🧐 Can Paytm Really Become Profitable by 2023?
Paytm has claimed it will become operationally profitable next year. But how close or far away from the truth is this statement?
Paytm.
For most of us folks this word is innocent enough, it's just a payments app.
But for folks who invested in the company's IPO, the word may be triggering.
After all, the company's share price is tanking every other day.
However, good times may be ahead for Paytm investors because the company claims it will become profitable (at least operationally profitable) by September 2023!
But how true is this statement?
📜 Paytm's Report Card
Let's analyse Paytm's Q2 23 performance to get an answer.
Paytm saw a massive growth in its loan business: The number of loans disbursed grew 224% year-on-year, while the loan amount increased by 482% to Rs. 7,313 crores.
Plus, it distributed 4.8 million devices across the country and has 80 million monthly transacting users. Impressive, right?
This massive growth in numbers is thanks to:
India's growing loan appetite
Paytm's focus on its payments and lending business.
You see, for much of Paytm's lifetime the company has been focused on too many things at once like:
Paytm Mall
Paytm Money (its wealth management arm)
Paytm First Games
And just like too many cooks spoil the broth, too many verticals spoil the chance of becoming profitable ( P. S. There's a lesson here in managing your life as well. Don't take on too many projects at once).
So, in 2020, right before its IPO, it decided that the lending and payments business would be its priority.
And that made sense because the payments business would bring in users and merchants to whom the company could then lend.
On top of this, the payments business also gives it additional revenue through:
Merchant Discount Rate charged on credit and debit card transactions made through Paytm's devices.
Rent on Paytm's Point of Sales machines and Soundboxes.
And Paytm's Soundboxes have given it a considerable edge over competitors. You see, back when online payments were a new thing a lot of people came up with fake apps that would show that a payment had been made. This caused huge losses to merchants who then didn't want to accept online payments. Paytm solved this with its Soundboxes which announce anytime a payment is actually made, helping merchants understand if someone is fooling them. And thanks to these boxes, Paytm gets the entire transaction history of a merchant even if payments are not made through its platform.
So, this business model has helped Paytm rapidly grow: Paytm app users and Soundboxes help acquire merchants, merchants help acquire lenders and Paytm gets a commission from it all.
But there are a few inherent challenges to this business which is what is stopping Paytm from becoming profitable. What are these challenges?
😥 Challenges to Paytm's Profitability
First and foremost is competition. Paytm is facing tough competition from not one but two Pes- BharatPe and PhonePe.
The BharatPe Challenge: BharatPe is giving Paytm competition in the lending space. This space is anyway super crowded but BharatPe is targeting the same kind of consumers as Paytm: merchants. It also has an advantage over Paytm: a Small Finance Bank licence, which means it can disburse loans on its own. Confused.
Currently Paytm doesn't act as a lender. It only acts as a matchmaker between lenders and customers. It identifies those in need of loans and recommends them to lending facilities. For this it earns a commission. But BharatPe has control over its entire lending business, which means it obviously earns more than Paytm even if it is disbursing lesser loans.
To overcome this challenge, Paytm will have to get a Small Finance Bank licence itself, something it has been working on. But this will bring in a whole new challenge: high employee costs. Focus on lending has already increased Paytm's employee cost from Rs. 1,185 crores in 2020-21 to Rs. 2,432 crores in 2021-22.
The PhonePe Challenge: PhonePe has taken a cue from Paytm's Soundboxes and launched similar machines. And it is renting them out for much cheaper, eating away Paytm's market share. This could seriously impact Paytm's revenue in the coming months and not just due to the loss of subscription revenue. Merchants with Soundboxes or PoS machines make up more than 75% of the value of loans disbursed.
So, profitability could be a distant dream.
But Goldman Sachs is more hopeful. It believes Paytm will be able to achieve profitability by 2023-24 because of the speed at which it has been cross-selling products.
It also highlighted that Paytm's EBITDA margin has improved a lot: from -51% to -16%.
But Macquarie, a brokerage house, believes that it will take Paytm 7-8 more years to become profitable.
Others have mixed opinions given that Paytm's revenue has been steadily rising in the last few quarters.
But will RBI's interest rate hikes put a pause in Paytm's rise? Or will it be able to achieve its goals?
⚡ In a line: Paytm is trying its best to become profitable but to achieve this goal it has to overcome a lot of challenges.
💡 Quick question: What steps can Paytm take to become profitable?
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Lovely read! Would be great if you could write a piece on the sound boxes too. It’s intriguing to know how they get data even when the payment is not made from their platform.