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What Paytm’s IPO Prospectus Tells Us About Its Business

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Vijay Shekhar Sharma’s One97 Communications Ltd. is a behemoth in all respects.

It claims to offer services, from payments to commerce and cloud, to 33.3 crore customers. It tells us that it has 2.1 crore merchants on its network. Close to 5 crore users transact via the network monthly. ‘Gross merchandise value’ or the value of goods and services going via Paytm networks is at over Rs 4 lakh crore.

But the company has continued to report losses — Rs 1,701 crore in the most recent financial year 2021.

How are each of its business faring? How does Paytm earn its revenue? Where are its biggest expenses?

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The One97 Communications draft red herring prospectus provides us some insights but also stops short of providing all the answers. This, as, the company has moved away from four reportable segments — payments, commerce, cloud and others — to a single segment.

“It has been assessed that group operates in a single operating as well as reportable segment. The segment reporting for years ended March 31, 2020 and March 31, 2019 has also been restated for this change in segment reporting,” the DRHP said. The group, it said, does not allocate operating costs and expenses, assets and liabilities across business units.

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Over the last three years, a much larger share of One97 Communications’ revenue is coming from payment services. In FY21, payment services contributed three-fourths to revenue from operations compared to just over two years ago.

In FY21, revenue from payment services stood at Rs 2,109.2 crore, a 10.6% increase over a year ago. Between FY19 and FY21, revenue from payment services has risen about 24%.

The prospectus doesn’t provide a break-up of the economics across different products, except to say that it generates higher fees from the use of certain payment instruments compared to others. “For example, we do not charge any fees for certain transactions through Rupay debit cards and UPI to comply with prescribed merchant discount rates,” it said.

The share of payments in the overall pie has risen also because revenue from commerce and cloud services is down sharply.

Revenue from this segment fell to Rs 693.2 crore in FY21, a drop of 38%. Over a two-year period, revenue from this segment has halved.

On balance, the company’s revenue from operations fell 14.5%.

The company’s expenses are still driven heavily by payment processing charges that have to be paid to banks and card networks.

These charges cost the company Rs 1,916.8 crore in FY21, down 15% year-on-year. The prospectus said the decline is because the company has been able to negotiate better rates.

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Marketing and promotional expenses remain the other big drag, although this has reduced significantly over the last few years.

These spends stood at Rs 532.5 crore in FY21, down 62% compared to a year ago. Compared to FY19, marketing and promotional spends are down 84%.

“As we have expanded our offerings, we have been able to increase consumer engagement and grow our consumer base with lower costs. We intend to continue being efficient with our customer acquisition and retention costs,” the DRHP said.

Marketing and promotional expenses as a percentage of revenue are down to 19% in FY21.

Since the company has said it does not allocate operating costs and expenses, assets and liabilities across business units, what it eventually provides is contribution profit and contribution profit margin across its overall business.

Contribution profit is calculated as revenue from operations less variable costs, such as payment processing charges and marketing/promotional expenses. Contribution margin is the percentage margin derived by dividing contribution profit by revenue from operations.

By this metric, the company saw positive contribution profit in FY21.

Going by more traditional measure, Ebitda and Ebitda margin for the company remain negative.

“We expect to continue to incur net losses for the foreseeable future and we may not achieve or maintain profitability in the future,” the prospectus said.

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