Why the wallet needs the cash

Going public is a milestone for a company. It means raising profile and capital, while opening oneself to greater public scrutiny. In the case of Paytm, which has already raised about $4.4 billion privately in just 11 years, it’s also an avenue to offer existing investors an exit. It’s something that Paytm investors—including the China-based Alibaba Group and Japan-based SoftBank, two of the world’s largest investors in Internet businesses—are keen on.

A bigger imperative for Paytm, though, is more capital for itself. Paytm is a leader in the wallets and payments space, but it has stopped growing at the scorching pace it once did. It’s also never been profitable. Its revenues surged five-fold after the Indian government temporarily withdrew 86% of the cash in circulation during the demonetization exercise in November 2016. But competition from other digital payment providers like PhonePe and Google Pay has since reined in growth. Although it has reduced losses, they remain at levels where Paytm will need more capital to keep going.

Lower Pitch

The roots of how Paytm has reduced its net loss from ₹4,217 crore in 2018-19 to ₹1,701 crore in 2020-21 lie entirely on the expense side. Post-demonetisation, Paytm went all out to win customers. Its total expenses ballooned four-fold in two years, from ₹1,989 crore in 2016-17 to ₹7,730 crore in 2018-19. About 43% of this increase came from advertising and promotional expenses.

Paytm has two other big spending heads: employees and payment gateway charges. It has maintained spending on these two heads. But it has dialed down advertising and promotional expenses 85% from its 2018-19 high of ₹3,451 crore. There are two downsides of such cost management. One, advertising and promotional expenses tend to feed revenues. Two, there’s a limit to how much a company can cut such expenses. At ₹533 crore of advertising and promotional expenses in 2020-21, Paytm does not have much space left.

Capital Crunch

Self-sustaining revenue growth has eluded Paytm so far. Hence, it has to draw on its reserves of capital. In 2018-19, its operations guzzled ₹4,496 crore of extra cash. In 2020-21, this was down to ₹2,242 crore. In other words, its current operations don’t generate enough cash, and it has to fund this deficit of ₹2,242 crore from its reserves. The $4.4 billion it has raised over the years has financed this. But 2020-21 was also the first time in the last five years when Paytm’s marquee, cash-laden investors did not pump any capital into it.

Its biggest investor (Alibaba Group) has Chinese roots, and after the Indo-China border clashes in May-June 2020, sentiment turned against it, perhaps making the group wary of further investments. Paytm has liquid assets of about ₹7,000 crore. At an annual drawdown of ₹2,200 crore, that is about three years of operational runway. ₹12,000 crore from the IPO will give it a capital cushion of another six years.

Baby Steps

Some of that capital is needed for expansion. A plethora of businesses now exist under the Paytm umbrella, beyond digital wallets, including e-commerce, data analytics and financial services. Its latest annual report shows 29 subsidiaries, whose numbers are consolidated into the parent, One97 Communications. There are also 12 other associate companies and joint ventures, whose numbers are not required to be consolidated into it.

In 2019-20, these entities did transactions worth ₹4,081 crore among themselves, or 1.1 times their consolidated revenues. However, at a net level, their contributions have been underwhelming. In 2020-21, the subsidiaries accounted for just 4.5% of consolidated revenues of One97.

They will need more capital, which partly explains the One97 IPO. The last time it raised funds, in November 2019, Paytm was valued at $16 billion. Once listed, how this valuation moves will depend greatly on whether Paytm and its subsidiaries can use their capital to grow well and become profitable.

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