Paytm IPO Analysis: Growth, Opportunities, Risks And More

The growing number of internet and smartphone users across India and the government’s proactive digital drive to ensure financial inclusion have seen the fintech market grow at a fast clip. In October 2021, the total value of UPI transactions in India stood at $1.5 Tn, while the total volume of transactions was 64 Bn.

Over the years, the fintech market in India has expanded beyond money transfers and bill payments. Paytm, an application initially launched as a mobile wallet to facilitate money transfer and mobile recharge, offers a wide array of services ranging from equity investment to insurance. The rise and rise of Paytm also indicate that full-stack fintech applications are the need of the hour across the country’s digital economy.

The burgeoning fintech market in India, increasingly adopted by businesses and consumers, has also attracted global tech giants and Indian conglomerates. Also, the fierce competition among Indian fintech players can affect their market share and long-term profitability.

Backed by SoftBank, Alibaba Group, T. Rowe Price and others, Paytm clocked a total operating revenue of $382 Mn in FY21. Compared to FY19, it had dipped 13%, primarily due to the diminishing share of commerce and cloud services revenue over this period. The company’s revenue from this segment took a significant hit due to the pandemic and witnessed a decrease in revenue share from 47.5% in FY19 to 25% in FY21. However, the share of the revenue from payments and financial services increased by 22 percentage points, from 52.5% in FY19 to 75% in FY21.

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The Competitive Edge Of Paytm’s Business Offerings

While many companies are still pursuing their super-app launch in India, Paytm’s offerings are second to none compared to existing super-apps. The platform provides a wide range of financial and ecommerce services, including bill payments, money transfers, ticket booking, ecommerce and investments. A 337 Mn-strong user base will also enable the company to lower its customer acquisition cost (CAC) for super-app services.

Strong Brand Value

In India, Paytm is synonymous with mobile payments. in the country. With an approximate consumer base of 337 Mn and 22 Mn merchants on the platform, the company is a clear winner in terms of user adoption. It is important to note that brand awareness and perceived quality significantly impact customers’ purchase intent.

Low CAC For Allied Services

Paytm today is not limited to money transfers and mobile payments. Instead, it offers an array of financial and ecommerce services. The company already considers itself a super-app, indicating it is serious about diversifying its revenue and customer engagement channels. With more than 114 Mn annual transacting users on the platform, cross-selling of other financial and ecommerce services will incur lower CAC than onboarding new customers for all its products and services.

Expenditure Control

Paytm has cut down some critical operational expenses, including payment processing charges (15% lower in FY21 than FY19) and marketing costs (84% lower in FY21 than FY19), as the company goes public. Although it was not EBITDA positive in FY21, a reduction in operating expenses indicates that the company is serious about being operationally profitable and is working towards long-term financial sustainability.

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Key Concerns: Paytm’s Business Offerings

Despite being the first mover at scale in terms of mobile payments and money transfers, Paytm’s market share in UPI transaction processing is way behind its competitors — PhonePe and Google Pay. In September 2021, the total value of Paytm’s UPI transactions stood at $8.4 Bn compared to $42 Bn bagged by PhonePe and $34 Bn by Google Pay. Similarly, Paytm’s total UPI transaction volume was 544 Mn compared to 1.6 Bn by PhonePe and 1.3 Bn clocked by Google Pay.

Competitive Market

Paytm competes with a diverse range of businesses due to the full-stack nature of its product offerings. More importantly, if a scenario of perfect competition occurs in the Indian fintech space due to market saturation, it will be tough to ensure the long-term sustainability of profit margins. For instance, in the UPI domain, the company is already lagging behind its competitors.In September 2021, the total value of Paytm’s UPI transactions stood at $8.4 Bn compared to $42 Bn bagged by PhonePe and $34 Bn by Google Pay. Similarly, Paytm’s total UPI transaction volume was 544 Mn compared to 1.6 Bn by PhonePe and 1.3 Bn clocked by Google Pay.

Multiple Regulatory Requirements

As a full-stack fintech player, Paytm must comply with multiple regulatory requirements from the RBI, SEBI, IRDAI and income tax authorities. The growing digital adoption across the country has led to policy changes regarding the usage of the internet and new-age financial technologies. Adverse interpretation of these policies can hinder the growth of companies like Paytm and may incur greater legal and compliance costs.

Non-Binding Merchant Contracts

Paytm’s operating revenue depends on the fee collected from the services it provides to its merchants (B2B customers of the company). Although there was an 88% rise in the number of registered merchants, from 11.2 Mn in FY19 to 22 Mn in FY21, the contracts binding these merchants are not adequate for long-term engagement. Provided it allows the merchants to disengage from the platform without a cause. With stiffening competition, the threat of platform substitutes is growing and may lead to severe revenue loss for the company in the long run.

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