Remind me about Paytm…

It is the best known digital payments company in the country. All of us have used the service at some point, or seen signs for it at shops we visit. Its parent company is called One97 Communications Ltd—which debuted on the stock market this week.

The founder: Vijay Shekhar Sharma’s story reads like a tech startup fairytale. The son of a school teacher, he grew up in Aligarh—and studied engineering in New Delhi,  “where he taught himself English by listening to rock music and reading text books with their Hindi translations.” 

In 2000, Sharma launched his first business called One 97—a text-based people-search service—its name inspired by 197 is the number for phone inquiries. The next year, he launched Paytm—shorthand for Pay Through Mobile—which allowed you to top up the balance on your prepaid mobile phone, and became a digital wallet service in 2014. 

The Paytm story: The company’s meteoric rise was fuelled by two key factors. First: the surge in the use of mobile phones in India—as they became increasingly cheaper. Second: Demonetisation. With the government pivoting hard toward digital payments and away from cash, Paytm became the hottest bet in the market. Interesting nugget to note: 

“It famously courted controversy by taking out full-page advertisements with the Prime Minister’s photograph welcoming the decision to shred 86% of all the currency circulating at that time and had to apologise for the unauthorised use of Modi’s picture.”

The numbers: The company currently has 337 million users and it is the market leader in what insiders call the P2M (person to merchant) market—where a person uses a digital payment service to pay a store etc. It has 50% of that pie. But for all that, it has not turned a profit as yet. The company has posted losses for eight straight years—most recently reporting a loss of Rs 3.82 billion (382 crore) on revenues of Rs 8.91 billion (891 crore) in the first quarter ended June 30. 

Point to note: Paytm’s biggest shareholders are foreign investors like Japanese SoftBank, China’s Ant Group and Warren Buffet’s Berkshire Hathaway. Ant, Alibaba and SAIF Partners (a Hong-Kong based private equity firm) collectively own more than 50%, with Softbank as the next largest investor with 18%.

Ok, so what happened…

Paytm’s IPO came on the heels of blockbuster performances of other startups like Zomato, Nykaa and PolicyBazaar. But unlike the rest, it was very slow off the block. The big investors were slow to snap up the shares allotted to them—and the shares were not fully subscribed until the third day. Institutional investors were already expressing doubts in the lead up to the IPO—and that skepticism bore fruit yesterday on the first day of trading:

• The stock price plunged 27% from Rs 1,950—already offered at a 9% discount on its issue price of Rs 2,150—to Rs 1,564.15 at its lowest. 
• It was the worst first day performance for an Indian unicorn—valued at Rs 1 billion (1,000 crore) or more. The record was previously held by Coffee Day which debuted in 2015!
• Trading was halted when the downward plunge hit a circuit breaker—which kicks in when the newly listed stock dips or rises by 20% from its opening price to give investors and the market to cool down.
• While Zomato’s share price surged 65% on debut, and Nykaa rose by 79%, Paytm wiped off more than double the money it raised through its IPO worth Rs 183 billion (18,300 crore).
• Based on current share price, the company is worth Rs 1.01 trillion (1,01,399 crore or $13.6 billion)—which is seriously lower than the $16 billion valuation it received when it last raised investor funds in November 2019.

Why, what’s the problem with Paytm?

There are plenty of nerdy analyses of its business prospects (see: reading list below), but we are going to keep this simple and jargon-free.

The UPI problem: As we noted before, Paytm is the market leader in only one area—individual transactions with merchants. But the introduction of UPI (United Payment Interface) payments has essentially decimated that advantage. And here’s why. For starters, UPI is free and therefore more attractive than paying a fee to a digital wallet for each transaction. Also: Paytm only has 13% of the UPI market—and now faces stiff competition from the likes of “deep pocket big tech gorillas” like Google or well-funded retail giants like Reliance and Walmart (PhonePe). Today, Google Pay and PhonePe have cornered 40% of the market, forcing Paytm to third place.

Data point to note: Paytm’s take rate—the amount it makes per transaction—has dropped from 2.18% in 2016–17 to 0.79% in 2020–21. So that doesn’t bode well for its digital payment business either.

Profit, what profit? Paytm has been hugely successful in raising eye-watering amounts of money—and burning through 70% of it to primarily fund its losses. And it hasn’t made any promises about getting anywhere close to profitability. Its own share prospectus reads:

“We expect to continue to incur losses for the foreseeable future and we may not achieve or maintain profitability in the future… we cannot assure you that we will ever achieve or sustain profitability and may continue to incur significant losses going forward.”

The problem for Paytm is that analysts are just as sceptical about its profitability. An assessment by the foreign brokerage firm Macquarie notes:

“That Paytm has a problematic business model is exemplified—the business generates very low revenues for every dollar invested or spent towards marketing. This is especially problematic for a low-margin consumer-facing business where competition across each vertical is only increasing.”

More damningly, professor of finance Aswath Damodaran writes: “Access to capital from its deep pocketed investors, especially Alibaba, seems to have made this company casual about its business model and profitability, even by young, tech company standards.”

Classic ‘overstretch’: In his famous book ‘Rise and Fall of Great Powers’, Paul Kennedy argued that great empires fall because they inevitably overextend themselves—until a point the imperial project becomes too costly to maintain. Big businesses are no different. Aware of its problems with UPI and competition, Paytm has been expanding willy nilly into all sorts of businesses—trying to leverage its huge user base to create a ‘super platform’ of sorts. Over recent years, it has:

• Introduced ticket booking for movies, events, amusement parks and flights. 
• Dabbled in ecommerce via its consumer shopping platform Paytm Mall
• Kicked off Paytm Gold that enabled users to buy gold in quantities as little as Rs 1.
• Started a Payments Bank which offers features like deposits, debit cards etc. but does not lend money.
• Jumped into investment and wealth management with Paytm Money.
• And most recently launched a Paytm for Business app for merchants to track payments.

But as Macquarie points out, it is not ahead in any of these sectors—and nor have those businesses proved profitable so far. The one promising path ahead is to get into the lending business, but it doesn’t have a license to operate as a proper bank.

The bottomline: is best summed up by Damodaran who writes:

“The picture that emerges of Paytm is that of a  management that is too focused on racking up user numbers, and too distracted to care about converting those into revenues and profits, while making grandiose statements about its future. Using the corporate life cycle framework to assess Paytm, it resembles an adolescent with attention deficit issues, in its scattershot approach to growth and absence of attention to business details, and if you are an investor, you have to hope that going public will cause it to grow up quickly.”

Reading list

For a clear overview of the Paytm plunge, read Bloomberg News via Mint, Quartz or The Telegraph. Mint has Sharma’s response—or watch his TV interview here. For biz nerds, Aswath Damodran’s blog post—written before the IPO—and The Morning Context (paywall) are best. FinShots has a straight-forward and less critical explainer on Paytm and its business model—though written before its IPO mishap. Economic Times offers details on the Macquarie report, a good take on why Paytm crashed unlike its peers, and how Paytm’s problems may affect future IPOs.