MC Interview| I cannot tell you how elated I am. This mission is going to change India: IPO-bound Paytm's Vijay Shekhar Sharma

Founded in 2000, One97, the parent company of Paytm spent almost a decade catering to the mobile VAS (value-added services) market. It made its first pivot with the launch of a mobile recharge platform in 2010 and today has an ecosystem that spans payments, credit, insurance, merchants, wealth management, and e-commerce services.

In this interview with Moneycontrol, Sharma and Paytm's President and Group CFO Madhur Deora spoke about why they decided to go public, monetization plans, the path to profitability, competition, and what the IPO means for India.

Edited Excerpts:

It's been a long 21-year journey for you- from VAS to becoming India's leading fintech player. Now you are launching India's biggest IPO. What finally made you go public? Was it to give investors an exit- considering 10,000 crores from this issue is an offer for sale by existing shareholders? 

Vijay: There is a tremendous amount of work that goes into running a company and this kind of milestone where we can take this to mass investors, where we can go for an IPO is incredible. I never thought it would happen so fast. The pandemic accelerated every journey- swing from consumer to merchant mindset to readiness for an IPO. It is better for us to become an India-listed entity and India story instead of waiting for a foreign listing. We took a decision to list in India, and if in India, how about doing it now? Surprisingly, our IPO process started in the month of April, we had much less time to prepare. But the company, maturity, and scale have been tremendously good.

You already have one of the highest user numbers in India- 337 million users and over 21 million merchants. Will you now use the IPO proceeds for more customer acquisition or to monetize this user base- by cross-selling credit, insurance, wealth advisory, etc? 

Vijay: Our ambition is half a billion Indians- that is our holy grail. The user base will be headed towards that as a milestone. We believe that consumers, merchants, and customers on our platform have the opportunity to generate revenues and profits for the platform. Not all 500 million will be revenue or profit-worthy. Our obligation and success will be benchmarked by how many people we bring on financial services, to how many people we bring to the mainstream of the economy. We will continue to invest and acquire customers.

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Vijay, one thing that we see is that Paytm is so diverse and vast today- where will its biggest sources of revenue come from? If you have to simplify and break down your business and revenue model to a retail investor- what would you say to them?

Vijay: The primary story of Paytm is payments. It is our core moat where we acquire consumers and merchants. And then we offer financial services with our partners. Payments, commerce, financial services - that is our stack. Every line item of that is a large business by itself. We don't have to spend CAC(customer acquisition cost) to buy everything- if a customer comes for payment, he or she can become eligible for credit, they may book a bus ticket. I would say a large number of customers converted as user of financial services or commerce makes all the revenue and we believe more and more customers will mature towards this. It is easy to understand the model- payment is a customer acquiring and retention moat, there is commerce and financial services. The best way to look at it is how many customers, how much of revenue and what is the contribution margin- it means the company is able to monetize per customer better.

How have your newer initiatives such as broking and lending played out? 

Vijay: The most important financial service vertical and company vertical that we launched during the lockdown was credit - where the customers and merchants were offered credit from our financial institution partners. A credit product we created, Paytm postpaid is popular. The number of customers is so small that we can see a 100 percent growth year on year. Credit as a need for this country is an important thing. RBI in 2020 brought a guideline that made this business model more kosher. Credit is a huge opportunity. By partnering with banks and NBFCs, we believe we will be able to amplify this opportunity.

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The payment acceptance is still in the early stages. We have a lot more equipment coming after QR Code, sound box and POS device. That will be our next focus.

What are your plans with regards to a small finance bank license? You spoke about how you will be partnering only with the banks. Is that why you're not applying for an NBFC license?

Vijay: The plan is very very clear. We will not apply for an NBFC license. We would remain focused on partnering with financial institutions just because RBI hasn't even clarified it as a business model.

As far as Paytm Payment Bank is concerned, it has its own journey. Potentially on the day when RBI permits it could apply for Paytm small finance bank license and that is logical to do because there would be many other products we would be able to distribute because of that.
Paytm's plan is not contingent or changing on the basis of payment bank becoming a small finance bank.

In terms of the valuation have you left enough money on the table for shareholders? Do you think it is a fair valuation in terms of the price band?

Madhur: We absolutely think so. That was an important benchmark for us which is not only the valuation but also making sure that we have really high-quality investors who are joining us as a part of the journey.

At least to the extent we could, we want to make sure that we get really really high-quality investors on Paytm's cap-table, people who understand this journey, who understand how big commerce and cloud can be, how big payments can be, how good financial services can be.

A lot of numbers (valuation) were rumored, none of them were from us ... $22-25 bn and all. But it was important for us to leave enough and more not just for retail investors which should always be an objective but also for the highest quality institutional investors. This exercise was not about getting the last rupee or dollar of valuation.

Have any of Paytm's businesses attained enough scale where it is generating cash to fund other businesses?

Madhur: Our model is that our payments business- consumers and merchants that makes revenue and is profitable. All of the other businesses whether it is commerce and cloud or financial services adds significant profitability and contribution margin on top. Which is why what you would have seen is that last year our contribution profit for the whole year was about 13% and in the first quarter the number was 27%.

So we are seeing a significant jump in contribution margin partly because of payments becoming more efficient but partly because of other line items of businesses which have a very high contribution margin. So we are seeing that trajectory in our business. Two years ago this number was negative.
So we have come a long way in becoming very very efficient as a business.

One thing which I would point to which is there in our RHP is that we did 2.8 million loans in the last quarter just in the September quarter alone. In the entire year, last year that was 3 million and that is a profitable business and is growing very fast. We see multiple such businesses, whether it is cloud, advertising, commerce, or financial services becoming very sizable in terms of their contribution margin.

In the last couple of years, the competition in sectors such as payments, lending, broking, and overall financial services has intensified. Going forward what sort of an outlook does Paytm have? Also, your Q1 FY22 numbers show growth in revenue but also losses due to higher expenses. Paytm’s losses stood at Rs 382 crore for the quarter ended June 2021. How will you grow with profitability? What is the vision?

Vijay: India market has three key beauties.

It has a large number of underserved customers. You can have ten more large banks and then still India will not be able to say that we have more than enough. GDP growth is possible only when banks start to lend or lending institutions start to lend and then the capital goes into the economy. That possibility can only happen when there is so much competition and none of the competition is the zero-sum competition. It always has addressed a new segment and a new market opportunity.

In India, we need more number and types of companies, institutions that are able to accelerate credit to the small person, business, or individual. This is an underserved market.

Second, there is a large customer base like you and me who are smartphone (users). Desktop internet models or branch model is continuously in decline because now more and more things are happening on a smartphone.

The third is a market where there is a new product to serve to the customers.

Thanks to all these for the next 3-5 years, we are not even concerned about what kind of growth potential could come. The only swing that you could see would be due to something beyond our hands meaning some market situation or micro situation.

India's financial services sector is continuously going to grow and we all have an advantage. I am not even concerned about the competition. I am actually saying that more players grow the market. We saw it in payments five years ago.

Madhur: We are in a very different market. In the US for eCommerce to grow, malls had to shut down. That's just not the market we are living in, in India, where there is a huge amount of untapped opportunity.

Just to go back to your questions on financials, we will continue to focus on growing our contribution margin. In the meantime, I want to reiterate that we will continue to make investments in growing our merchant network, technology. We need to make investments as we go along but the focus would be to get to a very meaningful contribution profit.

From a village in Aligarh to helming the biggest IPO in India- it is the stuff of startup legend. What emotions are you going through today?

We all write about the great American dream. I believe the time has come to write stories and books on the great Indian saga.

I wish that we as Paytm and teammates become the champion of it, stand for and inspire many more to come to do that. We believe we are the change agent that will bring these financial services to the nook and corner which will grow the common economy and we all will rise again. Our success is not a success of generating more money or more profit. Our success will be the success when the financial services whether it is credit, banking, insurance, it is not premium customers' product but is a common customers' product in an easy to understand way.

I cannot tell you how elated I am. Today is the day when we are starting a journey to invite many more to join our mission and to everyone who is potentially going to join, this is a mission to change the fate of this country and not just to make money.

It will be an understatement and failure of us to benchmark the money that the Paytm journey makes. It will be a better success that how much of our economy grew because of our IPO.