Paytm IPO: 'We Are Super Bullish On Acquiring Merchants,' Says Vijay Shekhar Sharma
Paytm will focus on merchant payments and offering credit products through its network to drive growth.
One97 Communications Ltd., commonly referred to as Paytm, will focus on merchant payments and expanding disbursement of lending products in the near term. This comes as it tries to expand the services it offers to customers on its payment platforms.
The Vijay Shekhar Sharma-promoted company will see its initial public offering open on Nov. 8. Shares are being offered in a price band of Rs 2,085–2,150. The issue size is Rs 18,300 crore, making it India's largest IPO.
The issue values Paytm at close to $20 billion, compared to a $16-billion valuation in 2019 when the company raised $1 billion.
"A higher valuation could have been achieved but we decided to price it at a level where everyone makes money. We could have priced it higher but this is where we felt most comfortable," said Madhur Deora, group chief financial officer at Paytm.
From Consumer To Merchant
One97 Communications remains unprofitable, although the extent of losses has reduced over time.
One97 reported a consolidated loss of Rs 1,701 crore in FY21 compared with Rs 2,942 crore in FY20. In the first quarter of FY22, revenue from operations rose 62% year-on-year, the company said in its prospectus. The consolidated loss for the three months ended June stood at Rs 381.9 crore.
One of the concerns around Paytm's financials has been the fact that while the gross merchandise value has been rising, the 'take rate' or the percentage of this gross merchandise value that Paytm records as its revenues, has been falling.
Sharma said this doesn't concern them. "The business model is that customers come for payments and convert into commerce and financial services," he said. "If you see other payment companies, they don't make any money."
Once customers are brought into the Paytm ecosystem, the company earns fee income by offering them cloud, commerce and financial services.
"While the take rate has gone down, the contribution margin has gone up. In the first quarter, it was at 27%," Deora said.
Contribution profit is calculated as revenue from operations less variable costs, such as payment processing charges and marketing/promotional expenses. Contribution margin is the percentage margin derived by dividing contribution profit by revenue from operations.
The idea, Deora said, is to run payments as "efficiently as you can, while you make money by offering other services to merchants. That is the winning model".
Alongside Paytm, most other payment firms are focusing on the merchant segment since there is little or no money to be made on peer-to-peer payments. Will competition from other deep-pocketed fintech firms hinder Paytm's growth ambitions in this segment? Sharma doesn't think so.
"Deep pockets help more on the consumer side rather than on the merchant side. To reach a merchant, you have to jump through a lot of hoops. This is not hard work, it is magic work," Sharma said. The idea is not just to add a payment solution to a plethora of options that already exist but to offer the best product at the lowest cost, he said.
Pushing Credit
Alongside merchant payment, Paytm is expanding its partnerships to expand credit products. Paytm does not do or intend to do any lending on its own, Sharma said.
"Large banks are tying up with Paytm because they can acquire customers at a fraction of the cost through us," he said.
As part of these tie-ups, Paytm gets a fee but does not offer any risk guarantee. "In our business model, we can't offer that. We don't offer that," he said. Some others in the business such as Mobikwik do include a credit guarantee as part of the loans they originate.
"For us, it is a fee story. There is a distribution charge and we help them collect," Sharma said, adding the onus on deciding whether a customer is creditworthy or not is entirely on the lender.
Watch the full interview below: