One97 Communications (Paytm)

Riding on fintech wave

Leading brand, full suite digital ecosystem with customer & merchant base benefiting from digitalization

One97 Communications (Paytm) is India's leading digital ecosystem for consumers and merchants building the largest payments platform in India based on the number of consumers, number of merchants, number of transactions and revenue end March 2021.

The company was on incorporated on 22 December 2000. It offers payment services, commerce and cloud services and financial services to 33.7 crore registered consumers and over 2.18 crore registered merchants end June 2021. The two-sided (consumer and merchant) ecosystem enables commerce and provides access to financial services through financial institution partners, by leveraging technology to improve the lives of consumers and help merchants to grow their businesses.

The company launched Paytm in 2009, as a mobile-first digital payments platform to enable cashless payments for customers giving them the power to make payments from their mobile phones. It started with bill payments and mobile top-ups as the first use cases, and Paytm Wallet as the first Paytm Payment Instrument.

The company has been able to leverage its core payments platform to build an ecosystem with innovative offerings in commerce and cloud, and financial services. Paytm is available across the country to millions of consumers, shopkeepers, merchants, and small businesses.

The 'Paytm' brand is India's most valuable payments brand with a brand value of US$ 6.3 billion, and Paytm remains the easiest way to transact across multiple methods.

The Paytm app is a payments-led super-app offering consumers with innovative and intuitive digital products and services. It offers consumers a wide selection of payment options on the Paytm app, which include (i) Paytm Payment Instruments, which allow them to use digital wallets, sub-wallets, bank accounts, buy-now-pay-later and wealth management accounts and (ii) major third-party instruments, such as debit and credit cards and net banking.

The consumers are enabled to transact at in-store merchants, pay their bills, make mobile top-ups, transfer money digitally, create and manage their Paytm Payment Instruments, check linked account balances, service city challans and municipal payments, buy travel and entertainment tickets, play games online, access digital banking services, borrow money, buy insurance, make investments and more.

The company strives to help merchants to grow their business by giving them access to technology, payment solutions and financial services. The payments platform gives merchants the ability to accept payments, online and on mobile platforms, and in-store, from a wide selection of Paytm Payment Instruments and all major third-party instruments. The company helps merchants acquire and retain customers on and off the Paytm app, through its suite of products such as commerce, advertising, miniapp listings, channel, and loyalty solutions.

The company has average 10,266 on-roll employees worldwide. It also engages contractors to provide temporary workforce.

The company offer products and services across payment services, commerce and cloud services and financial services. The products and services are carefully developed to address large markets, and in areas where the consumers and merchants are underserved.

Payment Services

The company has a full suite of payment services for both consumers and merchants which enables them to make and receive payments in a convenient, seamless, and secure manner both online and in-store.

The company is the largest payments platform in India with a GMV (Total value of commerce products sold on Paytm platforms) of Rs 4.03lakh crore in FY2021. The company has an overall mobile payments transaction volume market share of approximately 40%, and wallet payments transaction market share of 65%-70% in India as of FY2021.

The company offers extensive payment offerings to consumers to make online bill payments, mobile top-ups and money transfers using the Paytm app, make online payments on third party apps and in-store payments through QR codes and devices. Consumers can use a wide selection of instruments, both third party and Paytm Payment Instruments.

It also offers merchants, Business Payments, a single platform solution to help manage their cash flows and their payables including (i) vendor payments, such as rent payments, invoices, and utility bill payments, (ii) customer cash backs, refunds, and channel partner incentives, and (iii) employee salaries, reimbursements, and tax benefits.

Commerce and Cloud Services

The commerce and cloud services offerings provide a lifestyle destination for consumers to avail lifestyle commerce services such as ticketing, travel, entertainment, gaming, food delivery, ride hailing and more. Easy access to such services within the Paytm App environment, through native offerings or through mini-apps partners, plays a critical role in user engagement and retention, and enhances brand. The company also provides software and cloud services that allow large, medium and small merchants to improve their business operations and access important financial tools such as banking, wealth and credit facilities. In FY2020, the company processed a total Commerce GMV of Rs 14220 crore and in aggregate generated over Rs 1100 crore of revenues.

Financial Services

Financial Services is set of innovative financial inclusion offerings including mobile banking, lending, insurance, and wealth management for consumers and merchants. The reach, size and scale of payment services places the company at the center of payments flows between consumers and merchants. The company distributes and/or develops financial products that can be the source of payments (such as deposits or lending) and destination of payments (such as wealth management). Since most of its financial services businesses were launched recently between 2019 and 2021, financial services contributed a relatively small percentage of revenue.

Mobile Banking Services: The Company provides mobile banking services through Paytm Payments Bank. It offers a comprehensive suite of digital banking products for individuals, small and medium enterprises, and large corporates including current account, savings account, salary accounts, fixed deposits (through Paytm Payments Bank's), and debit cards.

Some of the Paytm Payment Instruments are offered with Paytm Payments Bank. Paytm Payments Banks had 65.4 million savings accounts end June 2021. Paytm Payments Bank was the largest UPI beneficiary bank with a market share of 17.1% in transaction volume in Q4FY2021.

Lending: The Company operates a technology platform with capabilities across the entire loan cycle including origination, developing credit risk models, loan management and collection to provide a seamless credit access to consumers and merchants through financial institution partners. The company works with financial institution partners in improving their distribution, underwriting and collections, and aim to drive the increase of credit in India. By leveraging Paytm platform's digital reach, democratizing credit is a significant opportunity for Paytm, to service the underserved and unserved.

Insurance and Attachment Products: In collaboration with insurance partners, the company offer, (i) attachment products such as movie and travel ticket cancellation protections based on user engagement on platform and as a part of the payments flow, and (ii) subsidiary, Paytm Insurance Broking Private Limited, a registered insurance broker with IRDAI offers an insurance marketplace with products across auto, life and health insurance, where the company also provide policy management and claim services for customers.

Wealth Management: The Company provides wealth management services to consumers through the Paytm app and the Paytm Money App. The company aim is to bring access to wealth management products to many consumers and merchants. Paytm Payments Bank launched fixed deposits on the Paytm app. The company launched Paytm Gold in collaboration with a partner. Paytm Money offers mutual funds, equity and futures and options trading through a registered investment advisor license and equity broking license from SEBI.

The company believe that its brand, distribution, insights, technology skills, and the scope of ecosystem give an advantage to grow business through, (i) cost-effective acquisition of consumers and merchants; (ii) reinforce platform by building higher engagement and stickiness with consumers and merchants; and (iii) build high monetization products at low cost of acquisition. The company refers to these attributes of business model as 'flywheels'. Ecosystem has multiple, self-reinforcing flywheels, which drive consumer and merchant engagement and growth on ecosystem.

The Offer and the Objects

The initial public offer (IPO) consists of a fresh issue to raise Rs 8300 crore issuing 3.99 crore shares at lower price band of Rs 2080 per share and 3.86 crore shares at the upper band of Rs 2150 per share.

Further, the offer of sale (OFS) comprises raising of Rs 10000 crore by issuing 4.81 crore shares at lower price band and Rs 4.65 crore shares at upper price band.

The issue is to be made through the book-building process and will open on 8 November 2021 and will close on 10 November 2021.

Out of the net proceeds, the company proposes to utilize Rs 4300 crore towards growing and strengthening Paytm ecosystem, including through acquisition and retention of consumers and merchants and providing them with greater access to technology and financial services, Rs 2000 crore for investing in new business initiatives, acquisitions and strategic partnerships and balance for general corporate purposes.

In addition, the company expects to receive the benefits of listing of the Equity Shares on the Stock Exchanges, including among other things, enhancement of Company's brand name among existing and potential consumers and merchants, retaining existing and attracting potential employees, and creation of a public market for the Equity Shares in India.

Strengths

The company has a wide addressable market in India across payment services, commerce and cloud services and financial services and gives multiple growth vectors to the company. The market segments that the company serves have a massive scale and growth, are significantly underpenetrated, and have potential of technology to grow the industry.

Paytm is a trusted brand and is available across the country to millions of Indian consumers, shopkeepers, merchants, and small businesses. Paytm brand is also India's most valuable payments brand, with a brand value of US$ 6.3 billion and Paytm remains the easiest way to transact across multiple methods.

The payments platform, with a wide selection of daily life use cases and payment instruments, provides the company with large scale and reach.

The company has robust base of 33.7 crore registered consumers and over 2.18 crore registered merchants end June 2021. The scale and reach of the company help to distribute new products and services across all of businesses faster and in a cost-efficient manner.

The company has developed unparalleled insights into the way Indian consumers spend and save, and the way merchants operate their businesses. Each transaction on ecosystem provides insights that help to improve personalization for consumers and merchants and create products and services addressing their needs.

The company is also able to leverage these insights to develop insights and credit risk models for itself and for financial institution partners and prevent fraud on ecosystem.

The company has an average engineering and technology team of 2,471 members end June 2021, allowing the company to launch products and services quickly, build various features, offer integrated and synergistic products, ensure system stability, handle large scale, and provide highest success rates.

The company is the only payments company in India that, together with affiliates, owns each layer of the payment stack allowing to integrate payments offering seamlessly with other offerings.

The strong network effect leads to low acquisition costs, higher monetization and lifetime value of consumers and merchants, and better economics across offerings.

India is a country of hundreds of millions of young and aspiring consumers and millions of small businesses in India that would benefit from having increased access to affordable software, technology, and financial services.

India continues to be the fastest growing major economy globally and is expected to grow at a CAGR of 9% over next five years to become a US$4.2 trillion economy by 2025.

With increasing smartphone penetration and internet usage, and the proliferation of digital products and services for consumers, India's digital ecosystem is at an inflection point. Overall digital commerce (including e-commerce, e-recharges, and bill payments) in India is expected to grow over 3.3 times in the next five years to more than US$300 billion in FY 2026 from approximately US$90 billion in FY2021

India's payment landscape has transformed over the last decade driven by the emergence of mobile payments, the government's vision to transform India into a cashless society, the creation of innovative and robust payment infrastructure, high consumer and merchant acceptance and regulatory support.

The Indian financial services market continues to be significantly underpenetrated in terms of household debt, credit card per capita, stock market investments, insurance premium, retail lending, MSME lending etc.

The regulatory initiatives are driving digitization of payments and financial services

Weaknesses

The company has incurred net losses and expects to continue to incur net losses for the foreseeable future and may not achieve profitability in the future.

The market for platforms, products and services offered by the company is evolving, and it is difficult to predict future limits of market opportunity.

The operating expenses are expected to continue to increase as the company hire additional personnel, broaden marketing efforts and promotional activities, expand operations and infrastructure, both domestically and internationally, continue to enhance platforms and brand, and develop and expand its capabilities, expand products and services, and expand and improve interface, which may result in an increase in net losses.

Some of subsidiaries and associates have incurred losses for the past few fiscal years.

The company is required to pay payment processing charges to financial institutions and card networks for processing transactions on its platform. The company may not be profitable if payment processing charges payable to financial institutions and card networks increase significantly and the company is not able to pass on these higher processing charges to merchants or consumers.

Any increase or decrease in payment gateway charges could make pricing less competitive, lead to change pricing model, adversely affect margins, and prevent the company from reaching profitability.

The company needs to be successful in establishing or maintaining mutually beneficial relationships with payment card networks, banks, and acquiring processors.

The company offers some of its services in partnership with Group Company, Paytm Payments Bank. The company owns 49% equity interest in Paytm Payments Bank and Vijay Shekhar Sharma holds the remaining 51%. While Vijay Shekhar Sharma is a promoter of Paytm Payments Bank, the Company is not categorised as one of its promoters.

The company derives revenue primarily from the fees earned from merchants for the payments, commerce and cloud, and financial services provided through its platforms. Thus, the growth substantially depends on ability to maintain and grow relationships with existing merchants and increase the volume of transactions processed on platforms.

GMV has increased from Rs 2.29 lakh crore in FY2019 to Rs 4.03 lakh crore in FY2021 and stood at Rs 1.47 lakh crore in Q1FY2022. Top five merchants contributed 32 of GMV and 43% of revenues in FY2021 and 23% of GMV and 35% of revenues in Q1FY2022. Top 10 merchants contributed 28% of GMV and 41%of revenue in Q1FY2022.

The business is subject to regulation by various statutory and regulatory authorities in India, including the MCA, the RBI, Income tax authorities, SEBI and the IRDAI, and other authorities.

The laws and regulations governing businesses of the company are evolving and may be amended, supplemented, or changed at any time.

The company is subject to chargeback and refund liability risk when merchants refuse to or are unable to reimburse chargebacks and refunds resolved in favor of their customers. Any increase in chargebacks and refunds not paid by merchants may adversely affect business. The company incurred a loss of Rs 2.5 crore in FY2021 and Rs 2.9 crore in Q1FY2022 on account of inability to collect refunds from the relevant merchants.

The company participates in markets that are competitive with continuously evolving technology and consumer needs. There are low barriers to entry in the industry and the cost of switching between offerings is low.

The business depends on a strong and trusted brand.

The success and growth of business depends upon ability to innovate and develop new products and services.

The company is expanding and may in the future continue to expand into new industry verticals and geographic regions and would get exposed to specific regulatory, credit, and other risks associated with a new industry vertical or geographic region.

Acquisitions, strategic investments, entries into new businesses, and divestitures could disrupt business, divert managements attention, result in additional dilution to shareholders etc.

As a technology-based platform, business generates and processes a large quantity of personal, transaction, billing, behavioral and demographic data. The company faces risks inherent in handling and protecting large volumes of data.

The company relies on telecommunications and information technology systems, networks, and infrastructure to operate business and any interruption or breakdown in such systems, networks or infrastructure or technical systems could impair ability to effectively operate platforms or provide products and services.

Valuation

One97 Communications (Paytm) has posted 2% growth in the revenues to Rs 3280.80 crore in FY2020, while the revenues declined 15% to Rs 2802.40 crore in FY2021 amid the impact of pandemic. However, the company has recorded improved revenue growth of 62% to Rs 890.80 crore in Q1FY2022. The bottomline remains in red due to high operating expenses.

At the higher price band of Rs 2150, the company is demanding mcap of Rs 139854 crore and offer is made at 44.5 times post-IPO EV/TTM sales for period ended June 2021. There is no comparable listed player in India.

The post issue book value of the company stands at Rs 224.7 end June 2021. The scrip is offered at price to book value multiple of 9.6 times.

Fintech payments bank company that hit the market with IPO recently- Fino Payments Bank is offered at price to book value multiple of 9.9 times. In terms of EV to sales for TTM ended June 2021, Fino Payments Bank is offered at 5.9 times EV to sales.

Another fintech player just concluding its IPO, PB Fintech - owners of Policybazar and Paisabazar platforms, is offered at price to book value multiple of 7.8 times. In terms of EV to sales for TTM ended June 2021, PB Fintech is offered at 46.4 times.

The significant under penetration of the products category in which the company operates provides healthy growth potential. However, the company operates in dynamic and competitive fintech industries making it difficult to predict prospects. The business is subject to intense competition from existing or new competitors.