Is there light at the end of the tunnel for Paytm?

There are indications in the last two quarters that the business is doing well. The company posted operating profit in the third quarter of fiscal 2023, three quarters ahead of its own guidance. As SnapView wrote earlier, This was followed by excellent results for the fourth quarter of FY23, which shows that it can become free-cash-flow positive in the near future as it intends to.

Operating profit – or earnings before interest, taxes, depreciation and amortization (EBITDA) – is calculated by subtracting operating expenses from revenue, ignoring interest payments on debt (a negligible 7 crores) and depreciation of the asset ( 160 crores). In case of Paytm, we also need to exclude Employee Stock Options (Esops), which are huge 363 crore one quarter.

In Q4 FY23, the company reported Ebitda of 234 crores on an operating revenue of 2,334 crores. this is a big improvement from Reported on revenue of 31 crore EBITDA 2,062 crore in Q3 FY23. After Esops and depreciation, there was a net loss of 168 crore which is much less than the loss of Rs. 392 cr reported in Q3.

One reason for the huge volatility in the share price is that Paytm is in several new areas of business that investors cannot value with any great accuracy. But all of its core business lines are doing well, and it’s taken us a long time to understand how it makes money.

Paytm connects customers with merchants and while it doesn’t make much money directly from its intermediary role, it builds relationships with individual consumers and businesses at the retail level. Those relationships and the data that come with them translate into an understanding of who is creditworthy and what they need, which means it can facilitate smaller loans. Money is loaned by someone else, but Paytm takes commission.

Plus, it has revenue streams from things like renting soundboxes that confirm payment. It also operates as a payments bank, charges interest on cash held in digital wallets, issues co-branded credit cards with various banks, and provides digital security services to businesses.

Paytm divides its business into segments such as ‘payments and financial services’ and ‘commerce and cloud services’. The former includes payment services and financial services (including loans) for consumers and merchants. ‘Commerce and Cloud Services’ includes ticketing, credit card transactions and cloud services for businesses.

In the last financial year, the revenue of payments and financial services increased by 66% 6,385 crore while cloud and computing services revenue grew by 38%. 1,520 crores. Loan and credit facility increased by 252% 1,540 crores. Paytm levies a tax of around 5% on the loans it offers. It has rented out nearly 6.8 million payment-confirmation soundboxes to merchants 100 a month. It has 28,479 sales staff (many of whom are temporary workers).

Paytm’s understanding of the data it captures has helped it turn small loans into a big business. Traditional financial service providers (Paytm works with at least six of these) don’t have this data and without it it would be too expensive for them to try and judge credit, so they’re happy to work through Paytm. Are. Similarly, the company can help issue credit cards to individuals who would be too far down the financial ladder for traditional financial businesses to bother with.

Due to its first-mover advantage, Paytm has a large market share in sectors that are inherently monopolistic. For example, it has added to the digital wallet segment. Everyone needs a digital wallet but few need two. You get zero interest on the cash you keep, but Paytm earns interest on it by depositing it in the bank. Similarly, merchants appreciate an Internet-enabled soundbox that confirms payments instantly, but they don’t need two such devices.

Fintech is a highly competitive business with very low margins. Having a headstart and a large warchest (thanks to its IPO) gives Paytm an edge. The company targets ambitious levels of penetration, such as 500 million users (it currently has around 90 million active monthly users) and 100 million merchants (it currently has 34 million). This would essentially require taking over 80% of current smartphone users.

The founder says he is interested in Artificial General Intelligence (AGI), which he sees becoming a part of everyday life. This is definitely an uncharted territory, but it will be interesting to see what Paytm intends to do in this area.