Paytm's missing link

Even his staunchest critics can’t deny that Vijay Shekhar Sharma has done a stupendous job in the fintech space after he founded Paytm in 2010. Paytm is a product with high recall and used its first-mover advantage to create a new customer behaviour through an easy transaction experience and reach. In that sense, its disastrous public market debut in November has been a nasty surprise to investors — after Wednesday’s trade, the stock has eroded over half the value from the initial public offering (IPO) price of Rs 2,150.

One doesn’t need to be an expert to figure out that the most sensible way of managing this massive confidence crisis is to put your head down and focus on the missing link — a clear focus on making its business sustainable and profitable. That’s precisely what Aswath Damodaran, professor of Finance at the Stern School of Business at New York University, advised Mr Sharma a few days after India’s largest IPO.

In a blog post in December, Professor Damodaran, also renowned as the Dean of Valuation, said Mr Sharma should talk less and focus more on Paytm’s path to profitability. “If I were the top management of the firm, I would focus more on improving the abysmally low take rate,” he wrote.

Take rate refers to the percentage of gross merchandise value that Paytm records as its revenues. Analysts have noted that the take rate has, in fact, plunged from 2.18 per cent in 2017 to 0.79 per cent in 2021, as it has chased users.
 

Mr Sharma has, however, done exactly the opposite of “talking less.” In recent media interviews and fireside chats, he attributed Paytm’s disappointing stock market debut to an insufficient understanding of its business model among investors. “People are underestimating the compounding impact that the customer base on this platform has,” Mr Sharma said at the Internet and Mobile Association of India’s (IAMAI) annual summit last week.

He avoided talking about profitability this time — a pet theme of his in the previous year’s IAMAI summit where he said this year (2021) onwards, every payment business in India will talk sustainability and profitability. In fact, he went further in an interview to Reuters in January 2021 by saying that Paytm may become profitable in 2021 itself because of the increase in use of its payments platforms due to the pandemic. A couple of months later, however, Paytm’s IPO document said the opposite: “We expect to continue to incur net losses for the foreseeable future and we may not achieve profitability in the future.”

Exactly a year later, Paytm’s first financial results as a public company showed losses widened to Rs 474 crore in the July-September quarter from a year earlier amid rising expenses. Its revenue, of course, rose more than 60 per cent, boosted by strong growth in its financial, commerce and cloud services.

Talking too much can have other side-effects, too. For example, at the IAMAI event, Mr Sharma said Paytm should be benchmarked against only Bajaj Finance and claimed that in less than three years of offering credit on its platform, Paytm now does more loans than Bajaj. The data, however, suggests otherwise. According to the last reported data, Paytm disbursed 4.4 million loans during the December quarter against 7.4 million by Bajaj Finance. Besides, it’s an apples-with-oranges comparison. Unlike Bajaj Finance, which is a non-banking finance company, Paytm offers credit in tie up with lending partners as it does not have a licence to lend.

Macquarie Capital has also expressed its concerns on the consistent reduction in the ticket size of Paytm’s loans. “At this size (sub-Rs 5,000 levels), we don’t think it is doing many merchant loans and most of the loans are small-value BNPL loans (buy now pay later)”. The other key risk is regulatory action. Paytm’s foray into the insurance business was rejected by the Insurance Regulatory and Development Authority of India, and Macquarie believes that this could dent the company’s prospects of getting a banking licence.

Lastly, let’s look at payments, which is currently the biggest source of revenue as well as customers for Paytm. Payment and financial services contribute to almost 80 per cent of the revenue. The reality is that Paytm trails PhonePe and Google Pay on the dominant UPI platform by a wide margin. PhonePe has a 47 per cent market share, Google Pay 34 per cent and Paytm 10 per cent. Competition is expected to intensify further with WhatsApp Pay also entering this segment. Thus, Paytm has a lot of catching up to do in its most critical business segment.

In an earlier blog post, Professor Damodaran had said Paytm resembled “an adolescent with attention deficit issues, in its scattershot approach to growth and absence of attention to business details”. These are harsh words and the author may have exaggerated to drive home a point, but Mr Sharma should listen to the broader message. After all, blaming investors for “insufficient understanding” of Paytm’s business model can have only a limited shelf life.