Key takeaways from Paytm’s draft papers for share sale

The IPO papers say the payments firm might not be able to turn profitable in the near future.

Indian digital payments leader Paytm, supported by significant investors such as Ant Group and SoftBank, has recently submitted an application for India's largest initial public offering (IPO) valued at ₹16,600 crore. With an impressive total gross merchandise value (GMV) surpassing ₹4 trillion in the fiscal year ending March 2021, Paytm has also reported substantial assets under management (AUM) and total deposits amounting to ₹5,200 crore.

In terms of its user base, Paytm boasts over 333 million customers, 21 million merchants, and a staggering 7.4 billion transactions across its diverse platforms, spanning payments, commerce, cloud, and financial services. However, despite its substantial reach and engagement, Paytm has been grappling with losses since its inception.

Paytm derives its revenue from two primary segments: Payment and financial services, and commerce and cloud services. Over the years, its payments platform has displayed an annualized growth of about 11.5%, expanding from ₹1,700 crore in FY19 to approximately ₹2,100 crore in FY21. However, revenues from commerce and cloud services have experienced a notable decrease, declining from over ₹1,500 crore in FY19 to less than ₹700 crore in FY21. Consequently, this has resulted in an annualized decline of 7% in aggregate net sales from FY19 to FY21.

Notwithstanding the reduction in revenue figures, Paytm has made commendable strides in enhancing its profitability. EBITDA losses, which constituted a negative 130% of revenue in FY19, have now been mitigated to around 60% of net sales.

It's worth noting that Paytm acknowledges in its draft IPO documents that achieving profitability in the near future could prove to be a challenging feat, given the swiftly changing dynamics of the business landscape.

The company employs a unique metric to gauge profitability: contribution profit. This entails calculating the difference between revenue from operations and various costs, including payment processing charges, promotional cashback expenses, connectivity and content fees, contest, ticketing, and logistics costs. During FY19, Paytm reported contribution losses of approximately ₹2,000 crore, which have since transformed into a contribution profit of ₹363 crore by FY21.

Another pivotal performance metric for Paytm is gross merchandise value per monthly transacting user (GMV/MTU). GMV represents the total value of payments made to merchants through the app's transactions over a specific period, while MTU denotes a user who completes at least one successful transaction in a given month. According to the draft documents, GMV/MTU in terms of rupee value has surged by nearly 48% from the December quarter of 2019 to the March quarter of 2021.

Furthermore, the founder of Paytm, Vijay Shekhar Sharma, retains ownership of around 14.6% of the company, including a 5% stake held through VSS Holding Trust. Notable investors such as Alibaba.com, SoftBank, Berkshire Hathaway, and Elevation Capital are among the key selling shareholders in the IPO. Market reports suggest that Paytm could achieve a post-money valuation ranging from $25 billion to $30 billion.

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