One97 Communications Ltd., set to launch what may become India's biggest-ever initial public offering, may invest more in its lending and wealth management operations to counter the thin margins in its main business of online payments, analysts say.
The debut is widely anticipated as One97 operates Paytm, India's biggest online payments platform, and is 38% owned by Chinese fintech giants Alibaba Group Holding Ltd. and its affiliate Ant Group Co. Ltd.
Investors are zooming in on the company's business model as online payments are rising exponentially in India, but the business itself is hardly lucrative for operators. A growing share of online payments in the country are done via a unified payments interface operated by the National Payments Corp. of India and backed by the central bank, which helps users avoid paying merchant fees.
"Payment revenues for Indian [financial technology companies] represent a miniscule proportion of their transaction values," said Sampath Sharma Nariyanuri, fintech analyst at S&P Global Market Intelligence.
After deducting handling charges, most fintechs are, at best, breaking even at the transaction level, Nariyanuri said. "Therefore, success for fintechs like Paytm will largely hinge on their ability to rapidly expand adjacent financial services such as lending, insurance and wealth management products."
One97 plans to raise 166 billion rupees, or $2.23 billion, from the IPO, according to its draft prospectus filed on July 15. If successful, it will dwarf state-run miner Coal India Ltd.'s share sale that raised 154.75 billion rupees in 2010, the biggest Indian IPO on record. One97 may launch its IPO in October, around the Diwali festival, according to local media reports.
As of March 31, One97 served 333 million consumers and over 21.1 million merchants via its payment, commerce and cloud services.
Paytm conducts its financial services businesses through partnerships with traditional institutions. On Aug. 23, it announced a deal with HDFC Bank Ltd. under which India's biggest private-sector lender will encourage its merchant partners to use Paytm's point of sales payment system.
One97 also has an e-commerce platform, Paytm Mall, which faces competition from well-funded players such as Amazon.com Inc., Walmart Inc.-backed Flipkart Internet Private Limited and Reliance Retail Ventures Ltd., which is owned by Reliance Industries Ltd., India's biggest company by market capitalization.
In its main business, Paytm faces competition from Alphabet Inc.'s Google Pay, Amazon Pay, and PhonePe Private Ltd.
"All payment companies, not just Paytm, need to look for alternate revenue channels like financial services," said Pranav Bhavsar, founder & head of research at India-based independent investment firm ASA Capital Management. "Paytm's biggest strength is its brand and its user base."
Since its launch in 2010, Paytm has become a household name in India, facilitating even the smallest payments via smartphones. From vendors selling vegetables laid out on tarpaulin sheets by the roadside to cab drivers, Paytm has become synonymous with online payment transactions. Its rise coincided with the surge in smartphones in India, where apps in local languages and easy-to-understand symbols has allowed even those who can't read and write to adopt mobile phone technology, leapfrogging desktop computers.
One97 does not disclose the revenue breakdown between its payments and financial services businesses. It said in its draft prospectus that payments and financial services accounted for 75.3% of total revenue of 21 billion rupees in the fiscal year that ended March 31, growing from just over 50% two years ago.
Revenue from commerce and cloud services, its second-biggest segment, decreased by 38% to 6.9 billion rupees as customers cut spending on travel, movies and events due to the pandemic, it said.
For Paytm, "payment [and] financial services are on the rise while commerce and cloud are on the decline," said Abhishek Shindadkar, an analyst with India-based financial firm InCred Capital.
The Indian market is underserved for payments and financial services products, a segment One97 expects to grow, according to the prospectus. The company plans to use 43 billion rupees from the IPO proceeds to grow the Paytm ecosystem. Another 20 billion rupees will be for new business initiatives, acquisitions and strategic partnerships, according to the company's draft prospectus filed on July 15. The remainder will be used for general corporate purposes.
A spokesperson declined to comment on plans to grow the company's financial services businesses.
"They've built a really strong, large customer base on payments side, so people use e-wallets for bill payments, recharges and more," said Patrick Stokvis, vice president at research company Third Bridge. The company has historically focused on smaller merchants in major cities in order to increase its customer base, although they may pivot towards acquiring larger merchants on their road to profitability, Stokvis said.
Red hot IPO market
India has seen a flurry of consumer tech companies listings in 2021 with relatively high valuations. Investor focus has shifted to India as China's crackdown on technology firms ranging from fintech to education has spooked investors.
Food delivery platform Zomato Ltd. raised 93.75 billion Indian rupees in the country's biggest IPO this year. Oyo Hotels and Homes Pvt Ltd., ride hailing app OLA Fleet Technologies Pvt. Ltd. and Pine Labs Private Ltd. are among other startups looking to tap investor interest in initial share sales in India. Local media reports have also listed Flipkart and education technology company Byju's K3 Education Private Ltd. as IPO prospects. The amount of funds raised in IPOs has already touched $6.3 billion this year, crossing the total in each of the last three years, according to S&P Capital IQ Pro data.
As of August 24, US$1 was equivalent to 74.14 Indian rupees.