Chart Fun | What’s With PayTM’s Valuation?
When the unstoppable force of a Story meets the immovable object of Plausibility.
We yearn for the warm cloak of certainty, in a windswept world of imperfect information and unknowable futures.
Scratch the optically alluring surface of most stories, and one enters a labyrinthine world of Plausibility Hoops. Where the observer is forced to pause and test the plausibility of the key assumptions underpinning each story line.
This piece looks at India’s most valuable start-up: PayTM.
…and the various Plausibility Hoops that the story needs to conquer in order to emerge victorious on the other side (read: 1) survival, 2) long-term value creation).
Disclaimer: We had no access to either the company managements, or internal numbers. Publicly available sources and a liberal dose of Fermi Questions were used to parse the company through the prisms of valuation and narratives.
PayTM is a well-known Indian e-commerce payment system and financial technology company. It has been a poster boy of the new wave of Indian technology start-ups. One97 Communications, which operates PayTM, has raised more than $3 Bn to date. In its last round in Nov’19, the company hit a valuation of $16 Bn.
What’s the story line driving investor interest?
STORY 1: PAYTM AS A PURE PLAY PAYMENTS COMPANY
In this world, PayTM’s primary revenue stream will be driven by its mobile wallets, and P2P/P2M payments gateway business. These are mounted over India’s Unified Payments Interface (UPI) rails infrastructure. Transaction processing fees are in the 2–3% range in the US. In India, by contrast, many UPI payments for services are processed at near-zero or very low take rates, constraining the revenue line. Significant consumer surplus is mirrored by a producer deficit.
To understand the landscape that greets PayTM, a closer look at the Indian Payments space, with a specific focus on UPI, is in order.
India’s UPI — started in 2016 — has grown from 0 to a transaction value of $370 Bn in 4 years. UPI accounts for a little under 20% of all India financial transactions by value.
Low processing fees is partly responsible for this stupendous growth. Since US-like transaction processing fees are a stretch in India, the current total revenue pool is estimated using a 1% overall take-rate. For a granular look at the competitive landscape, the top 5 players (source: link) are listed in order of market share. The Top 5 account for 96% of UPI volumes. Transaction value estimate for each player is derived from the last publicly available share of transaction volume.
PayTM’s (highlighted) revenue guesstimate is $400 MM.
PayTM’s last publicly available financials peg revenues around $500 MM. The company has been loss-making at the operating level, as it has been in growth mode.
We now move deeper into assumptions-land.
- Assume India’s UPI transaction volume grows at 30% CAGR over the next decade. (somewhat likely)
- Assume no change in Average Transaction Value ($23 currently) in a decade. (coin toss)
- Assume no change in the current market shares of Top 5 players in a decade. (stretch)
Given the nascent stages of adoption and headroom for growth, (1) seems somewhat likely. (2) is a coin toss; ATV has been around current levels in recent years. (3) is a stretch. If one includes Samsung Pay, Facebook (WhatsApp Pay), and Jio Pay, competitive intensity is only likely to increase in this space.
But we’ll stick with these for now.
With these assumptions, India UPI Transaction Value a decade from today will exceed $5 Trillion. If UPI’s share of total volume increases to 50% from today’s 18% (assumptions!), India financial transaction value is slated to reach $10 Trillion in a decade; 5x from today’s levels.
Total value of non-cash payments stood at nearly $100 Trillion in the US, 4.5x GDP. Corresponding figures for China is ~1.5x, while India currently stands at 0.75x. At 8% GDP growth over the next decade (more assumptions), India’s payments value-to-GDP multiple would be 1.7x. Resembling China today.
The potential Revenue pool a decade ahead is also laid out in the table. At different take-rate assumptions. Take-rates are likely to trend down with time; particularly in India. The government is likely to lean in on maximizing consumer surplus as an incentive to drive cashless adoption.
Let’s stick with 1% take-rate (no change in a decade) for the moment.
PayTM’s potential revenue pool in this world is $5 Bn.
Turning next to investor pricing behavior.
What does PayTM need to do to grow into its last valuation of $16 Bn?
Left panel depicts range of fair values for PayTM.
Right panel depicts fair value range under specified operating metrics.
To grow into its last round valuation, PayTM needs to deliver revenues exceeding $11 Bn and profits of ~$3.5 Bn in a decade.
This implies a CAGR of 37%; margins of 30%; and ROIC exceeding 65%.
Addressing each imputed assumption in turn:
GROWTH: Imputed growth for PayTM has been achieved by less than 5% of listed Indian companies over the past two decades. This growth needs to be delivered in an environment of high competitive intensity in a country that is leaning towards maximizing consumer surplus in payments. The $5 Bn potential revenue for PayTM implied in the table would fall short of the imputed revenue.
PROFITABILITY: PayTM would need to extract FAAM-like (Facebook, Apple, Alphabet, Microsoft), or Chinese Big Tech-like (Tencent, Alibaba) margins.
ROIC: PayTM needs to deliver capital efficiency that is higher than FAAM & Chinese Big Tech average.
In our discourse so far, no mention has been made on profits & cash flows. Considering the ecosystem build out costs that are being borne by the players, and the competitive intensity, profits have not featured much in the narrative.
PayTM has an approximately 1-in-20 shot at delivering the expected growth. And it needs to achieve this while extracting a level of profitability & capital efficiency that is beyond the reaches of even the most profitable technology/internet companies on the planet.
This triple-ask — if delivered —would still peg PayTM’s last round valuation in the 88th percentile of our fair value range.
Plausibility Hoops.
Are imputed assumptions cautiously optimistic?
Or, will valuation realign to reflect realities?
There is, possibly, another angle.
Perhaps an expanded story line is what investors are betting on…
STORY 2: PAYTM AS A ‘SUPER APP’
In this world, PayTM develops along the lines of Ant Financial (payments, banking, wealth management, financial services aggregation), Tencent (WeChat Pay, gaming, investment holding company), or a Yandex (Russia super app).
This shift in story line could open up the possibility of ‘future Total Addressable Markets (TAM)’, ‘market share disruption’, and other ‘geographical markets’ not visible today.
Since PayTM is not a social network + payments company, it is more likely to either tend towards credit aggregation (e.g. LendingTree), and/or jostle with India’s financial services, and/or the wealth management/distribution. Mining deeper into B2B payments (dominated by BillDesk, which is supposedly considering a sale) is another option. But the economics on B2B payment companies are significantly below those that PayTM would need to deliver to grow into its valuation.
Each of these forays have real implications on the firm’s profitability profile.
LendingTree is US’ largest online lending marketplace. It does $1 Bn in revenue and is valued at 4.5x revenue. Notably, though, its operating margins have halved over the past 5 years to single digits today. This would be a far cry from the 30%+ imputed margin profile for PayTM.
Indian financials and wealth management are 10–20% ROE businesses. The former is a leveraged regulatory beast, while the latter is cyclical, with scale conferring competitive advantages. Both businesses, while reasonably attractive, are a far cry from the super normal levels of capital efficiency imputed in PayTM’s valuation.
Perhaps, there is a third story.
Nobody cares.
The idea horizon seldom matches the investment horizon for most investors. Most investors are time constrained in terms of holding period. A quick flip is the path of least resistance.
Such incentives tend to push companies into a raise-to-burn-from-the-next-highest-bidder-or-sell cycle.
Which is a fine strategy.
Except for the last entrant to the party.
Or, if the Ferris wheel of market benevolence comes to a halt.
