PAYTM

LOSING ITS HOLD

The company’s financial metrics reveal significant profitability challenges, as reflected through its return on equity and return on capital employed. Additionally, the negative EV and EBITDA ratio underscores operational inefficiencies

One 97 Communications Limited owns and operates Paytm, India’s leading mobile payments and financial services distribution company. Paytm offers consumers and merchants a comprehensive suite of payment services and pioneered the mobile QR payments revolution in India. The company partners with financial institutions to distribute various financial service offerings to its customers and merchants. Paytm also builds technologies to help small businesses with payments and commerce.

Key Business Segments
Paytm’s revenue comes from:
1. Payment Services: This includes revenue generated from processing transactions for consumers and merchants.
2. Financial Services: Paytm distributes financial services offerings, such as loans and insurance, in partnership with financial institutions.
3. Marketing Services: Paytm provides marketing and advertising services to businesses.

Subsidiaries, Associates and Joint Ventures
Paytm has a complex corporate structure, with 29 subsidiaries, 10 associates and three joint ventures in India and abroad as of March 31, 2024. These entities operate in various sectors, including payments, financial services and technology.

Regulatory Saga
One 97 Communications Limited has faced significant regulatory challenges primarily through its subsidiary, Paytm Payments Bank Limited (PPBL). These issues have raised concerns about compliance and governance, impacting the company’s operations and market performance. The trouble began in March 2022 when the Reserve Bank of India (RBI) imposed restrictions on PPBL, barring it from on-boarding new customers due to serious violations of ‘know your customer’ (KYC) norms and anti-money laundering regulations.

Multiple audits revealed persistent supervisory concerns, highlighting inadequate compliance practices that raised alarms about potential money laundering activities. In February 2024, the RBI escalated its actions by prohibiting PPBL from accepting deposits or conducting credit transactions. This included halting top-ups for wallets and prepaid instruments like FASTags.

The RBI’s measures aimed to protect customers and ensure the integrity of the banking system, reflecting a broader concern about PPBL’s operational practices. Compounding these regulatory challenges, One 97 Communications received a warning from the Securities and Exchange Board of India (SEBI) in July 2024 regarding related party transactions (RPTs) with PPBL. SEBI found that transactions valued at ₹1,309 crore in FY22 were conducted without necessary approvals from the audit committee or shareholders, raising significant concerns about corporate governance.

Financial Impact
These regulatory hurdles have adversely affected Paytm’s financial performance. The company’s stock price plummeted from its IPO price of ₹2,150 to around ₹403 by March 2024, leading to a loss of approximately USD 2 billion in market value. Investor confidence has waned due to ongoing compliance issues and perceptions of instability.

Management Response
In response to these challenges, One 97 Communications formed an advisory committee led by former SEBI ChairmanMeleveetil Damodaran to enhance compliance and governance standards. This initiative aims to restore investor confidence and ensure adherence to regulatory requirements.

Recent Developments
As of October 2024, Paytm received approval from the National Payments Corporation of India (NPCI) to on-board new Unified Payments Interface (UPI) users after an eight-month ban due to non-compliance with data protection and risk management guidelines. This approval allows Paytm to regain momentum in the competitive digital payments landscape but comes with strict conditions requiring enhanced risk management and customer data protection measures.

FY24 Financial Performance
The company reported total revenue from operations of ₹9,978 crore, reflecting a 25 per cent year-over-year (YoY) growth from ₹7,990 crore in FY23. This performance was driven by a 27 per cent YoY increase in revenue from payments and financial services, with payment services contributing ₹6,235 crore. Financial services and others added ₹2,004 crore, growing by 30 per cent YoY, while marketing services, which contributed ₹1,738 crore, grew at a slower pace of 14 per cent YoY.

Contribution profit rose 42 per cent to ₹5,538 crore in FY24, with the margin improving to 56 per cent from 49 per cent in FY23. This was driven by higher net payments margin and a greater share of high-margin financial services. However, the RBI directive on PPBL in January 2024 impacted revenue scale and near-term profitability.

The company estimates a steady state annualised EBITDA impact of around ₹500 crore due to the discontinuation of PPBL offerings. Despite achieving operating profitability in FY24, Paytm’s overall net loss persisted due to significant expenses, particularly employee benefits and other costs. However, the net loss narrowed to ₹1,422.4 crore in FY24, compared to ₹1,776.5 crore in FY23.

Q2FY25 Financial Performance
Paytm reported a revenue of ₹1,660 crore in Q2FY25, representing an 11 per cent quarter-on-quarter (QoQ) growth. The contribution profit for Q2FY25 stood at ₹894 crore, marking an 18 per cent QoQ increase. The contribution margin also improved to 54 per cent from 50 per cent in the previous quarter. This signifies enhanced efficiency in managing direct expenses.

The company moved from a negative EBITDA of ₹792 crore in Q1FY25 to a negative EBITDA of ₹404 crore in Q2FY25. Paytm’s gross merchandise value (GMV) excluding discontinued business reached ₹4.47 lakh crore in Q2FY25, exceeding the previous peak and reflecting a 17 per cent year-on-year (YoY) growth. The company’s credit card distribution business continued to scale up, with 13.8 lakh activated credit cards as of September 2024.

Key Focus Areas
Paytm’s growth strategy focuses on leveraging AI to reduce costs, prioritising compliance, driving merchant payment innovations, expanding financial services through partnerships, and aggressively acquiring new UPI customers.

Declining Monthly Transacting Users (MTUs) In 2024, between January and June, Paytm experienced a significant decline in MTUs, largely due to regulatory restrictions on Paytm Payments Bank (PPBL):
1. January 2024: MTUs peaked at 10.4 crore before RBI restrictions on new UPI user on-boarding.
2. April 2024: MTUs dropped to 8.0 crore, a 24 per cent decline from January, reflecting the sharpest impact of the restrictions.
3. June 2024: Stabilisation occurred at 7.8 crore MTUs, still 25 per cent below the peak.

The key drivers included the RBI directive, a 10 per cent drop in active merchants during February-March, and disruptions from app upgrade mandates. However, recently, on October 22, 2024, Paytm received approval from the National Payments Corporation of India (NPCI) to on-board new UPI users. This development is expected to support a recovery in MTU growth, aided by Paytm’s efforts to reactivate 10 lakh merchants, focus on high-value users, and strengthen monetisation strategies. The effectiveness of leveraging this approval will be the key to driving future MTU growth in a competitive landscape.

Key Shareholders
As of March 31, 2024, some of Paytm’s largest shareholders included:
1. SAIF III Mauritius Company Limited (10.8 per cent ownership).
2. Resilient Asset Management B V (10.26 per cent ownership).
3. Antfin (Netherlands) Holding B V (9.86 per cent ownership).
4. Vijay Shekhar Sharma (9.09 per cent ownership).

Valuation
The company’s financial metrics reveal significant profitability challenges, as reflected in a return on equity (ROE) of –9.07 per cent and a return on capital employed (ROCE) of –8.5 per cent. Additionally, the negative EV and EBITDA ratio of –44.1 underscores operational inefficiencies, while the high market capitalisation to sales ratio of 7.15 suggests potential overvaluation relative to its revenue.

Conclusion
In the intensely competitive digital payments market, Paytm confronts significant challenges against rivals like PhonePe and Google Pay. Despite regulatory approvals and revenue growth, the company’s strategic positioning remains uncertain. The financial metrics reveal ongoing profitability challenges and market valuation concerns. Given these fundamental weaknesses, we recommend AVOID.