One97 Communications, the parent company of Paytm, has filed a draft red herring prospectus with SEBI, capitalizing on the stock market boom and rising digital transactions. It is all set to open for its IPO.
Paytm (Rs. 16,600 Cr) will be India's largest IPO issue followed by Coal India (NS:COAL) (Rs. 15,200 Cr) and Reliance Power (NS:RPOL) (Rs. 11,000 Cr).
IPO FACTS
PAYTM OVERVIEW
Paytm ("pay through mobile") is a financial technology and digital payment system company based in Noida.
Paytm is available in 11 Indian languages and offers online services such as movie, and event bookings, utility bill payments, travel booking, mobile recharges, as well as Paytm QR code used for in-store payments at restaurants, parking, tolls, grocery stores, fruits, and vegetable shops, educational institutions, and pharmacies.
PAYTM SNAPSHOT
PAYTM SERVICES
Paytm Payments
- Paytm Wallets: Paytm collects a commission from network providers in exchange for allowing recharges and bill payments. Paytm earns interest on the money we keep in our e-wallet by opening an escrow account with one of its partner banks and earning a mutually agreed-upon interest rate.
- Paytm Payments Bank: Paytm Payment Bank offers saving accounts, as well as a debit card and the ability to make quick and easy payments. They are currently not profiting as much as they could from these deposits because they are unable to lend this money. Paytm Payments Bank wants to become a small finance bank, and FASTags has helped it get one step closer to that goal.
- UPI: Paytm was initially focused on the UPI business, but realized it was not working as per their expectations. A lot of money has to be spent on marketing for the growth of the UPI business, but Paytm has not been able to monetize this segment.
- FASTag toll collection: FASTags is a fantastic business opportunity that Paytm jumped into. Paytm has received around Rs. 69 Cr in FASTag security deposits. This money will be used to invest and earn interest.
Paytm Credit
Paytm Credit has begun to make a great impact. Merchant Credit and Consumer Credit are the two parts of their credit segment.
Consumer credit has options such as Paytm Postpaid (i.e. a credit limit of one month), Personal loans, Credit Cards in partnership with SBI (NS:SBI). Paytm earns unit fees of around 2-6%. The only major competitor is Bajaj Finance (NS:BJFN).
Active and verified merchants are offered credit based on their wallet activity.
Paytm Money
Paytm Money is a platform that provides investment products.
- Direct Mutual funds: This has aided in huge user acquisition, making Paytm, India's largest originator of new SIPs. Paytm Money has built partnerships with asset management firms and provides detailed information on the funds available.
- Stocks: Paytm announced the launch of their broking service. It provides a no-frills Demat account to retail investors.
- Pension Schemes and Digital Gold: A fee is earned by Paytm on investments made through their platform to the pension schemes and gold.
It can face competition from Zerodha and Upstox in the broking segment.
Paytm Insurance
Paytm offers term life, health, motor insurance, and micro-insurance for small-ticket electronics and smartphones. Policy Bazaar is their major competitor. Policybazaar take rates are slightly higher than Paytm’s take rates. When compared to the rest of the world, India has a large insurance gap which provides Paytm a great future if utilized in the right manner.
Ecommerce
Paytm Mall, like any other e-commerce app or website, is a dedicated app for online shopping.
Internet Commerce and Cloud
Paytm's online commerce offerings include flight, movie, bus, train, and event ticketing.
Paytm for Business
Offline Merchants: Paytm provides offline merchants with QR codes, point-of-sale terminals, and a sound box. While receiving payments via QR code is free, Paytm charges merchants a fee of 1.8-2% for payments made through point-of-sale devices. When a payment is made, a soundbox is a speaker that announces the amount received.
The soundbox generates a monthly rental of Rs 100. Paytm has looked to increase merchant wallet share by offering credit to merchants. It has also begun to provide software solutions to its merchant and corporate clients.
Paytm faces competition from Pine Labs and BharatPe in the offline merchant acquisition space. mSwipe and Pine Labs in PoS space. BharatPe and PhonePe in the QR code space.
Online merchants: Paytm provides a payment gateway platform for online merchants. Some of India's leading online merchants, including Big Basket, Swiggy, IRCTC (NS:INIR), and Uber, use the platform for their online checkout.
Paytm faces competition from MobiKwik, BillDesk, Razorpay, Cashfree, CC Avenues, and other payment gateway services.
10 KEY TAKEAWAYS FROM PAYTM’s DRHP
1. Industry Overview and Opportunities for Paytm
Paytm is the largest payment gateway aggregator in India based on total transactions, with the widest ecosystem of payment instruments.
Merchants and consumers benefit from technology because it expands their reach and accessibility. India added 500 million+ new smartphone users over a decade.
Merchants have seen a significant increase in the acceptance of digital payments. Covid 19 has seen a steep increase in digital payments even by small Kirana stores.
Consumers are quickly adopting digital payments because they offer simple, secure, and convenient ways to transfer funds between accounts.
Although digital payments have been steadily increasing over time, India remains a cash-based economy. This provides Paytm with a great future opportunity.
2. Key Shareholders are offloading their stakes
The founder of Paytm Vijay Shekar has reduced his holdings from 15.4% to 9.6% and two new funds have been entered for further investments.
The share price or the stake to be diluted by any of the shareholders is not disclosed in the DRHP. Most of the investors with more than 1% holdings are fully or partly diluting the stake. Ratan Tata Associates who also has investments in Paytm is also looking forward to offloading some of their stakes.
Paytm claims to be a professionally run business with no identifiable promoters.
3. Paytm will continue to be a Foreign-Owned Company after IPO
Paytm is currently a foreign-owned and controlled company that will remain so after the IPO under the consolidated FDI policy and foreign exchange rules, and that it will be subject to Indian foreign investment laws as a result.
China-based, Ant Financials holds almost 30 percent of Paytm. Ant Financials had also stated in their IPO prospects that Paytm is a company where they have significant influence.
4. Why is Paytm Raising money through IPO?
Rs. 43000 million will be used to expand the Paytm ecosystem by attracting and retaining customers and merchants, as well as giving them better access to technology and financial services.
Rs. 20,000 million will be used for investing in new business initiatives, acquisitions, and strategic partnerships.
The leftover funds will be used for general corporate purposes.
5. Paytm continues to be a loss-making company
Paytm has been losing money for the past three years and expects to continue doing so. We can also see a slight dip in their Total Revenues and also Revenue from Operations for FY21. However, their Total Expenses and even Net Losses have been reducing year on year.
The company also stated that they can’t predict future results of operations or the limits of market opportunity because the market for their platforms, products, and services is constantly changing.
They also expect their operating costs to rise as they hire more people and expand operations and infrastructure in India and elsewhere.
The onslaught of covid resulted in a 38 percent drop in revenue from commerce (ticketing) and cloud services. However, Paytm's annual transaction value has increased as a result of the pandemic-induced shift to digital payments.
6. Paytm Money is being cautioned by the Securities and Exchange Board of India (SEBI)
SEBI has found some violations of laws and regulations in Paytm Money's uploading of clients' KYC data and provision of investment advice. The market regulator, SEBI sent Paytm Money a written warning to take corrective action.
7. Paytm is involved in several litigations.
In the Paytm IPO, 11 law firms represented various stakeholders of the company.
Paytm's India Counsel was ShardulAmarchandMangaldas and Paytm's International Counsels were Latham & Watkins (Singapore).
Paytm has an unresolved income tax matter worth Rs 3,700 crores.
In other filings with SEBI, Paytm revealed that it spent nearly 78 crores on legal fees for FY 2021. It also spent 76.8 crores in FY 2020 and 93.8 crores in FY 2019.
8. Paytm’s 100% stake in its Insurance subsidiary is flagged by RBI
After the government said foreign firms could increase their stake in insurance intermediaries from 49% to 100%, Paytm, a foreign-owned company bought a 100% stake in its insurance broking subsidiary between November 2019 and February 2020.
RBI flagged this deal under the Foreign Exchange Management Act (FEMA), which was only updated in April 2020 to include the new FDI limit. Paytm has applied to the government for post-facto approval, which is still being processed and is subject to change.
9. Gross Merchant Value (GMV) has been increasing year on year
Paytm's business is reliant on its merchant ecosystem, with merchant fees from commerce, cloud, payments, and fintech services accounting for a large portion of the company's revenue.
One of the key performance metrics for payment and financial services is GMV. GMV is the rupee value of total payments made to merchants through transactions on the Paytm app over a period. It does not include any consumer-to-consumer payment service such as money transfers.
Its total merchant base has increased from 11.2 million in FY19 to 21.1 million in FY21. Paytm's revenue from operations is made up of 75% transaction fees from merchant payment services.
This can also act as an added risk if it does not continue to add on more merchants and fail to retain the current merchants it can cause a huge drop in their revenues.
10. Regulatory Risks
One97 Communications established Paytm Payments Services in January 2021 as a subsidiary through which it applied to the Reserve Bank of India for permission to transfer its payment aggregator services business to the new entity. It has yet to receive approval.
The authorization is required to comply with the RBI's new Payment Aggregators Guidelines, which state that a single entity cannot continue to provide an e-commerce marketplace and payment aggregator services at the same time.
National Payment Corporation of India (NPCI) will soon begin prohibiting third-party applications such as Paytm from initiating UPI transactions above 30% of the total volume of UPI transactions processed in the previous three months.
The regulatory framework for online gambling may hurt Paytm First Games' future operations. On its platforms, Paytm First Games offers several skill-based real money games.
New investors from non-compliant jurisdictions such as Mauritius, the Cayman Islands, and Uganda are no longer permitted to acquire, directly or indirectly, 20% or more of the voting power of any existing payment system operators, according to an RBI notification dated June 2021. And Paytm does have some investors from these jurisdictions.