How Paytm could catch a windfall from stake in SoftBank’s PayPay

ALSO READ: Paytm Q1 results: Net loss widens to Rs 839 crore; revenue falls 36%

It’s not clear, however, when and what valuation Paytm will exercise its rights on PayPay. However, it stands to gain as much as Rs 2,000 crore from an early bet.

"The carrying value of PayPay stock options is roughly Rs 2,000 crore," Madhur Deora, Executive Director, President and Group CFO at Paytm said in response to an analysts' query during a call to discuss the latest quarter earnings.

While the details may not be divulged, the timing of Paytm's mention about the option in its latest earnings is significant.

The capital from such a move could provide a much-needed boost to Paytm's slowing business.

In July last year, Reuters reported that PayPay was considering a US listing to capitalise on higher valuations. A SoftBank executive had previously estimated the company’s valuation at around 1 trillion yen ($6.8 billion).

If PayPay’s valuation increases, particularly with a potential US listing, the value of Paytm’s call option could rise significantly. Exercising the option at a predetermined price might allow Paytm to acquire shares at a lower cost and sell them at a higher market price, leading to substantial financial gains.

Even if the firm decides to sell the stake post-IPO, it would stand advantageous, especially if PayPay’s stock price increases.

In both the scenarios, Paytm's cash reserves could get a huge boost and the capital it needs for rebuilding the tracks or debt reduction.

Paytm-PayPay link

Paytm’s association with PayPay dates back to 2018.

The company had partnered with PayPay Corporation—a joint venture between SoftBank, its largest shareholder back then, and Yahoo Japan (Z holdings)—to launch QR-code-based cashless payments in the region.

“PayPay Corporation, SoftBank, Yahoo Japan, and Paytm will expand the number of users by including the customer base of SoftBank and ‘Yahoo! Wallet,’ which comprises approximately 40 million accounts. They will also deploy the platform using SoftBank's sales know-how and develop a tailored service offering leveraging Paytm's technology,” a press release dated July 27, 2018, notes.

As part of the setup, Paytm served as a technology service provider to the firm while holding a call option on PayPay equity, which gave it an estimated 5.4 percent stake (once exercised).

At the time, SoftBank was one of the largest shareholders in Paytm through its Vision Fund. However, over a course of time, the Japanese tech investor has pared down its share to nil and fully exited the firm, as of June 2024.

Paytm’s announcement of its cash reserves and PayPay stake comes as the company seeks to regain its foothold in the fintech space following setbacks to its banking entity.

Although it has resumed most operations, including lending and UPI transactions, losses continue to mount as it has lost a significant portion of its active users.

Besides losing almost 20 percent of customer base between January to March alone, the firm's share in UPI transactions came down for a fourth  straight month in May to 8.1 percent from 13 percent in January.

The company has been restructuring by reducing employee costs, pruning non-core assets like travel and ticketing, and streamlining its lending business with more secure offerings and a distribution-only credit model.

In Q1FY24, Paytm’s consolidated net loss widened more than two and a half times to Rs 839 crore from Rs 357 crore a year ago, reflecting the impact of RBI curbs on its payments bank business. Sequentially, the loss increased by 50 percent from Rs 550 crore in the preceding quarter.

Revenue from operations declined by 36 percent to Rs 1,502 crore in Q1FY25, compared to Rs 2,342 crore in the year-ago period.

Of this revenue, Rs 900 crore came from the payments business, Rs 280 crore from financial services, and the remainder from marketing services.