Vijay Shekhar Sharma reappointed CEO, but everyone wants to know how Paytm will make money

A question worth a million dollars many investors are asking today is exactly when will fintech giant Paytm make money. The only clue investors have today is the company's guidance for operating profits and, mind you, not the net profits, which will actually make Paytm eligible to pay dividends. One97 Communications, the parent entity, has guided the stock market that it will achieve operating profitability by the quarter ending September 2023, i.e., one year from now. But this guidance is for EBITDA (earnings before interest, tax, depreciation and amortisation) and before the ESOP costs.

Now let's take a look at where the company stands today on the operating profit front. In 2021-22, it recorded a negative EBITDA of Rs 1,517 crore on a total income of Rs 5,264 crore as against Rs 1,654 crores EBITDA on an income of Rs 3,186 crore in the previous year. On a year-on-year basis, there was a marginal improvement in the EBITDA. Have things then improved in the first quarter (April-June) of 2022-23? Yes, to some extent, as negative EBITDA improved on a quarter-to-quarter basis. The company's EBITDA improved to Rs 275 crore in April-June of 2022-23 from Rs 368 crore in January-March of 2021-22.

"We remain bullish on the customer demand. Our usage of the platform and monetisation is on track and we believe that we will very comfortably be able to achieve the September timeline to achieve EBITDA breakeven," promised Vijay Shekhar Sharma, MD& CEO, Paytm to shareholders.

After reaching an all-time low of Rs. 511 per share, the price of Paytm shares did increase to Rs. 780 after the EBITDA guidance.  The stock, however, still has a way to go before reaching the IPO offer price of Rs 2,150 a share. In fact, this much-hyped stock was listed at a price below that of the offer price.

Paytm's business model

Let's take a closer look at Paytm's business model. The company's business model is woven around acquiring payment customers and distributing loans. The company, which is clocking over 75 million monthly users, has onboarded 28 million plus merchants at the last count.

"The cashbacks are on a decline. We still give it only when it is necessary," says a company official. In fact, a large part of the losses earlier were because of cashbacks to garner users as well as merchants. It  is now aggressively converting these users and merchants for credit (personal loans, credit cards, cash advance loans), savings, and investments. But the challenge here is to do it at scale, which would take some years.

More specifically, Paytm earns money as users download the app, use UPI to transfer money, pay online vendors, or make offline payments by scanning QR codes. While there is no merchant discount rate (MDR) on UPI for debit transactions, the government is reimbursing players like Paytm for person-to-merchant (P2M) transactions by providing a subsidy. The subsidy amount is not big, but revenues are trickling down from P2M, which many regard as a zero-revenue game. The RBI has also come out with a working paper on introducing a MDR on UPI transactions. But it is still under discussion.

The company has also created an additional revenue layer called "Soundbox" for merchants where a device confirms the payment received instantly. No need for a vegetable vendor or Kirana store owner to check whether the payment was received or not. So many merchants are now being converted into soundbox merchants. The installation of a soundbox offers a steady revenue line.

"This first of its kind, innovative device, Soundbox, is helping us generate monthly subscription revenues," says a top company official. He adds that the payback period for a soundbox is anywhere between 12 and 14 months.

"The life of a device is about three years," he adds. The company is also exploring further monetisation of credit-worthy merchants as there is a payment history by offering cash credit. In the credit space, Paytm has tied up with close to half a dozen financial services players for the distribution of loans where it earns a fee. It is offering short-term small ticket size personal loans and merchant loans of Rs 1 lakh to 1.5 lakh. It also has a BNPL (buy now, pay later) product called Postpaid. In fact, the company is also offering loan collection services for EMIs for lenders.  
In the just completed June quarter of 2022-23, it disbursed loans of Rs 5,554 crore as compared to Rs 3,553 crore in the March 2022 quarter. The figure for the December 2021 quarter was Rs 2,181 crore. The company claims that it has recorded an annualised run rate of over Rs 25,000 crore in July 2022.

Similarly, the company is also exploring cross-selling opportunities with the lending partners. Paytm is approaching them with new products. But the real money would come when Paytm gets a full scale or small finance banking licence to do lending business. The margins are generally high if one builds a lending book with prudent lending practices. The company's co-branding credit card is also picking up. The company claims that there are merchants using the Paytm app to collect payments. While financial services have a disproportionate share in the revenues, the company’s cloud and e-commerce business is also gaining traction.

Clearly, investors are waiting for the company’s guidance to come true by September next year. That will be the first credibility test. The next will be the net profits after taxes.