Can Paytm's finances be ever-green?

Founded by Vijay Shekhar Sharma in 2010, Paytm is India’s most valuable startup worth ~$16 bn based on its most recent funding as of Nov. 2019. Given ever increasing competition (from PhonePe, GPay, Amazon Pay), a cash guzzling business model and zero profits till date will the company turn the tide and justify its valuation? In a Feb 2020 interview with Your Story, Mr. Sharma remarked that Paytm is set to be profitable within the next 18-24 months. Let’s find out if that is possible given the company’s current standing.

What does the company do? A hell lot.

From starting as a peer -to-peer online wallet, Paytm now enables users to pay utility bills (electricity, water, gas), book train/bus/ flight/ movie tickets, buy insurance, stocks, gold, pay EMIs, apartment bills, buy goods and utensils from Paytm mall (as you would from Amazon), make deposits and earn interest (Paytm payments bank) make donations, devotional payments blah, blah.

The company is basically trying to create a commerce ecosystem so that users never have leave the app to avail another service; just like WeChat. Like seriously. In addition to the payment services, they have a messaging app (Paytm inbox), a gaming platform (Paytm First Games) and even an entertainment portal (Paytm Entertainment) among a slew of other initiatives.

How does it make money? By sitting atop and facilitating the flow of payments in the money pipeline.

Paytm earns revenue via four primary sources:

• Commissions it earns from usage of its wallet services (bill payments, ticket bookings etc. This is the company's primary source of income.
• Commission it earns from sellers of good via Paytm mall
• Interest it earns on the float amount that remains in its escrow account via Paytm Payment Bank. Paytm has a banking license from RBI under which it can accept deposits but can't dole out loans.
• Service fees from Paytm’s AI cloud computing platform in partnership with Alibaba.

However, Paytm’s customers are not individuals but merchants instead. Merchant’s pay ~1 - 2% fees on every transaction while individuals pay nothing. That is the company subsidizes the individual via the merchant.

As of 2020, Paytm had a total of ~500 mn users with only a third (~140 mn) of monthly active users. Whereas it’s paying customer base was made of over 17 mn  offline merchants, with a target of growing to 25 mn by end of the year.

Financials - Red since inception but...

In FY 20, Paytm spend ~$850mn to earn ~$495 mn in revenue, i.e. a reported loss of ~$355 mn. This was a better performance compared to FY 19, which saw Paytm spend over a billion dollars to earn revenues of ~$488 mn i.e. losses worth $566 mn.

Source: Economic Times

Paytm is loss making because the company still follows the classic start-up model i.e. get a gazillion users hooked to the platform and then monetize. The company provides deep discounts in the form of cash backs to attract and retain users on its platform. This strategy didn't work as well for Paytm Mall.

Mobile wallets have a moat due to their data sensitive nature. A customer using the platform wouldn’t generally like to switch to another as that would requires re-linking their bank accounts, verifying KYC etc. which is often sensitive, tedious and sometimes a tad bit savvy for most users. Also, there is a modest network effect such that as more widespread and acceptable they become, the more people download and use it. So once customers are onboard, they are likely to keep using the service for a long time (high LTV).

As such, it makes sense for Paytm to go big on customer acquisition. In FY 19, the company spent $480 mn on customer acquisition which was almost half of its expenditure and 1.1x higher than its revenue. Furthermore, in August 2019 the company earmarked ~$100 mn for acquiring 250 mn customers and comments from its latest round of funding in November of the same year proposed an expenditure of ~$1.3 billion over the next three years for ‘expanding its services in tier III cities and smaller towns’; aka acquiring new customers.

Read any recent interviews of Mr. Sharma and you are likely to see a lot of mention on user growth.

Unit Economics

Given, revenues of $495 mn (in FY 20), Paytm effectively earned ~$29 per merchant (for 17 mn merchants). Given, ~7 mn new merchants added and total customer acquisition cost (CAC) of $425 mn (assuming CAC as 50% of expenditure, same proportion as FY 19); the customer acquisition cost turns out to be ~$61 (425/7). That is a ~2 year (61/29) payback period assuming no direct costs (untrue, there are direct costs which will make payback even higher). This is a very long payback period and a very high CAC. 

Valuation: Inflated? or perhaps not.

Esoteric methods aside and given no EBITDA, let’s eyeball Paytm’s valuation as a revenue multiple. Comparing it’s 2019 valuation of $16 bn valuation with $488 mn of revenue (FY 19) imputes a multiple of ~33x. This is a correction compared to its 2017 multiple of ~62x given a $7 bn valuation and $113 mn of revenue. Peer-wise, it stands a lot fair compared to PhonePe’s revenue multiple of 280x given a $7 bn valuation and $25 mn of revenue in FY 19. However, a point of note is that PhonePe's valuation comes from more than just revenue alone. Also, though not fully comparable, publicly listed Visa’s EV/revenue multiple stood at ~17x in 2019. Given Paytm is valued as a growth company, it's revenue multiple doesn't look that bizarre.

So given all this can Paytm turn the tide and be a profitable company within the next two years? It is difficult to predict especially for a start-up. Is it impossible. Absolutely not but it will be a mammoth task indeed. What do you think?

And that’s that folks. Cheers.

New merchants added as of FY 20 (7 mn) has been estimated as the difference between the number of merchants in 2019 (10 mn) and 2020 (17 mn).