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One 97 Communications (Paytm) IPO: Information analysis

This is going to be India's biggest IPO. Find out if you should bid for its shares.

One97 Communications (Paytm) IPO: Information analysis

One97 Communications (Paytm) IPO: Information analysis

One 97 Communications owned 'Paytm' is India's leading digital ecosystem for consumers and merchants. The company offers payment services, commerce and cloud services, and financial services to more than 33 crore registered consumers and 2 crore registered merchants, as of June 30, 2021 . Consumers use the company's platform for payment services such as money transfer, in-store payments, bill payments and financial products such as personal loans, credit cards, insurance and investment solutions. The company holds a 49 per cent stake in its associate Paytm Payments Bank through which it provides services such as wallets, FASTags, bank accounts and UPI services. Paytm Payments Bank is the only profitable arm of Paytm.

On the other hand, merchants to this platform get access to payment offerings such as QR code and payment gateways. Lenders and insurance providers also use the company's platform to increase their consumer base.

The company generates revenues from payment and financial services primarily in the form of transaction fees charged from its merchants, consumer convenience fees charged for certain types of transactions such as flight, train and bus bookings, and subscription fees for certain products, such as Paytm Soundbox and POS. For financial services, the company charges sourcing fees from financial institution partners and collection fees. This segment accounted for 75.3 per cent of its revenues in FY21, while the rest comes from commerce (in-store sales) and cloud services.

Strengths:

  • Its brand 'Paytm' is one of the most renowned payment brands in India.
  • Paytm is also the largest payment platform in India in terms of numbers of transactions with GMV (Gross merchant value) of Rs 4,033 billion in FY21. It processed a total of 5.9 billion merchant transactions. In the second quarter of the current fiscal year, its GMV stood at Rs 1,956 billion as compared to Rs 947 billion in the same period last year.
  • As per RedSeer, Paytm has a payments transaction volume market share of 40 per cent and wallet payments transaction market share of 65-70 per cent in India in FY21.
  • The company's investor list includes some of the most prominent names such as Softbank, Warren Buffett, and Ant Group.

Weaknesses:

  • The company has a history of incurring losses. However, its losses have narrowed down from Rs 4,225 crore in FY19 to Rs 1,701 mainly on account of reduction in marketing and promotional expenses.
  • Although the company has been growing in terms of GMV which has increased from Rs 2,292 billion in FY19 to Rs 4,033 billion in FY21, it has to retain its consistency of growth in order to turn profitable.
  • The company has also been burning cash and has incurred more than Rs 8,900 crore of cash outflow from operating activities.

One97 Communications (Paytm) IPO: Information analysis

IPO questions

The company/business

1) Are the company's earnings before tax more than Rs 50 crore in the last 12 months?
No, the company reported a loss before tax of Rs 1,788 crore in the last 12 months ending June 30, 2021.

2) Will the company be able to scale up its business?
Yes, the company has an asset-light business model, which allows it to scale up its business faster than traditional businesses. Along with this, increasing number of smartphone users and rising internet penetration will further propel demand for digital payment as it is a simple, safe and convenient way of transferring money.

3) Does the company have recognisable brand/s, truly valued by its customers?
Yes, the company's brand 'Paytm' is one of the most renowned brands in India and is the largest payment platform in India in terms of number of transactions.

4) Does the company have high repeat customer usage?
Yes, the company claims that GMV generated by consumers acquired in FY17 have increased by 6.8 times by FY21 which clearly indicates the repeat customer usage.

5) Does the company have a credible moat?
No. Although the company is a market leader in the payment services, it does not have a distinct credible moat to safeguard its business.

6) Is the company sufficiently robust to major regulatory or geopolitical risks?
No, as the company is engaged in payment gateway services, banking and wallet business and broking and insurance related business, it has to adhere to various regulations from RBI, SEBI, and IRDAI.

7) Is the business of the company immune to easy replication by new players?
No. Since it is a technology-based company, its business model can be easily replicated. However, building a brand image like Paytm can be difficult.

8) Is the company's product able to withstand being easily substituted or outdated?
Yes. Increasing pace of digitalisation and wider acceptance of digital payment along with government initiatives towards a cashless economy, will safeguard the company's products such as payment services from being outdated.

9) Are the customers of the company devoid of significant bargaining power?
The company has two categories of customers. One: individuals who download the app and make payments. Two: merchants who receive payments.

Individual payers effectively have very high bargaining power because they currently pay nothing and if Paytm ever tries to charge for payments, they will immediately move to other apps. Merchants too typically accept payments through all digital means and actively guide their customers to use payment apps that they find more attractive.

Effectively, Paytm's customers have very high bargaining power because they are able to enforce zero or close-to-zero pricing on the company.

10) Are the suppliers of the company devoid of significant bargaining power?
No, the company's suppliers include technology providers which aren't devoid of any significant bargaining power. Also, the top-10 suppliers accounted for more than 61 per cent of total expenses in FY21 which shows consolidation of the expenses to a few suppliers.

11) Is the level of competition the company faces relatively low?
No, the company faces competition from other payment providers such as Google Pay and PhonePe.

Management

12) Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters totally hold more than a 25 per cent stake in the company?
Yes, the founder of the company Vijay Shekhar Sharma will hold 8.9 per cent stake in the company post-IPO.

13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes, its CEO and founder Vijay Shekhar Sharma has been associated with the company since its inception in 2000.

14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes, we have no reason to believe otherwise.

15) Is the company free of litigation in court or with the regulator that casts doubts on the intention of the management?
No, there are tax proceedings to a tune of Rs 3,733 crore against the company.

16) Is the company's accounting policy stable?
Yes, we have no reason to believe otherwise.

17) Is the company free of promoter pledging of its shares?
Yes, since the company is professionally managed, it does not have any identifiable promoter.

Financials

18) Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital of more than 18 per cent?
No, the company has incurred losses in the last three fiscal years.

19) Was the company's operating cash flow positive during the three years?
No, the company has reported negative operating cash flow during the last three years.

20) Did the company increase its revenue by 10 per cent CAGR in the last three years?
No, the company's revenue decreased by 6.9 per cent CAGR in the last three years.

21) Is the company's net debt-to-equity ratio less than one or is its interest-coverage ratio more than two?
Yes, the company has a debt-to-equity ratio of 0.07 as of June 2021 with no long-term debt.

22) Is the company free from reliance on huge working capital for day-to-day affairs?
Yes. The company has a strong cash position with positive working capital and has a negative working capital cycle of 67 days which means that it collects cash before it has to pay its creditors.

23) Can the company run its business without relying on external funding in the next three years?
No, the company has been burning cash and has reported an operating cash outflow of Rs 8,900 crore in the last three years. Although the company is raising Rs 8,300 crore from the IPO, it might need external financing in the future.

24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
Yes. The company's short-term borrowings decreased by 31.6 per cent from FY19 - Rs 696 crore to Rs 476 crore, as of June 30, 2021.

25) Is the company free from meaningful contingent liabilities?
Yes, the company has contingent liabilities of Rs 5.2 crore, which is only 0.84 per cent of its equity, as of June 30, 2021.

Stock/valuations

26) Does the stock offer an operating-earnings yield of more than 8 per cent on its enterprise value?
No, the company has been reporting negative operating earnings during the last three years.

27) Is the stock's price-to-earnings less than its peers' median level?
Not applicable. No other listed companies are involved in a similar line of business. The company has reported negative earnings during the last three years.

28) Is the stock's price-to-book value less than its peers' median level?
Not applicable. Post-IPO, the company's stock will trade at a P/B of 9.6 times.

Disclaimer: The authors may be an applicant in this Initial Public Offering.