Paytm’s Uphill Climb Begins Now

Have Vijay Shekhar Sharma and Paytm turned things around? That’s the question on many lips this weekend, after very encouraging numbers in key parts of its business for the concluding quarter of FY23.

For one, the feeling within the company is definitely bullish on the back of the financial performance and what Sharma and CFO Madhur Deora told investors in the earnings call on Saturday morning.

We will look to dissect some of this bullishness, see whether Paytm is leaning too heavily on the lending business and how the competition is shaping up in the areas where Paytm is investing. First, a look at the top stories this week from our newsroom:

• The Zomato-Swiggy Killer: Can ONDC replace the duopoly of the food delivery apps and bring relief to aggrieved restaurants? Here’s our in-depth feature to give you the answer
• Ecommerce Founder Salaries: The founders of India’s ecommerce majors received cumulative annual pay of INR 49.83 Cr in FY22, but who earned the most?
• Reliance’s Tira VS Nykaa: Can Reliance’s latest major bet dethrone the long-time beauty commerce champion? Here’s what the experts say

Paytm’s Billion-Dollar FY23 

Before we dive into the analysis, let’s see the headline items from the FY23 numbers: The fintech major narrowed its Q4 FY23 net loss by 78% YoY to INR 167.5 Cr, with operating revenue soaring 51% to INR 2,334 Cr. For the full fiscal year, Paytm’s net loss fell 25% to INR 1,776.5 Cr and operating revenue surged 61% to INR 7,990 Cr or almost $1 Bn

But when we dive into the financials, it’s clear that the income from the lending business is the brightest vertical for the company. While payments revenue grew by 41% to INR 1,467 Cr, revenue from lending surged to INR 475 Cr in the March quarter. The number of loans disbursed grew a whopping 82%, and the total value of loans saw a massive leap of 253% YoY.

So Paytm is on track to become a lending company rather than just a payments app that it’s best known as publicly. However, the payments business is definitely a key part of the funnel for the company and helps it lower the cost of acquiring borrowers in the long run.

Decoding Paytm’s Lending Boom

Paytm now has close to 10 Mn borrowers at the end of FY23, but Sharma and Deora were confident of growing this even further in the months to come. Both pointed at the low penetration of the loan business among the total monthly transacting user (MTU) base.

For instance, the consumer personal loan business, BNPL or Paytm Postpaid have a penetration of 0.9% and 4.5% of the MTU, while the merchant loans business has reached 5.9% of all merchants with Paytm PoS devices. This indicates that there is indeed a lot of headroom for Paytm to grow its loan business, and it has not even tapped its own MTU base fully.

Of course, the low penetration is also a factor of the risk appetite of Paytm’s lending partners and the company’s head of lending business Bhavesh Gupta claimed in the earnings call, that Paytm wants to increase this penetration conservatively.

However, on the lending side itself, one potential stumbling block could be that Postpaid or BNPL has grown the fastest quarter-on-quarter at 30% compared to 17% for personal loans and 26% for merchant loans.

The company admits that even as it has grown its Postpaid acceptance network in the past year, it will need the loan ticket size to grow. The larger base of Postpaid users are key to bringing more borrowers on the personal loans side as well as credit card users, Paytm said in its results.

Incidentally, lending margins are higher on the personal and merchant loan side, so cross-selling on both fronts through BNPL or Postpaid will be key for Paytm in the near future if it wants to boost the contribution margins further. To put things in perspective, loan revenue has only grown by just about 6% quarter-on-quarter, but loan disbursals have seen a 26% uptick. So Paytm needs to get a better mix of loans to increase its take rates in the future.

What Else Is Paytm Counting On?

While it’s clear that lending is the raft towards profitability for Paytm, cofounder and CEO Sharma was bullish about how the payments business and particularly UPI will contribute in the march towards the black.

On the credit card front, the company is looking to launch a RuPay credit card on the UPI stack in the near future, though Sharma or Deora did not reveal a launch timeline. Paytm added UPI Lite support this week.

Sharma was also confident that UPI will open up in terms of monetisation in the next few months. He pointed to the recent interoperability of PPI on UPI as the first such step. “If our Paytm wallet is being used on somebody else’s QR, the merchant-side QR will have to pay us” Sharma told shareholders and analysts.

In March, UPI operator NPCI set an interchange fee of 1.1% for merchant transactions using prepaid payment instruments such as Paytm Wallets on UPI. But to make the most of the UPI opportunity, Paytm has to increase its market share significantly in the UPI payments space.

Fintech decacorn PhonePe has the lead with 47% market share of UPI in March, while Paytm only had 15% share and trailed second-ranked Google Pay.

Plus, the irony is that PPI-UPI interchange fee boost for its revenue will come when users scan QR codes belonging to other companies and pay by Paytm Wallet. So for this revenue stream to become a significant pipeline, Paytm needs competition to grow as well.

Well-Funded Rivals Wait In The Wings

Experts reckon that like Paytm, pretty much all fintech companies will rely on lending to grow revenue or profits. The market reacted positively to the pre-earnings expectations and Paytm ended Friday at INR 689.45 (5% up week-on-week) but still down 67% from the IPO price of INR 2,150.

To make matters worse for Paytm, the competition has grown a lot more intense this week, with Jio Financial Services demerging itself from Reliance Industries Limited. Jio has the capital muscle and licences to launch several new financial services and truly make things difficult for Paytm, PhonePe and others.

Paytm has INR 8,275 Cr or over $1 Bn to take on Jio, PhonePe and others, but the focus on profitability means the company has to spend this on areas that are bringing in the revenue.

It cannot afford to burn more and take a step back after the progress seen in Q4, but Sharma and Co cannot take it easy lest the competition gains on Paytm. PhonePe has raised more than $750 Mn this year and has plans to raise a further $250 Mn.

In other words, it has to scale up the lending business profitably and rapidly in the next two quarters.

“In two years, when we’ve grown our revenues by 2.9x, our margins have also improved by 57%,” Sharma said on Saturday, but given how the fintech market is shaping up, this is just the beginning of the uphill climb for Paytm.

Startup Spotlight: HYPD’s Creator-Preneur Engine

As the influencer economy goes through an unprecedented ad-revenue drought, the largest creators in the country have turned to ecommerce as a gateway to maximising income. And Orios-backed HYPD has built the tech stack that lets consumers buy listed products directly from creator-run storefronts in just three clicks.

Founded by Ashwarya Garg and Akshay Bhatnagar, HYPD already has 2,000+ creators on board in less than two years, who have earned more than $1 Mn in total from HYPD as commissions. Now, armed with $4 Mn funding, HYPD is taking its zero CAC model to tap up to 20 Mn influencers in the content-to-commerce space.

Sunday Roundup: Funding, Tech Stocks & More

• Funding Picks Up: May has begun on a slightly positive note for Indian startups with $174 Mn raised across 19 disclosed funding deals. Sign of good things to come?
• Zomato’s Rally: Continuing its bull run, shares of Zomato rose to a five-month high of INR 66.46 this week, and settled on INR 65.41, amid higher fund inflow from foreign institutional investors

• Apple Mania: Apple set a quarterly record and double-digit year-on-year growth in India, the tech giant said in its March earnings report this week
• Startup IPOs: SEBI has sought clarification from Mamaearth parent Honasa Commerce and hospitality giant OYO on their pre-IPO DRHPs with further observations expected soon

We’ll be back next Sunday with more. TIll then, follow us on Instagram, Twitter and LinkedIn for the latest news as it happens.

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