Paytm IPO – Invest with Caution

One97 Communications (Paytm) issue is the biggest issue of India, intending to raise Rs 18300 crores, comprising of a fresh issue of Rs.8,300 crore and offer for sale by existing shareholders of Rs.10,000 crore. Company will use Rs 4300 Crores for Growth and acquisition of the Paytm ecosystem, and Rs 2000 Crores for Investing in newer initiatives, and partnerships Mr. Vijay Shekhar Sharma is the founder selling shareholder. Antfin, Alibaba, Alibaba, Elevation Capital, SAIF Partners etc are the investors who will be selling the shares.

Paytm  raised Rs 8,235 crore from 122 anchor investors  which includes marquee investors like Blackrock Global Funds, Canada Pension Plan Investment Board, Aditya Birla Sun Life Trustee, Government of Singapore, Vanguard etc. Link Intime India is the registrar of the issue and Book Running Lead Managers for the issue are Goldman Sachs (India) Securities, Axis Capital, ICICI Securities, J.P. Morgan India, Morgan Stanley India Company, Citigroup Global Markets India etc are the to the IPO. 

According to the documents filed with SEBI, Paytm offers payment services, commerce and cloud services and financial services to 33.7 crores registered consumers and 2.18 crores registered merchants as of June 30, 2021. Company acquires consumers through marketing, cashback and promotions, and acquires merchants through marketing and sales personnel, by offering them accessing to technology through consumer and business apps, payment instruments, payment platforms, devices, cloud and software.

Paytm has average monthly transacting (Average MTU) users of 45.1 million as against the (Average MTU) users of 39.7 million in 2020. Company has increased its merchants base to 21.1 million as against the 16.3 million in 2020.

Company has been innovating in the commerce and cloud services space by launching new products and offerings which includes ticketing, travel, listing of Mini Apps and advertising for small developers and businesses. Under its Financial Services umbrella, company has been innovating  and launching newer initiative e.g. Paytm Gold, insurance broking, Paytm Payments Bank, Paytm Post-paid and wealth management services through the Paytm Money App.

According to the findings of the RedSeer Report commissioned by the company and quoted by the company in its offer documents, India will have approx. 1 billion internet users by 2026. Growing trend of  Urbanization, Rising Middle Class Population, Rising consumption, Reforms undertaken by the the Indian Government, evolving digital landscape, Digitization changing the way people transact in India, evolution of Indian Payment system are some of the key factors that will favourably impact the country.   

One of the risk is increase in company payment processing charges payable to financial institutions and card networks. If the payment processing charges increase significantly, Paytm will not able to pass on these higher processing charges to merchants or consumers, company may not be profitable. If the Company is unable to attract merchants to its ecosystem, grow its relationships with  existing merchants, and increase transaction volumes on its platforms, its business, results of operations, financial condition, cash flows and prospects could be materially and adversely affected

Revenue of the company has declined especially when the digital economy is growing. Revenue decreased to INR 3186.8 Crore in 2021 from INR 3540.7 Crore in 2020. Majority of the Company revenue comes from Payment and Financial Services followed by Commerce and Cloud services.  

Company has incurred net losses, of Rs (4235.5) crore in FY 2019, Rs (2943.3) crore in FY 2020, Rs (1704) crore in FY 2021. For the month ending June 2021, it incurred a loss of Rs (376.6) crore in the three months vs Rs (288.1) crore loss in the quarter ending 2021.

Company derives a majority of its revenue from transaction fees, which it collects from merchants for its payment services. Paytm needs to broaden its services and increase its revenue growth at a faster pace. Failure to broaden the scope of payments services will increase its vulnerability of core payments business to competitors e.g Phonepe & Google Pay, who are growing at a faster pace in India’s digital payment space. Revenue may also be affected by service mix. Company generates higher fees from the use of certain payment instruments compared to others. Company do not charge any fees for certain transactions through Rupay debit cards and UPI to comply with prescribed merchant discount rates. Any unfavourable changes in merchant discount rates could have a material adverse impact on its operations, cash flows and financial condition.

With Rs 18, 300 crore it is the biggest IPO in the history of country. Company faces strong comptetion in payment services spaces. Investors need to look at the risk carefully and those who trust the digital economy, can participate.    

Bureau Galactik Views

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