MC Explains: Can Paytm sustain its business model? A deep dive into how it operates and what-if scenarios
Last month, the Reserve Bank of India placed limitations on Paytm Remittances Financial Institution Ltd. (PPB), an associate company of One97 Communications, stating the activities were called for by "consistent non-compliances and continued material jurisdictional problems in the financial institution."
While the RBI performed not give details of the issues, it guided PPB to cease approving down payments, credit report deals or leading ups in consumer accounts, pre paid guitars, wallets, FASTags, as well as NCMC cards after February 29, apart from any rate of interest, cashbacks, or reimbursements. It additionally purchased the payments financial institution to clear up all pipeline transactions and also nodal profiles through March 15.
Complying with the announcement, the Paytm sell dropped 42 percent in 3 trading treatments. It scraped back thirteen per-cent on market value acquiring only to slow once again. Paytm has pointed out the regulatory solutions are actually assumed to have an effect of Rs 300 crore to Rs 500 crore on its own annual EBITDA on a worst case manner. Can Paytm brush off this loss, and also be actually up and running once again? Listed below is actually a thorough explainer on Paytm's service version and also exactly how factors could possibly advance
How does Paytm earn money?
To know this, permit's look at a consumer's adventure on the Paytm application. At its center, Paytm is a repayment application. Consumers download and install the application as well as pay.
These settlements can be done via the Unified Payments Interface (UPI), internet financial, cards as well as the digital budget. Paytm makes more than half of its own profits coming from processing settlements-- 38 per-cent of its revenue came from refining remittances for business (including tool memberships) in Q3 of FY24 and 21 percent from processing settlements for buyers.
It receives a percent of the gross goods worth (GMV): 3-4 bps on processing of UPI purchases and also 15-18 bps on various other apparatus. With UPI expanding faster than various other tools, the company expects mixed frame to stabilise at 5 to 7 bps. One bps (basis point) is one-hundredth of an amount aspect.
This is actually small to make any kind of substantial influence to Paytm's profit. So the firm uses this significant client bottom to cross-sell car loans as well as various other companies including broking, flick as well as traveling tickets, and also cloud companies.
All these services seem on the app's home screen. This means that while you might possess put up the application to pay, you can likewise obtain an individual funding or make use of the buy-now-pay-later solution.
Likewise, a business might possess mounted the app to get payments, but he/she can easily additionally acquire business loan or even utilize Paytm's business solutions to increase purchases with tickets, present certificates and also offers.
Paytm makes 2.5 percent to 3.5 per-cent of car loan market value upfront on the dispensation of lendings. In December quarter, Paytm distributed car loans of Rs 15,535 crore, up 56 percent YoY basis.
Analysts think that Paytm's extra financially rewarding companies, which provide substantially to revenues, are cloud and commerce, adhered to through economic companies. Remittance solution is the least profitable as well as likewise provides the least to the cat.
Yet, this sounds like other payments applications Google Pay and Amazon Pay. What is Paytm's upper hand?
Paytm's advantage is actually the budgets organization, which supplies in to remittances revenue. The Paytm wallet chased the November 2016 demonetisation. With Rs 500 and Rs 1,000 currency keep in minds outlawed, folks took to the Paytm purse, implying you move loan coming from your financial account to the purse as well as utilize the money in it to bring in the remittances via the app. You could possibly pay companies, or even transmission to yet another pocketbook, like say, clearing up accounts with a good friend, etc. The maximum money that may be stored in a wallet is Rs 99,999.
Back in 2016, payments through UPI-- a platform that enables instant fund transfers between bank accounts-- were not popular yet, so apps like Google Pay that enable bank account-to-bank account transfer had not taken off.
The wallet-- like credit cards-- generates revenue from the merchants (based on what is called merchant discount rate) who receive payments through it. But this contributes only about 5 percent to total GMV, according to Jefferies.
What has RBI come down on?
The entity affected by the RBI's action is Paytm Payments Bank. One97 Communications holds 49 percent of this company and the rest is held by Vijay Shekhar Sharma, the founder of Paytm. PPB is an associate company of One97 Communications.
Primarily, the RBI directed PPB to stop accepting deposits, credit transactions or top ups in customer accounts, prepaid instruments, wallets, FASTags, and NCMC cards after February 29, other than any interest, cashbacks, or refunds. It also ordered the payments bank to settle all pipeline transactions and nodal accounts by March 15.
Nodal accounts are bank accounts owned by intermediaries such as payment processors and e-commerce platforms to collect money on behalf of merchants (such as payments) and on behalf of customers (such as refunds).
So how do these restrictions impact the listed entity?
First, is the operational and revenue impact on the wallet business. Second, is the impact on all payments done using UPI transactions. Third, is the enterprise value of Paytm as it is after all a 49 percent stakeholder in the bank.
According to Macquarie, PPB houses all 33 crore of Paytm's wallet accounts. Meaning, the wallet money is kept in a PPB escrow account, which is another name for a bank account that holds money for someone else. This can no longer remain in PPB. Another bank will have to take this over.
If Paytm can not find another bank to host it, then its customers will be able to withdraw the money held in their wallet but customers won't be able to add more money to it. This means the wallet business will collapse.
Second, let's understand the UPI transaction chain ...
When money is transferred from a customer to a merchant through UPI, it is held temporarily in a pocket-- or nodal account-- in case there is a dispute (say, order not delivered) and a refund has to be made. Before the money is credited to the merchant's bank account, it makes a stopover at this nodal account, which every payment processor including Paytm needs to set up.
This nodal account too is an escrow account that is held in the intermediary's name. Market insiders believe that this escrow account too, for Paytm, is hosted by PPB.
So, without PPB's banking licence, two escrow accounts-- the one that holds the wallet money and the one that holds the nodal account money-- will need another host bank.
However, market insiders say other banks may be apprehensive about hosting these escrow accounts because of know-your-customer compliance requirements. There were at least 40 million merchant accounts attached to these escrow accounts, on Paytm as of FY23, and getting KYC done for pending accounts won't be an easy task.
"Banks may be worried that the regulator may come after them later," said a senior banking executive.
In its official statements, Paytm has said that several banks have shown an interest in hosting these customers and merchants.
But a fund manager told Moneycontrol that the Paytm management has indicated that the impact of the RBI's curbs on EBITDA would be Rs 300 crore to Rs 500 crore, which presumes the wallet business would wind down to zero.
How can this be salvaged?
If PPB does not lose its licence, then some fund managers say the business can be revived at a later date, although that will take time.
If PPB loses its licence, then the bank's pre-paid instrument or wallet will be gone too. Without the wallet, Paytm's ability to cross-sell services such as tickets and insurance will be significantly reduced.
It can continue to be in the UPI ecosystem, just as any other third-party application provider such as Google Pay and Amazon Pay. However, that will depend on the National Payments Corporation of India (NPCI) allowing it to continue as a third-party provider and Paytm finding a bank willing to host its nodal-account, and more importantly, a sponsor bank-- also known as a Payment Service Provider (PSP) Bank-- that is a member of UPI.
UPI operates a three-tiered ecosystem. The first is NPCI, which owns the pipe that transfers money. The second is the group of PSP or sponsor banks that give users QR codes/UPI IDs to access this pipeline. The third layer consists of third-party providers such as Google Pay or Amazon Pay.
As of now, Paytm has PPB as its sponsor bank. Amazon Pay has Axis Bank, Yes Bank and RBL Bank as its sponsor banks, and Google Pay has Axis Bank, HDFC Bank, ICICI Bank and State Bank of India as its sponsors.
Before PPB, Paytm used the pre-paid instrument licence that was issued for its wallet. When PPB was given its banking licence, Paytm surrendered its pre-paid instrument licence and brought its wallet business under PPB.
If PPB loses its licence, Paytm will need another sponsor bank, which will be held responsible for Paytm's actions.
"That will need to be a brave bank willing to work with Paytm's aggressive growth strategies and its chequered track record," said a senior banking executive.
It isn't impossible for Paytm to find a sponsor bank, which will be rewarded by NPCI for enabling UPI transactions based on the GMV of payments processed. But it won't be easy to find a bank willing to take on the risk.
What if scenarios ... If the banking licence is not lost and the regulator lifts the curbs, then it is business as usual. Brokerages will revise their price targets upwards and stock may rally again. The current 12-month target price for Paytm is Rs 740, down from Rs 960 earlier.
Scenario 1: PPB is not rescued, but a third party steps in to settle the UPI transactions. In this case, the wallet business for Paytm is entirely lost. Here, the impact on EBITDA could be Rs 300 crore-Rs 500 crore as per the management.
Some analysts feel this will hurt its ability to draw on an otherwise large customer base to up-sell its financial products. Others feel Paytm should be able to build the lost base back over time, even though it will have to live with the immediate financial jolt. This is because its rivals like BharatPe and PhonePe too have a similar structure-- they do not own a bank like Paytm does.
Scenario 2: PPB is rescued by other banks, both wallets business and UPI transactions are saved. In this case, the impact on EBITDA could be lower than Rs 300 crore - Rs 500 crore. The loss of time and opportunity cost till a bank steps in to rescue both parts will impact the company.
Scenario 3: No other banks step in to salvage the situation, not even the UPI part. Paytm's core proposition will be impacted. As users switch platforms, this can be a potential threat to Paytm's existence.
However, the Street believes this is a less likely situation as RBI would not want UPI customers to suffer out of the blue. The management is also confident that it will find a partner for UPI payments as it has communicated to customers that 'Your Paytm app will keep working beyond Feb 29'.
What is the fair value of the stock?
It's hard to evaluate the fair value of the stock because of the possible scenarios mentioned above. Based on the last traded price of Rs 419.15 as on February 9, One97 commanded a market-cap of Rs 26,640 crore. Stripping off the cash in the company's books of Rs 8,901 crore, the market-cap stands at Rs 17,700 crore or $2.1 billion.
The last round of funding in April 2023 in private markets for rival PhonePe stood at $12 billion. This was when Paytm stock in public market was trading at Rs 50,000 crore market cap. For BharatPe, the last valuation was $2.9 billion in August 2021, when Paytm had not listed.
Some investors feel that while private market valuations may still be exaggerated, Paytm is available at a steep discount. If it ropes in a nodal bank, it can rebuild its business and create value in due course. Lost reputation will however make the journey harder and financial partners will bargain hard.
Meanwhile, the company has brought in former Sebi Chairman M Damodaran to work with the board in further strengthening compliance and regulatory matters.
With Damodaran's experience in dealing with troubled situations including navigating India's oldest mutual fund The Unit Trust of India through its worst crisis, the expectation is that the company can put together a more credible case and get a more serious audience with the regulator.
Considering the tech issues and the challenge this entire crisis poses to crores of customers, RBI may consider extending the deadline beyond February 29. If this happens, apart from finding a sponsor bank for its UPI, it may also be able to find a solution to its wallet business, which the Street seems to have written off entirely.
