India's Paytm is smaller, sturdier version of Ant

A worker adjusts a hoarding of Paytm, a digital payments firm, in Ahmedabad
A worker adjusts a hoarding of Paytm, a digital payments firm, in Ahmedabad, India, January 31, 2019. Picture taken January 31, 2019. REUTERS/Amit Dave - RC1C2463DEA0

MUMBAI, July 20 (Reuters Breakingviews) - India’s payments posterchild is a smaller, sturdier version of its top backer, Ant. Paytm filed on Friday to raise some $2.2 billion in what’s set to be the country’s largest initial public offering in rupees. The company founded by Vijay Shekhar Sharma is well placed to rapidly expand in financial services without running into the kind of rude regulatory shock that kyboshed the Chinese financial technology giant’s own IPO plans.

The prospectus confirms Paytm’s reach. It shot to prominence during a 2016 banknote ban and now serves 333 million consumers and 21 million merchants. Paytm allows users to send money to friends, settle bills, buy groceries, book tickets and open a bank account. They can also tap wealth management products and, through the company’s financial partners, borrow money. Paytm earns most of its revenue from charging fees and commissions to merchants.

Its net loss shrank an impressive 42% in the year to March even though operating revenue contracted over 10% as a pandemic-induced slowdown weighed on its commerce business. Paytm grew gross merchandise value of payments to merchants by a 33% compound annual growth rate in the past two full financial years despite slashing marketing and promotional expenses by a much higher percentage. Scale has helped reduce its payment processing bill, and more customers are using two or more of its services.

It’s a glimpse at a powerful network effect. Research firm Bernstein calculates Paytm has higher revenue for each of its monthly active users than competitors; rivals include Google’s G-Pay and Walmart’s (WMT.N) PhonePe, which have grabbed payments market share riding on India’s free-to-use government-backed digital infrastructure. Paytm offers a bigger range of products like e-wallets which are easier to monetise, and uses payments as a hook to sell higher fee-earning services.

Still, justifying its mooted $25 billion market value would require Paytm to trade at more than twice Visa (V.N) and Mastercard’s (MA.N) blended multiple of trailing sales. That looks rich, not least as it faces stiff competition. Next year it will be eligible to apply for a banking license that allows it to offer small-ticket loans off its own balance sheet. Ant ran into trouble because regulators woke up late to the risks in its credit business. Paytm, at least, is used to jumping through official hoops.

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- India’s Paytm on July 16 filed for an initial public offering that will aim to raise 166 billion rupees ($2.2 billion).

- Half of the shares to be sold will be new stock. The company intends to use those proceeds to grow its customer base, to fund acquisitions and for general corporate purposes. Affiliates of Ant, Alibaba and founder Vijay Shekhar Sharma are among those selling an undisclosed portion of their existing shares.

- Paytm offers payment services, financial services and commerce and cloud services. Some 333 million consumers are customers, as are over 21 million merchants.

- Morgan Stanley, Goldman Sachs and Axis Capital are joint global co-ordinators.

Editing by Antony Currie and Katrina Hamlin

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