by Would you invest in Paytm’s IPO, knowing all the information that I’ve shared with you? My answer is no, that I would not do it. So today I have a very interesting case study for you on Paytm. And before starting the case study, I have two questions for you. So please make sure that you answer these two questions.
The first question is that who do you think Paytm is competing with? Are they competing with Google Pay? Are they competing with Amazon? Are they competing with Razorpay? Are they competing with any other company? Please mention it. The second question for you is that are you going to invest in Paytm’s IPO? I will give you my answer, the answer is no. So I’m going to give my analysis on this case study. So please read this whole article to understand the whole concept of Paytm. I will talk about a lot of business lessons along the way.
let’s get started. So there are four things that I’m going to explain in this case study. The first is that I will quickly take you through Paytm’s business model and how is it that Paytm is making money? The second point, I’m going to talk a little bit about that what is the real strategy of Paytm going forward? So what are the key areas that Paytm is going to focus on? Third, we are going to take a look at key challenges that Paytm is going to face and who are they competing against? Are they competing against WhatsApp, Amazon, or any other company? And finally, I’m going to talk about Paytm’sIPO and the way ahead.
Paytm’s Business Model
So first and foremost, let us try to understand how is it that Paytm is making money and what are its major revenue streams? Now it is currently operational across six broad domains. So let me take you through it ver, very quickly. So first and foremost, we understand categorically
What Paytm Wallet is?
Paytm literally started as a wallet, right? It was a place where we could store money, transact money. So that is what Paytm wallet is. And this has been up until now, the main core business of Paytm.
How does Paytm make money from this?
Very simply that you and I, when we store money in Paytm, we don’t get any return on that money. But Paytm invests that money in overnight liquid funds and various other instruments to generate a certain rate of return for itself. That is one. The second is that it makes certain commissions from the merchants’ side when interacting and giving payments to merchants and on the customer side.
When we transfer the amounts from our Paytm wallet to our bank account, there is a certain charge. Paytm also makes a commission on that. So this is the first key business model and I’m sure that many of us are already familiar with it.
Paytm recently also started something called Paytm Mall. Now Paytm mall is essentially a competitor to Amazon. It’s trying to sell everything, that is the eventual goal. Now, the reason why people are motivated in this business is that Paytm is Alibaba-backed. Right. Now, Alibaba is a massive-commerce site in China.
In India, Amazon has already grown very big. Paytm becomes a proxy for Alibaba to come and compete in the Indian market. So that is primarily the reason why Paytm mall has been launched. So this is the second business model. And if you’re familiar with Amazon’s business model, this equation for Paytm would be very clear. So this is the second business line.
Now, the third business line is the recharge one. Now on recharge, what happens is that there are certain recharges, for example, if you are charging a jio phone or Airtel phone, Paytm makes money by charging commission to Airtel or Jio. The very simple business model here right.
Now, moving onto the fourth part. There is also something called a payment solution. Now payment solutions essentially mean that, for example, if you are a merchant, if you are a small merchant, and if you don’t have any facility in terms of accepting payment via UPI or via Google pay, etc., then you can create a QR code. Now if a small merchant uses that QR code, it has to give a certain amount of money to Paytm as commissions, this is the fourth business line for Paytm.
Paytm, also entered very recently into digital gold. In India, there is a fascination to invest in gold. So Paytm partnered with a few firms and what it allows buyers to do is buyers can buy virtual gold and store it in their Paytm wallet, so to say. So this is the function of digital gold. Now, this digital gold business allows you to buy gold also and sell gold also, and Paytm in the middle would be making commissions.
So this is again a commissions based business. Now, this is the mother of all commission-based businesses, which is cross-selling. So PayTM is trying to enter the mutual fund market, stockbroking, insurance, everything. They will partner with a bunch of companies, be it insurance firms, mutual fund houses, etc, etc.
They will start charging a commission on the services which are being sold through the Paytm app. Now, there are a few things that you need to notice here.
Paytm is both a B2C business to consumer and a B2B business
Now, first and foremost Paytm is both a B2C business to consumer and a B2B business. What do I mean by that?
For example, Starbucks. Now Starbucks is a B2C because it’s selling directly to the consumer, so it’s a B2C business. But Paytm actually makes money directly from consumers also, for example, Paytm wallet, and merchants also. How merchants? for example, Paytm solutions. So they are both B2B and B2C businesses. That’s the first key point that you need to know.
The second key point that you need to notice about Paytm is that it is a very vast business and Paytm is entering into a vast array of businesses. And this is the reason why I said earlier that Paytm is a very confused fintech company right now.
The third thing that you need to notice right now is that Paytm has a very high expense. The reason is that it is spending money in terms of acquiring customers and it is spending an insane amount of money acquiring businesses or merchants. So it is burning the candle from both ends. So it is spending an insane amount of money every single year.
I will put up the chart here and you can notice that:
- Paytm is still a net loss-making company that is making massive losses.
- Revenues are not going up. It has come down.
- Expense is still very, very high, despite it cutting down the expense by 40 percent this year.
Paytm’s strategy
These are some fundamentals and financials you must understand and you must understand and notice the point that the reason why it’s a high expense company is that they don’t have a singular business strategy.
Paytm don’t have a singular business strategy
They are operating everywhere. They are trying to compete with everyone. Be it Amazon. Be it Razorpay. Be it PayU, be it Google pay. Be it Phonpe. They are trying to compete with everyone. And in that race, they are not being effective in terms of acquiring these customers effectively by spending money.
They are not being effective in terms of acquiring businesses or merchants very effectively.Right.So the amount of capital that flows into these businesses, that is being burnt at a massive rate. And this is the reason why that despite not growing any revenues this year, their entire focus was to just bring down the cost.
Even Paytm understands that its business model is extremely complex and it is trying to simplify. So here are some key statements that I will read out for you, and I will show you two things here. One is key statements that have been made by the founder of Paytm. And I will walk you through the cost-cutting structure that Paytm is following.
The cost-Cutting structure that Paytm is following
Now, if you take a look at the 2020 numbers for Paytm, you will quickly see that the marketing and promotional spends were slashed by 63% in 2020 by Paytm.63%.
Number two, the advertising expense was cut down by 28 percent. And number three, the staff expenses jumped by 30 percent.
If you just analyze this cost structure, what is it that you would get out of it? You will simply understand that Paytm is ramping up its hiring, but at the same time it is cutting down costs on a wide variety of other factors.
Ask yourself the question that why they have cut down the expenses?
The reason is very simple that Paytm has been a consistent lossmaking company since its inception. Now it is going to go for an IPO, later this year and of course, it needs to rationalize its cost.
You might have read my case study on Zomato. Zomato again is doing a similar bookkeeping exercise where they are trying to cut down the cost increase revenue, so on and so forth, and trying to project profitability.
Paytm is doing the same exercise now. But despite cutting costs, unlike Zomato, Paytm is still a loss-making company. Zomato turns profitable this year, but Paytm is still a net lossmaking company even this year.
The second key point that you need to know through this cost structure is very simple, that the focus of Paytm has moved away from giving discounts, cashback, and getting into that customer acquisition risk. They are moving away from B2C things and now they are moving to B2B things.
They are focusing more on the merchant side. Now, here is a statement that was given that we launched an all-in-one QR at the beginning of the year, which allowed merchants to remove all the clutter from the desk.
It is the only single QR that can take the wallet, card, UPI payments. There has been very good acceptance and traction for this. If you combine the fact that Paytm is cutting down its cost structure everywhere else and focusing on hiring people who can go out and start acquiring more and more merchants, plus it is offering more and more merchant conveniences, it is very clear that going forward Paytm’s strategy is merchant acquisition, not customer acquisition. It is trying to get in the B2B game, not the B2C game.
Now, if you ask yourself the question that Paytm actually winning in this merchant acquisition game, I would want you to take a look at this particular chart. Now here you can see that from financial year 18 to 19, it grew its merchant base from seven million to 12 million. So this was a jump of approximately how many percent? Approximately 70 percent.
If you take a look at the growth data of merchants from financial year 20 to21, by how much has the merchant onboarding grown? So it has only grown by twenty-five percent, 4 divided by sixteen and 200. That gives you twenty-five percent.
So from a time where it was growing at a rapid rate of 70 percent, now it has come down to twenty-five percent. And this is an area where Paytm itself has admitted that they want to focus on growing their merchant business.
If the growth has been slow here, then these are troubling signs for the company. Second, and more qualitative, that you can understand about whether or not merchants are going to sign up at Paytm and is going to help them, you need to understand how the merchant psychology would work. Now the merchant category can be segregated into two parts and let me explain this via an example.
Let’s assume that I’m a small shopkeeper and I have a small business owner and I sell normal household items such as dal, chawal, atta, ghee, all that stuff.
Now, what type of help would I be expecting from these big players? One I would be expecting backend help. For example, if I need to do my basic accounting, then I have companies likeKhatabook that can help me in doing that.
The second option would be that I would want to partner with retailers like Amazon who can get my product or more of my products to consumers, which is a front-end logistics play. So Paytm is somewhere stuck in the middle, it’s trying to compete with everyone. It’s trying to compete with Amazon also. On the flip side, it’s trying to compete at the back end also with companies like Khatabook, Razorpay, etc. So for Paytm, it becomes multiple battles that they are trying to fight at the same time.
This brings us to an interesting section where we will try to uncover who exactly Paytm is trying to compete with. Now Mr.Sharma was asked a bunch of questions around whom they are competing against, and these were some of his classic responses. So he was asked point-blank that do you see a threat from Whatsapp? So he said that we decided not to pursue P2P money transfer, which means that at one stage they were also trying to do that.
So we decided not to pursue P2P money transfer, which is what WhatsApp does. We want to focus more on merchant payments. This ties into the previous section that I was speaking. That Paytm is focusing on merchants. We have stopped spending money on P2P since the last two quarters and WhatsApp is all about P2P. I agree on two fronts that
Number one, that Paytm is focusing extensively on merchants now. It’s trying to streamline its business.
Second, it is not trying to compete against WhatsApp because that itself is a losing battle for Paytm. Therefore, it went into that business line but got out very quickly as soon as it realized that WhatsApp was getting into this domain with fierce strength.
Now, second, let’s try to analyze that, is Paytm trying to compete with Amazon, and what are its game plan. So Mr. Sharma was asked that what plans do you have to scale up your operations to a level where you can compete with top e-commerce players? He responded that if they stop spending money recklessly, only then he can compete with them. But we have the money and a robust business model.
We have been able to build a legitimate market place and it has done very well for us. Now, first and foremost, I slightly disagree because Paytm has been an extremely responsible company in terms of burning money. Same to Amazon and I think that goes into the nature of the e-commerce business. Now here is a news article. It categorically says, and these are the numbers for 2018 and 19, because the numbers were very clear, that in 2018, major players Flipkart, Amazon, Snapdeal and Paytm mall have registered losses of INR ten thousand eight seventy-nine crores.
You might ask me at this stage that you think that all these companies, whether it’s Paytm, whether it’s Amazon, whether it’s Flipkart, have lost their mind? Why are they burning so much cash? So you need to understand the fact that a big company like Amazon or Flipkart, what they are currently getting into is, are trying to become the one-stop-shopping destination for a majority of the households in India. For example, I tend to only buy from Amazon.
I don’t even go to Flipkart and check prices now. Whatever is there on Amazon, I’ll just go and buy it because I’m so habitual of buying stuff on Amazon. I’m sure that that is the case with many of you as well. That we will get habitual to buying on a certain portal, be it Amazon, Flipkart, Paytm Mall and we will continue to use that over and over again. That is the first step for these big players to get you hooked to a habit and become a one-stop solution. So that is step one.
Step two is that once you get ingrained in terms of buying from Amazon, then Amazon starts high selling products at the back end. For example, you might have observed something called Amazon Basics, which is the homegrown brand of Amazon.
Once they start replacing these high-end products, their margins shoot up. And that is the point at which these companies might become very profitable and would gain massive profitability going forward.
So this is a massive golden nest for a company, whoever can win in this race. But for the time being, this is a losing proposition for a company like Paytm, which is bleeding money from any vertical it is getting into.
And it is playing a very confusing game. Now, you might say why do you say that Paytm is such a confused company? I will tell you why. So let me ask you this, that what do you know Amazon for? You would say that Amazon is a very good logistics play. The moment I order my items, I get the items at a very quick rapid speed.
Essentially, what you’re trying to say is Amazon has a very good logistics management play. If you take a look at their prime membership, what are they focusing on? They don’t want you to watch just videos. The objective of prime is very quick delivery. That is the USP. By focusing on prime, becomes another acquisition strategy for Amazon. Now, Paytm doesn’t have any such strategy.
So it will lose the logistics management game compared to Amazon. Now, if I ask the same question about Paytm, what is it exactly that Paytm is trying to do? You would say that Paytm is trying to build a mega app.
They are trying to compete against Khatabook also. They are trying to compete against Google pay, also. They are trying to compete against Flipkart and Amazon also, so they are trying to compete against everyone.
Would you invest in Paytm’s IPO?
Now, this brings us to the final section of this Article, here is a very important question that I would like to ask you. Would you invest in Paytm’s IPO knowing all the information that I’ve shared with you? My answer is no, that I will not do it. Not because Mr. Vijay Shekhar Sharma is not a good businessman. He’s a brilliant businessman. He has built a billion-dollar enterprise.
Of course, he knows what he is doing. But unfortunately, Paytm has gotten to a point where it is fighting too many wars, very unprofitability. Now, you might say that you know what, Mr. Vijay Shekhar Sharma is a visionary. And I’m sure that he has a way forward as to how to make Paytm profitable.
So there is a very interesting statement that I would like to read out what Mr. VijayShekhar Sharma spoke about in one of his interviews. He said that in the fintech journey, we are just gathering ingredients now.
I have not even started cooking. He believes that the fintech revolution in India is not fast food, but gourmet meals. We don’t even have an appetizer yet. So essentially what he’s trying to say is that you know what, I’m just collecting ingredients.
I’m just going and experimenting with a bunch of businesses, and then I’m going to figure out how to monetize it profitably. As an Indian, I’m very proud that entrepreneurs are taking massive risks and building new things, which is critical for an economy.
Conclusion
As an investor in an IPO, if I look at the fundamentals, I’m just trusting one person and his vision too much without any historic backing as to generating profitability for its shareholders. So for that reason, I would not be investing in this IPO, but very happy to hear your counterarguments. What do you think about this?
I hope you found this insight to be useful and meaningful. One should follow the Risk Management, Money Management, and Fear and Greed concept of the market to avoid big losses. Please comment on what case studies you would want me to make. I would appreciate it. And share it with your friends that will help this website grow. And I will keep making more awesome articles. For more trading ideas do follow us on
