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November 2016 was a weird time for Indians as Demonetization hit them. The company Paytm also became pretty popular with people during this time. Paytm saw an opportunity for growth and took it. Ever since, “Paytm Karo” has become common jargon for Indians.
Paytm, owned by One97 communication, has become India’s leading digital ecosystem with a market share of around 65% in the Digital Wallet industry. The company started its operations in 2010 as a mobile and DTH recharge platform and soon expanded to multiple other business lines such as Payments bank, ticketing, payments gateway.
Paytm can be used for a lot of purposes, including paying for goods and services to investing in mutual funds. When Uber adopted Paytm as a payment method, and demonetization came by, Paytm gave consumers the option to make cashless transactions. It saw a huge increase in usage with some 330 million consumers and over 20 million merchants as of March 2021.
However, it seems that Paytm has spread itself too thin. Being the first mover did allow it to monopolize the digital payments space, but it now faces stiff competition. The introduction of UPI by the government is also hurting Paytm’s business model. UPI is a real-time retail payment system through which the majority of Paytm’s transactions go through. The Government has mandated a zero Merchant Discount Rate or MDR. Even though Paytm is a leader in the Payment-to-Merchant market, it’s revenue growth has slowed down and its commission rates have taken a hit. Profitability has become difficult to achieve.
Furthermore, Paytm has not achieved any meaningful market leadership in any of its verticals outside payments, which is worrisome. Leadership, in several verticals, has been in churn which hasn’t helped their case.
While Paytm has many competitors overall, India’s payments market is estimated to be worth USD 1 trillion in the next three years, up from about USD 200 billion last year, thus the pie is big enough to have 3-4 major players such as PhonePe, Google Pay, Amazon and JioMoney alongside Paytm.
So, what is our view on company valuation?
The stock price of the company has seen a downside of about 40% since the IPO at Rupees 2,150. The stock still seems to be overvalued with a price to book ratio of about 14 times and a price to revenue ratio of some 21 times. However, if Paytm figures out some way to monetize their UPI transactions, it can significantly improve its financial metrics. It can also improve its banking operations once it gets the required licenses from RBI. That will make Paytm quite an attractive investment.
What are the risks to this investment analysis?
As of now, Paytm faces strong competition from Amazon, Google Pay and PhonePe, who could take away further market share from Paytm. JioMoney can grow to become a significant competitor given its comprehensive ecosystem. Moreover, the Government could also reverse its decision to mandate zero MDR for UPI transactions.
So, would you invest in Paytm?
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