Payments business remains the most profitable, says Paytm CFO Deora

Paytm's Group Chief Financial Officer Madhur Deora

One97 Communications Ltd, the parent of Paytm, has had a brutal ride in the equity markets with its valuation sinking  more than 40 percent since it listed on the stock exchanges in November.  At the heart of the market angst has been the fact that Paytm’s potential revenue growth did not warrant the lofty premium its stock commanded. This was pointed out by analysts at Macquarie Capital when they slashed the company’s target price in a note in January. Macquarie has further slashed its target price for Paytm to Rs 700 now, citing costs towards employee stock options (ESOP).

Regulatory changes, along with the intense competition in the payments space from large international firms could pose revenue challenges, according to analysts. The payments provider’s quarterly net loss widened for the December quarter, but growth in revenues was strong.

 In an interview with Aparna Iyer, group chief financial officer Madhur Deora said the payments business remains the most profitable segment for Paytm and the company will demonstrate this going forward. Edited excerpts:

Is it accurate to say that the revenue generating capacity of the payments space is going down? 

This is not true. Our payment services to merchants grew 117 percent year on year. Payment services to consumers grew 60 percent year on year. I know two or three quarters ago investors were slightly sceptical about this because we didn’t have the numbers to show. Also the pandemic happened in those two years. It was hard to show the normal growth of payments. What we are seeing now is that the total of these two lines (payment services to merchants and consumers) is more than Rs 1,000 crore of revenue in Q3. Nobody does Rs 1,000 crore revenue in India fintech today.

Do you believe that multiple payment options will thrive side by side and not cannibalize each other? 

You just look at data. Credit cards, debit cards and UPI (unified payment interface) are all going strong. The data is already telling us that wallet, card and UPI -- all three -- are growing. Merchants want to accept the types of payment instruments that customers want to use. I won’t say all payment modes will remain, some of them may be replaced by an upgraded version. For example, can IMPS (Immediate Payment Service) be replaced by UPI over time? Potentially yes. Overall, does the growth of one instrument mean cannibalization of another? Almost in every case, the answer is no.

How do you approach UPI? 

UPI is fantastic to get new customers and new merchants. It is good for merchants also as they transact at zero cost. As customers get used to digital payments, their needs also grow over time. People seek convenience and better products. People may seek credit-bearing products. Consumers move to more and more payment instruments. There is no market in the world and India won’t be an exception where customers use only one payment option. Customers use different payment services for different needs. Our non-UPI GMV (gross merchandise value) grew 77 percent year on year which directly translates into revenue growth. The UPI part of GMV is growing faster. But this is not a bad thing. UPI growing faster means a couple of things. One is I am getting new customers on a very low acquisition cost. When the customer is using UPI or anything else, the customer is generating behaviour on my platform on the back of which we can give them credit products. I would argue that a customer using UPI on Paytm is more likely to take a credit product from Paytm than a credit card user. The important thing is to get the customer in cheaply as possible and create a habit for the customer.

Revenues are strong, no doubt. Where is the quarterly loss coming from? 

The losses have widened because of an accounting charge we have to take after our IPO. This is a non-cash charge and no one is paying anything for this. Leaving aside this charge (ESOPs) our EBITDA (earnings before interest, tax depreciation and amortization) improvement is substantial. Eventually we will become EBITDA-positive. We are very focused on this. There are massive opportunities and as we grow bigger we see more of these. The digital ecosystem is under-penetrated right now. We want to continue to play for the big prize, being a large internet ecosystem in the country. On the other hand we want to be very efficient and get revenue growth. We will balance between the two. But, we also have to continue to invest. If someone said forget about two years from now but bring down the losses to zero today, I can do it in two quarters. But that is not the point. The point is to build a company that has hundreds of millions of customers and merchants that use multiple products on your platform.

What can you update us about the Raheja QBE deal? 

We are having constant discussions with the regulator. There is no formal or informal, official or unofficial indication from the regulator that the deal is rejected. These things take time and we are in constant discussions.

Can you give a perspective on your costs? 

Payments processing charge is our biggest cost item. Our contribution margin has gone from 9 percent to 31 percent. Our indirect expenses grew by 52%. We are not stopping investments in any area. In things that matter, we are investing. This is just the power of the platform that when revenues grow, costs also grow but by a significant lower percentage. Marketing expenses do not have a big share in total costs. We are not under-investing. I know there is some narrative that before going public you slash your marketing expenses but that is not what we have done.

The growth is strong but Paytm is not getting more bang for the buck. When it comes to the take rate, there isn’t much to show…? 

I have never talked about take rate. People calculate that number and then they expect us to meet that number. It is not the right way to look at the business because that implies some GMV which has a lower take rate or zero take rate should be avoided. As long as you can make a margin on any kind of GMV or even if you can do that GMV at zero margin, you should take that GMV. I am not saying we negotiate pricing downwards. Growing GMV efficiently leads to growth of your platform and that leads to many monetizing opportunities. Just because the platform is at a certain take rate, does not mean you avoid all GMV which is lower than your current take rate. We want to offer all kinds of products to customers. We will make money in payments and we will make more money in commerce and cloud and financial services, and the aggregate of that creates a powerful platform. The overall take rate may go up. Over time as more and more of this services kick in, the aggregate of all the revenues put together will give a positive impact on the overall take rate.