According to the Internet Trends 2017 report by Mary Meeker of Kleiner Perkins Caufield & Byers, the number of Internet users in India increased 28% to 355 million and internet penetration grew to 27% in 2016. About 80% of Internet usage is through mobile phones. A major beneficiary of this trend is leading wallet company and Billion Dollar Unicorn Paytm.

Paytm’s Journey

Paytm’s parent company One97 Communication was founded in 2000 by Delhi College of Engineering graduate Vijay Shekhar Sharma. The company was initially founded to offer live astrology services for a GSM operator in Delhi in 2001. Soon after, it launched SMS-based applications, gaming applications, and subscription-based content services. By 2010, Vijay had figured out the importance of mobile phones in the country and launched Paytm as an online recharge portal.

The website initially allowed subscribers to purchase pre-paid recharge cards for their mobile phones. Inspired by the initial success, Paytm started allowing customers to purchase recharges for Datacards and even tickets for the Delhi Metro. Within a year of its launch, the company was handling over 500 million subscribers on a daily basis. To leverage its user base, Paytm also launched Marketplace for online commerce and Wallet to become India’s biggest mobile payment service platform.

Today, Paytm has over 215 million users and 5 million merchants. It allows consumers to make payments for their mobile phone, electricity, gas and water bills, book bus tickets and movie tickets, pay admission fees for associated schools and colleges, book amusement park tickets, and even make purchases from its online marketplace.

Last month, the Paytm Payments Bank Ltd was launched. Following this, One 97 Communication transferred the Paytm wallet business and all the wallet accounts to the bank. Integrated into the Paytm app, Paytm Payments Bank will be India’s first bank with no charges for online transactions and minimum balance requirements. The limit of the account will be Rs 1 lakh. It will be charging Rs 100 annually for the debit card and will be offering 4% per annum interest. Currently, it is offering the service by invitation only. The bank cannot offer any loans or credit cards. 

Unlike other banking institutions, a payment bank is geared towards small savings and checking bank holders. The banks are focused mainly on payments and remittances to migrant workforces, low income households, small businesses, and other unorganized sector entities. Airtel Payments Bank Ltd and India Post Payments Bank Ltd are the only other payment banks in India.

Paytm’s Financials

Analysts estimate Paytm’s annual revenue to be Rs 576 crore ($90 million). It is estimated to have losses of roughly $200 million a year driven by its focus on cashbacks, discounts, and marketing.

For fiscal 2016, One97 Communications reported net loss of Rs 1,549 crore ($240 million). It had reported revenue of Rs 336 crore ($52 million) and a loss of Rs 372 crore ($57 million) in 2015. Revenue was Rs 210 crore ($32 million) on a profit of over Rs 5 crore ($800K) in 2014.

For the fiscal year 2017 ending March 31, Paytm reported that the number of transactions grew 3X to 1.5 billion driven by demonetization and the focus on digital payments. A majority of Paytm’s traffic – around 55% – comes from tier-2 and tier3 towns and 45% is from metro cities. Smaller cities like Durgapur and Sonipat have shown over 1000% growth in transactions. Gross Merchandize Value (GMV) in fiscal 2017 was around $5 billion. CEO Vijay Shekhar Sharma expects to hit 4 billion transactions next year.

One97 has been venture funded so far with $2.46 billion in investments from Alibaba’s ANT Financial, Intel Capital, SAIF Partners, Sapphire Ventures, Silicon Valley Bank, and SoftBank. In May 2017, Softbank invested $1.4 billion in Paytm at a valuation of $7 billion. In March 2017, One97 raised about $200 million in funding from Alibaba and Saif Partners for its de-merged e-commerce business, Paytm Ecommerce. In August 2016, One97 was valued at about $5 billion when it raised $60 million from MediaTek. An earlier round in 2015 for $550 million had valued One97 at $1.5 billion.

Paytm is now looking to consolidate the space. Last month, it signed a non-exclusive term sheet to acquire rival FreeCharge, which was acquired by Snapdeal in 2015 for about $400 million. However, with Snapdeal looking for an exit, the Freecharge acquisition is estimated at $45 million-$90 million.

Valuation Analysis

What Paytm has accomplished is extremely complicated, and its extraordinarily rich valuation is a testimony to that complexity. Also, it would be reasonable to assume that if Alibaba were to make a major acquisition in the Indian payments space, Paytm would be its most likely bet. The lack of competition in the space also makes the company positioned uniquely to leverage a very wide market penetration.

However, $7 billion valuation on $90 million revenue is exorbitant. The total amount of capital raised at $2.46 billion is also extremely high. You could argue it is justifiable. I would agree if in the next 12 months, the revenue starts to kick in gear to justify this level of capital raise and valuation. Going public with such wide losses would be very difficult, and valuation would get a dramatic haircut.

In the US market, privately held Stripe has a valuation of $9.2 billion while recently listed Square (NYSE: SQ), which is roughly four times bigger, is valued at $8 billion in the public market. Square is in a turnaround mode and is expecting revenues of $223-$226 million and EPS of $0.03-$0.05 in the current quarter. That points to ~$1 billion in annual revenue run rate. Valuation is 8x on revenue.

Clearly, in India a heavily loss-making entity with such high valuation is unlikely to be able to go public. In the US, it is possible, but the valuation, as we point out above, is likely to get downshifted dramatically.

Unless revenue and profitability starts to rationalize relatively soon, Alibaba will acquire the company at a much lower exit price. Depending on the liquidation preferences, especially of the May 2017 SoftBank investment, there would be some rather unhappy campers in the investor pool, may be even among the team members.

The company is extremely interesting, and if it could now focus on revenues and profitability, then the story would end well, giving India yet another much needed success story.