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Paytm's path to IPO: Tracking a 2-decade journey of pivots

This is not One97's first attempt to go public. In 2010, the company, which then used to provide value-added services (VAS) for telecom customers planned to raise Rs 120 crore through an IPO.

June 08, 2021 / 02:36 PM IST

Vijay Shekhar Sharma's rise from the nondescript village of Harduaganj near Uttar Pradesh’s Aligarh to the founder of Paytm, India's most valuable unicorn, is the stuff of startup legend. Sharma, 43, has often recounted how he was one of only two residents of Harduaganj who would go on to study engineering. But if his roots were modest, his ambitions were not, and still are not. In fact, the office of Paytm owner One97 Communications in Noida has a poster with the legend: "Go big or Go home."


Go big is what Sharma is seeking to do. The payments platform he founded is preparing to list in the public markets later this year at a valuation of $25-$30 billion.  The company was last valued at $16 billion when it raised $1 billion from Japanese investor SoftBank Group Corp. and Ant Financial Services of China in 2019.

One97 Communications reported revenue of Rs 3,186 crore during the financial year ending March compared to Rs 3,540 crore the year before, according to the company's annual report for 2020-21. It narrowed its loss to Rs 1,701 core in the period from Rs. 2,942 crore in the previous financial year, mainly by paring expenses.

"If you go with the business model of the technology company, even going with the future projection, the valuation reported is on the higher side," said an industry executive, requesting anonymity.

The performance of the initial public offering will largely be a function of market sentiment, he added. "It depends on the emotions in the market ... whether the market is going up or down. How is the global market behaving? The stability of the government is also a key aspect. Nobody is going to take a chance when the election is around," he said.

The Sensex is currently at an all time high. On June 3, it was up 382.95 points, or 0.74 percent at 52,232.43, and the Nifty up 114.20 points, or 0.73 percent, at 15,690.40 at close. As per data sourced from ACE Equity, the country has seen at least 18 IPOs with Rs 21,487 crore raised in 2021.

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Optimism around the accelerated vaccination efforts and declining Covd19 cases in the country is expected to be fueling this euphoria.

This is not One97's first attempt to go public. In 2010, the company, which then used to provide value-added services (VAS) for telecom customers planned to raise Rs 120 crore ($28 million basis a decade old conversion rate) through an IPO.  It had to cancel its plan because of market volatility.

Launched in 2000, One97 spent almost a decade catering to the VAS market. It made its first pivot with the launch of a mobile recharge platform in 2010. Until then, customers used to pay cash to get their phones recharged by offline retailers. Over 90% of Indian telecom users had pre-paid connections in India at the time. Ten years later, the market hasn't changed much.

The sheer number of users in India made it a huge market, but revenue generation was minimal.

Paytm's-journey-A-tale-of-many-pivots

Rapid transformation

By 2014, Paytm transformed into a mobile wallet. It allowed customers to transfer money from their banks to the wallet to make payments to merchants as well as individuals. The catch was that once transferred to the wallet, the users couldn't put the money into their banks.

The business model was simple. Paytm charged a small commission from merchants, offering its service free to end consumers.

Soon, the company managed to attract the attention of Chinese behemoth Alibaba Group Holding Ltd, which through its financial services arm Ant Financial invested in the company in 2015.

Soon after this round of fund raising, Paytm tried replicating Alibaba's success by launching online commerce through Paytm Mall. The aim was to provide a 360 degree platform to end consumers. The orders would be generated on the e-tailer and Paytm furnish the payment, closing the loop.

Over the years, it continued to add digital booking services such as movie or flight bookings and electricity bill payments.

One of the biggest shots in Paytm's arm came after the government banned old, high-value currency notes on November 8, 2016 to curb the generation of black money and encourage digital payments. The day forever changed the fortunes of Paytm.

One97 founder Sharma was attending a Network18 event when Prime Minister Narendra Modi made the announcement on the evening of November 8, 2016. Sharma took some time out of the event and started brainstorming Paytm's marketing strategy for the next morning with his marketing team.

What followed next was to put the company in a spot.

Paytm decided to publish the picture of the Prime Minister in advertisements congratulating him on the move.

The company claims it had not calculated the political controversy the decision would drag it into. The law requires the government's permission to be obtained for any decision to use the Prime Minister's picture.

The arrow had, however, left the bow. And Paytm's fortunes kept rising.

Although competitors and opposition political parties kept crying foul, the company's user base catapulted from 140 million in October 2016 to 270 million in November 2017.

Digital became the go-to method of payment for an end user struggling to get cash out of ATMs and Paytm went on to become one of the biggest beneficiaries of the move to convert India into a cashless society.

The company raised a massive $1.4 billion in May 2017 from  SoftBank, even as other consumer internet companies floundered in a depressed economy. The company's valuation more than doubled to $7 billion.

Ability to cross-sell

Paytm, which was among a handful of entities in India to have received payment bank licenses, launched the bank in May 2017 with the aim of bringing the unbanked population into the mainstream economy.

Meanwhile, the company was also watching the Bharat Interface for Money (BHIM) app launched by the Modi government in December 2016. Speculation was rife that BHIM had the potential to compete with and even oust wallets like Paytm.

Paytm went ahead and integrated the BHIM unified payments interface (UPI) with its platform in November 2017, ending such speculation. UPI has since remained a focus area for the company.

Paytm ranks third on UPI payments with a 12% market share. The largest share is with Walmart-owned PhonePe followed by Google Pay.

According to a report by Bernstein Research, over 83% of the transactions (by value) are person to person, which doesn't earn much revenue for companies. Paytm is instead focusing on merchant payments share, led by UPI's integration with its payment bank.

Of late, it has also made an elephant-footed entry into finance verticals with the launch of Paytm Money, and credit and insurance businesses.

Long story short, now that is where the moat lies. That's where the future potential of Paytm is.

The next stage is to build a cashflow-sustainable business model.

The question is how Paytm would build a revenue model out of financial services.

"Paytm has users and merchants and it has transaction data around it. It has the ability to use its platform to cross-sell multiple financial services," said Gautam Chhugani, director at Bernstein.

"All consumers and small businesses don't get access to credit from banks. Paytm will target segments where banks are not reaching out due to lower ticket size or lack of tech distribution. Currently, they have partnered with other banks and NBFCs {non-banking financial companies} to offer financial products. When it gets a small finance bank license, it will be able to innovate and test credit products from its own balance sheet," he added.

According to Bernstein, by 2023, the non-payments segments will make up 33% of the total revenue of One 97 led by the credit tech segment.

Last week, the company reported revenue of Rs 3,186 crore for 2020-21. Five years ago, revenue was Rs 573 crore. For most people, the devil will lie in the details.

Industry dynamic

"The growth reported by One97 Communications over the years has been very high. It is recognised as a big brand in the country. But Beyond that it is the industry dynamic that needs to work in their favour," said Deepak Shenoy, founder and chief executive of Capitalmind.

"We will have to wait for the prospectus to have intrinsic details of the businesses. It has expanded into insurance, credit. They are good businesses but the question is how beneficial are they going to be for One97. For instance, Paytm Bank is still not allowed to offer credit. These things will have to be taken into consideration before the investors take a call," he added.

Paytm's Payments Bank is waiting for conversion to a small finance bank. If that happens it would allow Paytm to use its balance sheet for lending-based monetisation, subject to regulatory approvals.

A former employee of the company, requesting anonymity, said that once the share sale prospectus is published,  it will become clear as to what sort of revenue is coming from which structure. "Unless they file the prospectus, you won't know how they are positioned," he said.

The company has backers such as SoftBank and SAIF Partners. SoftBank India Holding owns an 18.73% stake in the company, SAIF III Mauritius and SAIF Partners India hold 12.39% and 5.26%, respectively.

"Companies with financial backers always have a better perception compared to those without, since it is expected that governance is better and companies have a plan of action for growth," said Abhinav Harlalka, co-founder of Bombay Law Chambers, who looks after public listings.

Over 30% of the stake in Paytm is held by Ant Group. Given the constant scrutiny of Chinese companies in India following border tensions last year, the IPO is also seen as an exit route being created for the Chinese investors. Besides Ant Group, Alibaba holds a 7.32% stake in Paytm.

Given the valuation of the company, a secondary exit for the investors is out of the question. With the kind of stake these investors hold, for someone to come in and buy the entire stake would be an extremely difficult task. The IPO remains their only recourse.

Market experts note that the Securities and Exchange Board of India is encouraging technology companies to list in India "It would make way for our investors to take part in a massive wealth creation exercise," said the person cited above.

According to Indian regulation, loss-making companies can list on the bourses with a cap of 75% of their net public offer reserved for Qualified Institutional Buyers; the remaining 25% is open for retail investors.
Making the decision to go public official for the first time, Paytm on June 7 sent an offer for sale document to its investors and employees asking them to dilute their stakes. Moneycontrol reported this development.

It is now in talks to finalise a merchant banker. It will then appoint consultants and underwriters for due diligence and preparation of the share sale prospectus, which will need to be submitted to the market regulator for approval or rejection,  demanding rectification. Once SEBI finally approves it, the prospectus will be made public after which the company will proceed for the initial share sale.

Can the entire process be completed in the next five months?

Time is of essence for a company that is IPO-bound. If it has to be done, it has to be done quickly before any external factor changes market perception.

According to a second former employee of Paytm, working on strict deadlines has always been a norm for the company. "Honestly, we never used to pick up a project with a timeline beyond six months. This used to be our philosophy. So here also it should work in the company's favour. Currently, except for Covid uncertainty, the market is absolutely clear," the person said, requesting anonymity.

This person, too, is a bit skeptical about the $30 billion valuation, but said he was holding on to his shares. "There is a lot of buzz in the secondary market. People are ready to buy the shares for as high as Rs 30,000 per piece. Which means that they have an expectation of a bumper IPO," he said.
Priyanka Sahay
first published: Jun 8, 2021 01:56 pm

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