The Paytm Saga
Smooth Seas Do Not Make Skillful Sailors! - African Proverb
If you want to create serious wealth from equity markets, then volatility should be your friend. Because the very nature of equities is volatile. Just like how strawberry ice cream is cold, equity markets are unpredictable.
The very acceptance of this fact makes our investment journey easier. We are then able to see opportunities in the middle of a storm.
One such storm hit Paytm in January 2024. RBI moved to withdraw the license of its Payments Bank arm. At the start, there were no explanations offered and everyone was left to cook up their own stories.
I remember traveling to a remote part of Maharashtra and a 24-year-old boy told me that Paytm as a business is now gone. Such a comment came as a surprise. If you take out the internet revolution of Jio from India, these children wouldn’t have known what’s happening in the world.
When I looked it from another angle, I could see how Paytm had managed to penetrate in the rural parts of India. Today, everyone says Paytm karo, even when they are using Phone Pe or Google Pay. When your company becomes a verb, you have arrived.
Market Share of UPI Payments in India
(source: wikipedia)
The reason we see Paytm on the 3rd spot is because the company was looking to become a bank. That gave PhonePe, a massive headway in UPI category. Since there is hardly any money to be made in UPI, Banks decided to stay away. So practically, there is limited competition in this space.
Little Background on Paytm
Paytm was launched in August 2010. Back in the day when we used to carry heavy Blackberries and Nokia phones, having an app that stored money was a new concept to most of us.
Back then I was just about to complete my graduation and hence I was learning to use Debit / Credit cards and sometimes NetBanking for some transactions too. Internet was slow and there were some trust issues while making online payments.
The company then slowly went out to build a digital ecosystem of sorts. We could book our tickets or do some shopping via its App. Slowly, we could automate our monthly payments for utilities too.
Paytm was getting woven into our lives. We were still not using it completely. Demonetization did have some effect but then we were still using cash for our small transactions.
Then came UPI. In no time, money could be transferred. But some ideas need an external push. Covid-19 was when we witnessed the power of small online payments. Because now we couldn’t withdraw cash or even move outside. Everyone started accepting online payments.
Now, we are not able to think about a world without UPI. Carrying money has become so easy. Even if you are running short of cash, the product or service provider tends to accept cash for even Rs 10.
Do this – take a domestic vacation and make every payment via UPI.
As an investor, this will give you a fair idea of what’s changed. In years to come, there will be a research note that will talk about India’s reduced Gold import bills because of UPI and companies such as PhonePe, Paytm etc that worked super hard to bring this idea to life.
Valuations
Despite all the good things, the company did command extremely high valuations. Retail investors need to now understand how a venture capital firm or private equity players operate.
Any company that has come to the IPO stage through series of fundraising has its fiduciary duty towards its current investors (and rightly so!). These investors trusted the Founder from the stage where there was no business (just at the idea stage) and trusted him and stuck with him through the earthquakes and tsunamis the business faced growing up.
Hence, they create this ‘once in a lifetime opportunity story’ for any business they would like to exit and then command extremely high valuations. Somehow even brokers and television media tend to justify all this. It’s sheer craziness.
Because of this, the idea was to stay on the sidelines and watch the business closely. Let everyone exit the business and there will be enough space for domestic institutional investors and retail investors to come in. So, patience was exercised.
Yet, when the recent bad news occurred, we reached out to you saying that this is a good business to put your money in. Although we didn’t take a large bet in it because the risk was too high, we thought of staggering the position (ie. buying at every interval).
Our only thesis was that Paytm is now a systemically important business. You cannot eliminate it overnight. Yes, they have not followed the rules and for that the stock price has received its punishment. But its not end of the road for the company.
Operating Metrics
The company has close to 10 crore people transacting on the App every month and this number is increasing slowly. There are close to 1 crore merchant soundboxes in the market, of which 85 lakhs have been deployed by Paytm.
It’s lending business has been growing sustainably as well. Around 1 crore loans worth Rs 11,000 crores have already been disbursed. It is the fastest growing category. Now with the third-party lenders such Axis Bank, HDFC Bank, etc this business will boom too.
We will cover more metrics in our next leg of communication with you because the idea behind this document is to give you a brief about the high-level thinking that went behind taking the investment decision.
Conclusion
In a nutshell, the operating business of the company is stable. Yes, there has been a massive setback, but the founder Mr Vijay Sharma is capable of turning this around. Now with reasonable valuations and a clear outlook into the future, we find comfort in the business.
Disclaimer: Indigenous Investors is a part of Zaveri Savla Consultants LLP. Our promoter Mr Siddharth Zaveri is a SEBI Registered Research Analyst.