While Paytm’s aim for a $25-$30 billion valuation through its IPO has created a substantial buzz in the markets, "there's far more (or less) to Paytm than meets the eye," if one considers the company's business prospects, writes The Morning Context.
The structure: Previously all of Paytm's entities had been under One97 Communications, the primary legal entity.
- However, after 2016, a convoluted network of related-party transactions was formed among Paytm's three verticals - the digital wallet, payments, and financial services business; the payments bank business; and the e-commerce business, Paytm Mall - and its other subsidiaries and joint ventures.
Image Credit: The Morning Context
- This has made it challenging to assess the company's actual income and loss. Currently, One97 Communications is the holding entity of Paytm.
Revenue: One97’s many businesses are mostly small, and don't generate much cash flow for the parent. For example, in 2020-21, Paytm Money recorded a total income of Rs 12 crore and a loss of Rs 82 crore. Paytm's event ticketing business recorded an income of Rs 25 crore and a loss of Rs 25 crore.
- Even though Paytm's payment vertical has recorded Rs 187 crore of net revenue, the figure is not extraordinary and is quite typical of other payment processing companies.
Paytm Payment's Bank: While Paytm Payments Bank has been much celebrated in the market by regularly tuning in profits, more than 50% of its income actually comes from One97 Communications itself.
- Since all of One97's wallets business comes under Paytm Payments Bank, any revenue that One97 earns by letting the client use its digital wallet service is also recorded as income by the payments bank.
Paytm Mall: This has also been a loss-making entity. Unlike what's widely believed, One97’s commerce business is not just Paytm Mall, but also the company’s movie and ticketing businesses - which is "as good as done and dusted."
- Notably, One97 doesn't have any ownership of Paytm Mall, but still records revenue from "commerce and cloud services." This is because while Paytm E-Commerce's losses aren't recorded in the losses of One97's consolidated statements, the revenue One97 earns from the services it provides to the e-commerce platform is still accounted for.
Why the IPO: The Morning Context writes that going public is the only option for Paytm, since it has been unable to raise money through equity in recent times. Moreover, it has borrowed Rs 500 crore and a Rs 300 crore bank guarantee from ICICI Bank, in addition to a working capital facility of Rs 1,400 crore.
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