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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, which counts Ant Group and SoftBank among its backers, sought approval for India’s largest initial public offering worth ₹16,600 crore on Thursday.

With a total gross merchandise value (GMV) of over ₹4 trillion in the year ended March 2021, Paytm reported ₹5,200 crore in total deposits and assets under management (AUM).

It has had more than 333 million customers, 21 million merchants, and 7.4 billion transactions on its payments, commerce, cloud, and financial platforms. Despite the scale and penetration of the business, it has been reporting losses since its inception.

The company has listed a couple of key revenue segments for its business: Payment and financial services and commerce and cloud services. The payments platform witnessed an annualized growth of about 11.5% and grew from ₹1,700 crore in FY19 to about ₹2,100 crore in FY21. Revenues from commerce and cloud services have less than halved from over ₹1,500 crore in FY19 to less than ₹700 crore in FY21. This has led to an annualized decline of 7% in aggregate net sales from FY19 to FY21 for the business.

Despite a fall in revenue numbers, the company has managed to improve its profitability. EBITDA (earnings before interest, tax, depreciation and amortization) losses that stood at negative 130% of the revenue during FY19 have less than halved to about 60% of net sales.

To be clear, the draft IPO papers also state that the company might not be able to turn profitable in the near future due to the rapidly changing dynamics of the business environment.

Since the company does not distribute its expenses across different business segments, it calculates profitability through an additional metric. The firm looks at the contribution profit of the entire business. Contribution profit is the difference between the revenue from operations and costs such as payment processing charges, promotional cashback expenses, connectivity and content fees, contest, ticketing and logistic costs.

The company reported close to ₹2,000 crore as contribution losses during FY19 that got converted to contribution profit of ₹363 crore during FY21. Another important metric that the company looks at to gauge the performance is gross merchandise value per monthly transacting user (GMV/MTU). It defines GMV as the rupee value of total payments made to merchants through transactions on the app over a period. MTU is a unique user with at least one successful transaction in a particular month. The draft documents show that GMV/MTU in rupee terms has increased by close to 48% from the December quarter of 2019 to the March quarter of 2021.

Additionally, a strong investor base sure makes things prettier for Vijay Shekhar Sharma, who still owns close to 14.6% of the company, including the 5% held through VSS Holding Trust. He, along with the selling shareholders, will be part-exiting through the IPO.

The largest investor Chinese e-commerce giant, Japan’s SoftBank, Warren Buffet’s Berkshire Hathway, and Elevation Capital are the key selling shareholders, among others. According to a VCCircle analysis, the weighted average acquisition price per share for all the selling shareholders together is close to ₹930 apiece. Paytm is expected to attain a postmoney valuation of $25 billion to $30 billion, media reports said.

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