“Paytm has come to a level where it is looking interesting, but investing in the company still comes with a lot of ifs and buts”.
Shares of Paytm (One97 Communications) tanked over 6 percent on January 12 on a part-stake sale by Alibaba Group. As of September 2022, Alibaba.com held 6.26 percent of the payments company and in a block deal it sold a 3 percent stake.
The Paytm stock is down 75% from its Initial Public Offering (IPO) price. Does this make a good entry point for new investors?
Well, one way is to say that there is still no clarity on how this business model will evolve because the company does not have any significant competitive advantage with respect to cross-selling opportunities that hold the key to ramping up the business in a big way in the long haul.
The problem here, as I argued in one of my previous podcasts, is that the information aggregator platform that is now being built with information sharing from all the big banking and financial players will be a public good soon. And so, the data in itself may not be as big a proprietary edge as it was thought of, as far as credit is concerned.
But when you evaluate the stock, the other way to look at the stock is to be in the moment, not think too long term, take one step at a time and see where the business heads with limited visibility into the future.
Just think about the odds of Paytm going down versus going up relative to the rest of the market over the next few quarters. Suddenly, the picture may start to look a little better.
Institutional support
Purely from a technical perspective, on the demand-supply side, I think most of the IPO-related selling is now over. Of course, Alibaba is still a large investor and the sale on January 12 raises fresh concerns about how much more it may sell.
But the flip side is that of late some institutional interest seems to be emerging in the stock. So that lends some support, and unless something goes wrong fundamentally, you may not see a huge price disruption.
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Now, let’s look at the prognosis fundamentally.
Well, on January 9, Paytm reported that it distributed 3.7 million loans worth Rs 3,665 crore in December, up 330 percent on-year. For the December quarter, its total disbursements jumped 357 percent to Rs 9,958 crore.
Monthly transacting users jumped 32 percent to 85 million in December from 65 million a year ago. Gross merchandise value processed through the platform increased 38 percent year-on-year in December to Rs 3.64 lakh crore.
Paytm also added one million payment devices during October-December and the number of merchants paying a subscription fee for payment devices touched 5.8 million as of December 2022.
The company’s consumer engagement was at its highest on Paytm Super App with average monthly transacting users at 85 million for the quarter ended December 2022, up 32 percent on a yearly basis.
Merchant network
In essence, Paytm continues to add merchant network apart from customers to its platform. Plus over the past two years, Paytm’s net take-rate has improved from nothing to 13 basis points led by lower processing costs and a higher share of revenue from its Soundbox, which is a device that gets you audio or voice confirmation of payment in your preferred language.
The share of subscription revenue in the total payment revenue is now at 14 percent of gross payment revenue and 38 percent of net payment revenue, according to analysts from CLSA.
This is great, especially because Unified Payments Interface (UPI) payments do not earn the company any money but, now that Paytm has shown the way, others like PhonePe could take away any further gains.
The other part of Paytm’s business, i.e, the lending business is also growing at a very good pace. Paytm’s plan is to start selling credit cards to all its customers who avail of Buy-Now-Pay-Later (BNPL) kind of loans, which can become a significant revenue driver.
Overall, if Paytm is able to grow its subscription revenues from merchant devises, and also expand its loan book at the pace at which it is growing currently, while maintaining credit quality, it is only a matter of time that it will be able to cover its costs and emerge profitable.
EBITDA break-even
Of course, the ability of the company to grow its loan book without any asset quality issues is still to be tested, because this business is still at a nascent stage. But then, asset-quality issues will take time to unravel if at all those happen.
But in the meantime, the management has committed to making the company Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) break-even by the second quarter of FY24, and analysts believe this can be achieved.
For instance, JP Morgan expects a cash burn of $33 million over the next three quarters until break-even is achieved in the second quarter. One very important thing to watch out for will be the company’s ability to cut fixed costs especially as the bulk of its business, which is payments, has high fixed costs with low-revenue contribution. The company’s ability to cut this will be crucial to enhancing its core profitability.
In the next few quarters, there is a good chance that the management will achieve what it says it is set out to do.
Leap of faith
All said and done, Paytm will require a leap of faith in the management’s ability to grow and cut costs effectively to run a tight ship.
Of course, the big world-changing vision that was projected earlier has shrunk substantially but then the market price has corrected significantly too. Today, Paytm trades at a valuation it saw more than five years ago, in 2016.
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And nearly a third of its market cap is covered by the cash in its book which stood at $1.1 billion as of September 2022 apart from the $127 million outlay in cash for a buy-back. Plus, the fact that the Paytm board approved a buyback at a price of Rs 810 per share also provides some pyschological comfort.
Paytm has come to a level where it is looking interesting, but investing in the company still comes with a lot of ifs and buts. It really depends on what kind of temperament you have as an investor and about how much risk you can stomach.
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