Explained: Paytm headed for India's biggest IPO this Diwali, how does it make money?

This Diwali, India's stock markets are likely to see an unprecedented turnout for one of the most anticipated public listings of the year. 

Financial services firm Paytm will look to raise $2.4 billion (approx. Rs 18,300 crore) from the markets on November 8- in what will be the biggest Initial Public Offerings, the country has seen putting behind the large listings of Coal India (Rs 15,475 crore IPO) and Reliance Power (Rs 11,700 crore IPO).

Paytm's anchor round has, as per sources, seen participation from large foreign institutional investors funds and is expected to raise nearly $1.1 billion. 

Paytm CEO, Vijay Shekhar Sharma earlier played down the hype surrounding the overvaluation of the company by saying that the management has sought to stick to the lower end of the valuation. 

Also Read: Paytm to raise $1.1 bn from anchor investors in the largest-ever IPO anchor round

An estimate of various brokerages suggests that Paytm's valuation during IPO ( nearly $20 billion) is 50x of its FY21 revenues, yet a majority of the financial advisors maintain a "SUBSCRIBE" rating to this issue.

While it is expected that Paytm's listing will garner huge interest as well as capital from markets, Business Today.In takes a look at how has the company been able to turn its fortunes and where does it make the money from?

At a press conference announcing its IPO, Paytm's boss Sharma had clarified that the company is not focusing on one of the most popular forms of digital payments- United Payments Interface ( UPI) which crossed $100 billion transactions value in October, surpassing 4 billion in volumes.

Sharma reiterated that UPI doesn't guarantee revenue/profits to Paytm and is ideally one of the strategies of the company for more customer acquisitions. 

UPI market is currently dominated by players like PhonePe, Google Pay commanding 80% of the market share. The payments regulator, the National Payments Corporation of India earlier this year capped the UPI transactions at 30% of the market share for each one of the platforms to avoid abuse of dominance by a single player. 

Further the government's directive of implementing Zero Merchant Discount rate (MDR) for payment channels has also minimised the revenue resources for the platforms.

Paytm, on the other hand, has transformed into a multitude of financial services, targeting not only Peer-to-Peer transactions through the existent UPI structure but also offerings like its payment bank, wallets, insurance, lending, buy now pay later, QR codes,  gaming and even commerce offerings - all on the same platform.

Also Read: Paytm IPO issue size at Rs 18,300 cr, to open on Nov 8; check out price band, bid details and more

Sharma had earlier stated that he built one service leveraging the existing one and that is clearly evident in the form of the company's customer acquisitions, GMV, even as the profitability still remains a concern.

Analysts tracking the company told BusinessToday.In that Sharma has envisaged building a financial services company with his UPI payment platform mainly as a means to acquire customers, Paytm bank account/wallet/Fastag/Food wallet offerings to retain those clients whereas its commerce and finance offerings provide high margins/profits.

On the payments front, the company's tie-ups with merchants/traders whom it provides a Point-of-sale device (PoS), soundbox etc. are based on subscription fees which contributes to its revenue.

The lending business through which the company has tied up with banks, non-banking financial service companies (NBFCs), targets the underpenetrated market especially for small-ticket loans and is a huge bet Sharma has placed. 

But digital lending will also see more competition in times to come with many players getting into it. However, Paytm has the advantage of leveraging its brand and existent user base.

The company charges commissions from the lending partners/insurance companies etc. as well as brokerage fees for its wealth tech offerings which will drive its revenue.

The commerce offerings including ticket bookings, mini-Apps, as well as Paytm stores also help channelise revenue by charging transaction fees from the merchant partners.

Last but the least, Paytm has also built upon its advertising revenues, again helping it monetise its services.

"The super-app battle is heading beyond just pushing marketing dollars for market share (PhonePe and Google Pay spend 2-3x revenue) as UPI market share caps kick in. What will matter is financial services monetisation including delivery of credit-on-app and building a financial services suite - for both in-store and online merchants," said a recent report by Bernstein analysts.