Decoding Paytm ‘Blockbuster Loss Show’ in FY19

Media and analysts over the years have given a special place to Unicorns - startups which are valued over $1 billion. Often they hog the limelight for their growth, fundraises, branding and their impact on people and the economy. Vijay Shekhar Sharma led Paytm has a special place even among Unicorns, thanks to its valuations, investors and now, it seems, the sheer size of losses too.

Paytm’s losses make for particularly interesting reading as the company is into its 5th-year post-expansion into the wallets space effectively, and rather than showing any signs of moderation as one would expect, losses have only spiked. In fact, in a template that could be called unique to some Unicorns, every new loss-making expansion has only led to further outreach in ever new areas making the evaluation of the business both complicated and in some ways, opaque for ordinary analysts. 

So, you might be thinking what the story of the losses we are speaking about is? While most of the companies, including Paytm are yet to file their AOC-4 with MCA, the SoftBank-backed firm had shared its annual report with shareholders.

Entrackr has access to the report and we are decoding and simplifying it for you to understand Paytm’s financial performance in FY19. The company reported a net loss of Rs 4,217.20 crore in FY19, a surge of almost 163% as compared to the previous fiscal.

Unlike losses, the operational revenue recorded a mere 5.8% growth to reach Rs 3232.01 crore in FY19. Expenses, on the other hand, witnessed a 59% increase, amounting to Rs 7,730 crore in FY19 as compared to Rs 4,864.5 crore in FY18.

For any firm, not to mention mythical Unicorns, these numbers should ideally be reversed, with growth at a high level and losses dropping sharply. But not for Paytm, it seems. 

So we did a deep dive into just what these losses are made of. As it turns out, there is no place to hide behind the usual culprits like amortisation of goodwill or other such items. These are real expenses that are burying the balance sheet in red. 

To understand it better, you can look at the pie chart below.

Paytm had spent almost half of its total expenditure on customer acquisition (Rs 3,507.88 crore). So, this essentially means that the firm had spent Rs 275.88 crore more on customer acquisition than its total operational revenue - Rs 3,232 crore. 

Breaking down customer acquisition expenses further, the firm had spent Rs 2,832 crore on marketing alone while shelling out Rs 619.29 crore on advertisements. Notably, both of these expenses grew by roughly 50% and 87% respectively. 

Readers will recall headline numbers like the Rs 326 crore Paytm has promised to shell out for title sponsorship of the Indian cricket team for the 2019-23 period. A sponsorship it started in 2015, at a price of Rs 203 crore. A generous 60% incremental raise for Indian cricket at least. 

Payment gateway expenses increased by 87.12% in FY19. While it suggests that the volume of transactions had grown significantly, the company still lost Rs 2615.34 crore in its payment segment. It could be the impact of incurring MDR cost by Paytm on customer’s behalf as the firm bears the cost whenever you recharge wallet or transact using Paytm Payments Bank. 

A cost the firm’s founder Sharma has repeatedly promised to bear for the foreseeable future, if not forever. 

All right. What else?

Paytm has four main verticals - payments, commerce, cloud and others (vaguely described as businesses of the group including wealth management). How do they fare up financially? See the below infographic.

The Payment vertical had accounted for the biggest loss for Paytm. The firm lost about Rs 2,615 crore while revenue from the vertical stood at Rs 1,756 crore. Last fiscal, the firm posted a loss of Rs 1,213 crore with a revenue of Rs 988 crore for the same segment.

It’s worth noting that losses incurred by Paytm in commerce section have nothing to do with Paytm Mall. The total loss of Rs 1,687 crore was recorded by the firm in the course of providing services such as movie ticketing, selling travel deals and the provision of advertisement, brand promotions and technical support.

The commerce vertical's losses shot up to 3.3X to Rs 1687.22 crore, and revenue decreased by 37% to Rs 1130 crore in FY19 as compared to FY18. It’s quite bizarre that the company spent more to earn less in the last fiscal.

Cloud vertical had posted a profit of Rs 14 crore in FY19. However, its profit decreased by a whopping 68%. 

Coming back to total revenue made by the company in FY19, Paytm had a revenue of Rs 3,232 crore. If we look cautiously - the operational revenue is likely to include royalty and custom access fees paid by associate companies including Paytm Mall to its parent One97 Communications. 

Last year, Paytm had received about Rs 705 crore as royalty and customer access fees from Paytm Mall. We don’t know how much Paytm had received from Mall and other associate companies in the form of customer access fees and the firm has declined to share details about the royalty component included in operational revenue.

The trend of making losses is evident throughout the group as most of Paytm’s 27 subsidiaries have registered declines in FY19. For instance, Little which was acquired by the company in 2017 for around $30 million, registered losses of Rs 85.88 crore in last fiscal.

Similarly, Nearbuy and Paytm Money also recorded losses of Rs 50.9 crore and Rs 36.85 crore respectively. 

Conclusion  

Ultimately, the question arises - how healthy are Paytm’s financials? Well, these figures don't look promising at all, considering any conventional measures of assessing any business’s health. 

The company seems to be chasing scale at any cost, but for how long? The short answer: Till its backers continue to believe in its vision and fund that vision. 

Its net operating cash outflow for the year stood at Rs 4,495.63 crore. Further, the fact that the company spent more on customer acquisition than its total operating revenues in FY19 is quite fascinating.

The Sharma-led company is bleeding money and looks nowhere close to achieving break-even in the next two-three fiscals. Interestingly, if we factor in the negative operating cash flow and the wide gap between the growth of revenue and expenses, chances of Paytm IPO in the coming years look as likely as the company explaining the Sonia Dhawan saga to the world.  

Unless Sharma, who has a stated aim to go public in the next 24 months, has some more surprises up his sleeve. One reason why the market is looking to see the truth of rumours of a keen interest in beleaguered Yes Bank, which after all, showed a loss of ‘only‘ Rs 1507 crore for its last quarter, and that too for the first time since its launch. 

Interestingly, Paytm Payments Bank, Sharma’s foray into the small banking space, faces the same prospects of a tough business model, with many other entrants in the space either surrendering their licenses or pleading for a change in conditions. Though, for now, its profits on a small base must be a cause for immense relief for Sharma. 

In simple terms, Paytm loses money every time you use it. It lost more money in acquiring customers than it made from all users put together. After doing all that, it still finds itself relegated to third place behind Google Pay and PhonePe in the race to become the preferred UPI app for the country. 

Moreover, this is before WhatsApp's entry in the Indian market, which has 400 million-plus users in the country. One thing is for sure - just to protect its position in the market today, or stand where it is, Paytm might need to find a better way to do business. And when it finds that, it might just look back with regret on the many billions of rupees it took, to find the new survival mantra. 

Because, quite frankly, no self-respecting accountant will predict the term ‘profit’ with its books anytime soon.