Can Paytm Stave Off Competition From PhonePe, BharatPe In The Soundbox Market?

Anyone who makes UPI payments to merchants in India is familiar with the voice from a speaker confirming the receipt of money. If asked, a majority of digital payments users in the country would say that the speaker belongs to Paytm. And there is a reason behind this. Paytm was the first company to launch such a speaker, called Paytm Soundbox, back in 2019. For the next two years, it was the sole player in that space.

However, as the Soundbox became popular, the rivals of the Vijay Shekhar Sharma-led fintech giant also forayed into the space to make the most of the opportunity. 

While PhonePe and BharatPe launched their speakers last year, Google also started piloting the speakers, intended to help merchants with instant audio confirmation on receiving digital payments, earlier this year. Now, even banks, including HDFC Bank, State Bank of India, and IndusInd Bank, are focussing on products in this segment. 

The entry of these players has made the segment, which gained popularity because of Paytm, highly competitive and raised questions as to how this will impact the fintech giant’s market share.

However, BofA Securities believes that Paytm will continue to reap the benefits of being the first mover in the space. In a report, the brokerage said it expects the competition in the space to remain rational as it still has space for two-three new players to co-exist and target new merchants. 

Paytm To Add 15 Mn Devices

As per BofA’s estimates, India has 40-45 Mn merchants with ‘decent’ business size, out of which 2.5 Mn are large merchants, 20-25 Mn are tax-compliant SMEs, and about 15-17 Mn are SMEs with low turnover. As banks and point of sale (PoS) companies typically service large merchants, these merchants do not need the speakers. Hence, the target market for these devices is largely the SMEs. 

In that, BofA Securities sees Paytm adding 15 Mn new customers for Soundbox in the next 2-3 years.

“Our channel checks indicate that PhonePe and BharatPe are currently more aggressive and key competition to Paytm right now. In the past, we have seen some competitors offering free Soundbox and in process, looking to poach the merchant. But such instances have come down as it’s not economical for any company to do that,” said the brokerage.

“As Paytm charges (about) INR 100/month, the visibility on subscription revenue is high. We expect EBIT margins to be (around) 40% in steady state and expect payback on these boxes in 12-14 months (capex per box is INR 1,250),”  analysts at BofA Securities added.

The brokerage also increased its price target on Paytm to INR 1,020 from INR 885 earlier, which implies an upside of over 21% to the stock’s last close on the BSE on Friday.

Paytm shares ended Friday’s session almost 3% lower at INR 841.15 on the BSE.

 

Earlier this month, BofA Securities upgraded the shares on Paytm to ‘buy’ from ‘neutral’ rating and said that the startup was well-positioned to continue dominating the SME merchant landscape where the subscription model via Soundbox was improving merchant stickiness.

Ability To Customise A Moat 

During its Q4 and FY23 results announcement, Paytm had said that 68 Lakh merchants opted for subscriptions to its payment devices such as Soundbox and PoS as of March 31, 2023, which was a jump of 134% year-on-year (YoY). 

At the end of May, Paytm had 75 lakh merchants paying subscriptions for its payment devices.

BofA Securities noted in its latest research note that the Vijay Shekhar Sharma-led company manufactures Soundbox in India. Though a lot of components come from China, Paytm has control over software and hardware. As a result, it is able to customise these devices better and hence can launch variants at a faster pace. 

“We understand, Paytm maintains a good inventory – about three months of these components. As a result, even if there are any supply chain issues, Paytm would not face any major risks. The life of these Soundboxes is usually three-four years but could last one-two year more if the battery is replaced and (device) maintained properly,” said the brokerage.

However, as the two major competitors of Paytm, PhonePe and BharatPe, are not listed, they don’t necessarily have the same pressure to generate profit as the former. As such, they can offer higher discounts to disrupt the market, thereby posing higher-than-expected competition to Paytm.

Despite this, for now, BofA Securities expects Paytm to continue to grow in this segment steadily and in other verticals as well. Given the rising contribution from high-margin businesses and cost-control initiatives, Paytm’s margin improvement will happen at a faster rate than earlier expected, it said.