got listed today. Did you get any shares?
Paytm as a company gets 75% of its revenue from basic payments business which has an extremely low margin, if at all any margin, business. All their other new businesses — whether selling mutual funds, insurance, or gold loans through merchants — are still very small and will scale up over time.
On the aggregate, the payments business itself is a very large business with large volume and low margins. The other businesses, the mutual funds etc. selling through merchants is a growing business with slightly better margins. Against this backdrop, the proceeds from the IPO are going to be used for acquiring more customers and more merchants. What that means is that the company might reduce its margins on the payments business even more. Similarly, more incentives will be given to merchants for coming on board.
The company, given its size and the scale of operations, will continue to burn cash in funding the growth of these various businesses and the valuation being at the top of the valuation range, we will have to wait and see over time whether any of these businesses which they will start at some point become cash positive. It is a great company and has led to a phenomenal change in the face of digital India, but we still stay at the sidelines for some time.
Old timers say if you buy a company which is above the PE multiple of 50-60 times, you will not create wealth; but now the companies which are going public, do not have a PE or E. So what happens next?
All these companies are cash guzzling, negative earnings companies and they are trading on price to sales or depending on the metric of the company. In the case of Paytm, businesses other than the payments business have an inherently higher margin. So depending upon the kind of market share they very quickly acquire in getting merchants on board, the revenue split between them and the merchants will improve in Paytm’s favour.
In the case of Paytm’s payments business with low level of margins, one of the concerns in the market is how does one raise the pricing? The telecom industry has given out low ARPUs, low per minute call charges and the industry has struggled and are struggling still to raise the permanent charges. There are regulations on top and restricts such hikes.
I think unless the balance between the 35-25 reduces between payments and other businesses, some amount of discount to the other digital businesses will remain.
A year from now, of the four big companies which have gone public — Zomato, Nykaa, Paytm, and Policybazaar — which one will be listed higher from its current price and which one will be trading lower than its current price?
It is very difficult to answer but Zomato for instance is going to commit an additional $1 billion in acquiring other start-ups to add to its business every year. Other online businesses including Nykaa, Policybazaar are also buying up and so the underlying valuation of each one of these companies is not just in growing their existing business, but also in the valuation increase of the companies that they acquire.
If Zomato is investing $1 billion more in new start-ups, then if those companies’ valuations because of execution goes up, Zomato valuations goes up. The same logic holds for all these businesses. For Policybazaar or even Paytm, the scale of these businesses is far more than a Zomato or a Nykaa. So depending upon the acquisitions that they make, a Policybazaar will do well. Paytm I am still not sure how that balance will maintain and then Zomato. So that is the picking order — Policybazaar, Zomato and then Paytm.
You are making this point about how nearly 80% of Paytm’s business is a low hanging fruit, the mobile wallet. It is trying to increase its share when it comes to UPI but it is a very distant thought. It has 12% market share compared to PhonePe’s nearly 48%. Google Pay also is at nearly 36%. But the main threat comes from the regulatory overhang. Should the allocations that go towards banks, start going to companies like Paytm now?
Companies like Paytm will play a very important role in the digitisation and opening up of financial services because the reach is tremendous. One can have somebody in a very remote village and as smart phones become more affordable, the reach is just phenomenal so the growth is never in question. The RBI and the regulators recognised the importance of digital wallets and cashless transactions and what smart phones can do. I doubt there will be overbearing restrictions. But the one thing which I hope regulators stay away from is pricing.
Just as telecom industry pricing went through a hard phase, I hope they do not do that and that way the future is phenomenally good for Paytm because just the size of growth over years is just phenomenal.
