PayTM IPO Analysis: The Biggest Indian IPO is Here!
India’s largest IPO in a decade is near! One 97 Communications Limited, the parent company of PayTM, is expected to raise Rs 18,300 crore through its IPO next week. This piece covers the company’s financial position and business model.
PayTM is an Indian multinational company that specializes in digital payment systems, e-commerce, and finance. Founded in 2010 in Noida by Vijay Shekhar Sharma with an initial investment of $2 million, the company now holds a valuation of $16 billion or Rs 1.2 lakh crore. The company is backed by investors like Jack Ma’s Ant Group, SoftBank, and even Warren Buffet’s Berkshire Hathaway, to name a few.
Paytm is coming up with what could be known as the biggest IPO in a decade. It plans to raise nearly Rs 18,300 through its public issue. According to the RHP, the company would raise Rs 8,300 through a Fresh Issue and the balance Rs 10,000 through Offer For Sale (OFS). The draft papers had stated that the company had plans to raise Rs 2,000 crore in a pre-IPO placement. However, the plan was later scrapped since Paytm faced disagreements with investors over its valuation.
The company has a payments-led super-app, through which it offers 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/credit cards and net banking.
Merchants can use in-store and online payment solutions to accept payments through Paytm Payment Instruments as well as major third-party payment methods. To help them acquire and retain customers, and create demand, PayTM offers them services like selling tickets to customers, advertising, mini-app listings, channel, and loyalty solutions.
Paytm offers services to nearly 33.3 crore customers with 2.1 crore merchants on its network, as of March 2021. The company’s Gross Merchandise Value (GMV) stands at Rs 4 lakh crore. GMV refers to the rupee value of total payments made to merchants through transactions through Paytm Payment Instruments or its payment solutions, over a period.
According to a Redseer Report, Paytm has an overall payments transaction volume market share of approximately 40%, and wallet payments transaction market share of 65-70% in India as of FY 2021.
Paytm provides mobile banking services through Paytm Payments Bank, in which it owns a 49% equity stake. 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, and debit cards. As of March 31, 2021, Paytm Payments Banks had 64 million savings accounts, the largest UPI beneficiary bank with a market share of 17.1%.
Paytm also offers wealth management services through the Paytm app and the Paytm Money app. Paytm Payments Bank has launched fixed deposits on the Paytm app in partnership with commercial banks. It also launched Paytm Gold, which allows consumers to purchase gold for as low as Rs 1. Paytm Money offers mutual funds, equity, and derivatives trading through a registered investment advisor (RIA) license and equity broking license from SEBI.
Paytm has three revenue segments— Payment and Financial Services, Commerce and Cloud Services, and Other Income. The maximum revenue contribution is made by the Payments and Financial Services segment. This segment includes wallet payments, Paytm Payments Bank, Paytm Money, Paytm Postpaid, and other financial services.
Between FY19 and FY21, the contribution of the Commerce and Cloud Services segment has reduced by ~54%. This was mainly due to the disruption caused by the COVID-19 pandemic, which affected the travel, e-commerce, and entertainment business of Paytm. Paytm is a loss-making company. Between FY19 and FY21, the company has managed to limit its losses by ~59%.
Paytm has also managed to trim down its expenses by ~38%. Most of the company's expenditure is made on payment processing charges due to high volumes of transactions taking place on the app. In FY21, close to 40% of the total expenses were payment processing charges. Another major expense was ‘Marketing and Promotional Expenses’. Between FY19 and FY21, the company managed to reduce Marketing and Promotional expenses by 84% from Rs 3,408 crore in FY19 to Rs 532 crore.
Paytm holds a short-term debt of Rs 544.9 crores.
About the IPO
Paytm plans to use the Rs 8,300 crore that it raises from the IPO as follows:
|Growing and strengthening its ecosystem, including through acquisition and retention of consumers and merchants and providing them with greater access to technology and financial services.||Rs 4,300 crore|
|Investing in new business initiatives, acquisitions, and strategic partnerships.||Rs 2,000 crore|
Paytm hasn’t specified where it will be using the remaining Rs 2,000 crore.
Chinese mogul Jack Ma’s Antfin (Netherlands) Holding B.V. owns close to 29.6% equity stake in Paytm, the highest in the company. According to SEBI regulatory requirements, no shareholder can hold more than 25% in a ‘professionally managed company’. Since Paytm has decided to list as a professionally managed company, it cannot have a promoter. Antfin will be the largest seller in the IPO. It will be selling shares worth Rs 4,704 crore out of the total OFS of Rs 10,000 crore. Jack Ma’s Alibaba too holds a 7.2% stake in Paytm separately. Other shareholders include Berkshire Hathaway, Elevation Capital, SoftBank, and CEO Vijay Shekhar Sharma.
According to SEBI regulations, the company needs to offer not less than 75% of the net offer to Qualified Institutional Buyers (QIBs). This will bring down the retail quota from 35% to 10% as is the requirement laid down by SEBI. Therefore, retail investors like you and me have a lesser chance of getting an allotment due to supply-side restraint.
Despite being a loss-making company, Paytm has managed to trim its losses and expenses. It has diversified its revenue stream, which ensures that impact on one vertical does not affect the other. While the company remains in net loss, its financial growth and stability are healthy. The company does not have one specific listed competitor. It has a competitor in just about every domain it operates.
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