices that assist with reconciling transactions. Leveraging the company’s insights into the merchants’ payment flow, Paytm is able to offer them the opportunity to seamlessly obtain a loan from its financial institution partners. 

Having established the revenue metrics and how the payments business has become a strong customer acquisition tool, let’s understand how the company’s payments business is experiencing compounding growth. The management defined two distinct revenue streams: payment processing and subscription.

The company offers flexibility and convenience to consumers and merchants with its own range of Paytm Payment Instruments like Paytm Wallet and Paytm UPI as well as debit & credit cards and net banking. In payment processing, the company makes a net payment margin of 7-9 bps on the Gross Merchandise Value (GMV). The revenues earned on processing all kinds of payments, including those made with UPI (Unified Payments Interface), in the form of incentives from the government. The firm believes that government incentives for UPI (in absolute terms) may increase this year due to a surge in transaction volumes.

Further, the implementation of a charge for customers adding funds to their Paytm Wallet via credit card is helping drive a positive net payment margin. This approach is particularly profitable due to the limited availability of credit card acceptance in comparison to the widespread use of QR codes at a larger number of stores. Each quarter, there has been a steady increase in the number of customers opting to fund their wallets through credit card usage. Through this practice, the company is not only improving its own wallet economics but also contributing to the overall growth of credit card spending in India. In fact, the company’s ecosystem is a significant contributor to total credit card expenditure in the country.

Apart from earning revenues on processing payments, the company earns subscription revenue from merchants who use Paytm payment devices, such as Soundbox and EDC machines. As of Q2, the subscription-paying merchants crossed 4.8 million. The earned subscription revenue through device deployment with an average fee of ₹100 per month per active device.

To assist merchants in increasing their sales, the company offers the affordability and convenience of EMIs on Paytm POS devices. This allows businesses to leverage Paytm’s wide partner network to offer products on EMIs directly at the point of sale. Paytm is working towards monetizing EMI aggregation on its POS devices.

Merchants use Paytm devices not only to accept payments but also for fraud avoidance and reconciliation services that the company offers. 

In partnership with the lending partners, the firm witnessed a significant growth opportunity in the small credit market. By providing small credit to high-quality consumers, Paytm is able to service a segment that previously did not have access to this type of financing. This is a significant opportunity in the rapidly growing Indian market.

The credit business, where Paytm distribute loans in partnership with top financial institutions, has three components – Paytm Postpaid (Buy Now, Pay Later or BNPL), Personal Loans and Merchant Loans. Given the short tenor nature of loans, the loan book (in partnership with the lenders), is fairly fast-moving. This high rate of turnover has increased lenders’ confidence in collection abilities and in maintaining asset quality.

Paytm have partnerships with marquee financial institutions like Aditya Birla Capital, Hero FinCorp, Fullerton India, Clix Capital and Suryoday Small Finance Bank to provide end-to-end digital loans across the three categories. The company stands on 7 million unique customers who have obtained a loan through Paytm. 

Paytm commerce business offers digital products such as tickets, deals, and gift vouchers, which serve to make the Paytm App a destination for merchants to drive additional business. In the second quarter, the Gross Merchandise Value (GMV) for the commerce business was ₹2,021 crores, with revenue at ₹125 crores, equating to approximately 6% of the GMV.

The distribution of co-branded credit cards falls under the cloud business. The company currently has a total of 300,000 active cards with SBI Card and HDFC Bank. The variety of use cases on the Paytm App enables the firm to generate upfront revenue on card activation and receive a portion of the interchange fee for the lifetime of the card. As more and more banking customers prefer to use non-bank apps for their transactions, Paytm is well-positioned to capitalize on this trend.

Paytm provides detailed disclosure on the likely trajectory of ESOP costs for all ESOPs granted till November 2022. The expected costs were clearly outlined, based on the assumption that all ESOPs are vested and no new ESOPs are granted. The company reiterated that Founder Vijay Shekhar Sharma’s ESOPs will not vest until Paytm’s market cap crosses the IPO level on a sustained basis.

Lastly, the management highlighted growth drivers within various business segments. The firm sees a vast potential market in India, as there are currently only 250 million registered UPI users and 10 million total devices.

Supporting merchants in growing their businesses by offering coupons, deals, marketing, and loyalty programmes, which will generate more revenue and profit for commerce business. The management also sees a great potential in partnering with banks to sell their products. FASTag and co-branded credit cards have already proven successful. In financial services, the company will focus on expanding loan and stock brokerage offerings.

Overall, the meeting demonstrated Paytm’s strong focus on growth and monetisation opportunities. The insights shared by the management provided a clear understanding of Paytm’s business model and growth drivers across business segments. Paytm reiterated its sustained focus on enhancing profitability and achieving a positive EBITDA before ESOP costs by the second quarter of FY24.


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