Is Paytm A $20 Billion Company?

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Berkshire Hathaway recently invested in India’s largest digital payments company, Paytm (owned by One97 Communications), valuing it at around $10-$12 billion. Paytm generates its revenues primarily through its payment wallet services (including bill payments and mobile recharge) and its mobile-only marketplace known as Paytm Mall. Paytm Mall was spun off by One97 communications in 2016 and is owned by a separate legal entity. In the last two years, One97 Communications has seen significant revenue, user and transaction growth – driven partly by government policies in India to promote digital payments and through its expansion efforts.

Our interactive dashboard on Estimating The Valuation of One97 Communications analyzes the key valuation drivers for the company and allows you to arrive at your own estimates of the company’s revenue and valuation multiple to quantify any further upside in its valuation.

Increase In Number And Value Of Transactions Is Driving Strong Revenue Growth

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Paytm has witnessed strong growth in the number of transactions in the last two years. With more than 150% growth in transactions between April 2017 and March 2018, the company is now aiming to double its transactions over the next fiscal year (ending March 2019). This growth can be partly attributed to government policies in India promoting digital payments, as well as Paytm’s efforts to bring a wide range of payments such as traffic fines and highway tolls on its platform. The company increased the number of merchants on its platform from 1 million in the beginning of 2017 to 7 million by March 2018, and also launched its mobile app in multiple languages, appealing to the diverse population in India – consequently driving growth. The value of transactions on its platform has also increased by more than 50%. The factors have contributed towards the company’s strong revenue growth.

We expect strong revenue growth to continue over the next few years as One97 focuses on expansion and improving its platform. The company is likely to generate a gross transaction volume (GTV) of $50 billion in 2019 based on its half-year numbers. This is more than double its GTV in 2018.

Further, the digital payments economy is set for a very high growth in India, and is likely to reach $1 trillion by 2023 from $200 billion in 2018. However, with Google and WhatsApp launching a payments platform in India, Paytm is likely to face strong competition going forward. Google Payments in India has seen 750 million transactions since its launch in late 2017, and WhatsApp boasts a user base of more than 200 million active users in India. Both these players are likely to emerge as strong competitors for Paytm – which currently has a lead with 300 million registered users and 120 million monthly active users of its in-app messaging service.

Based on these growth parameters and Paytm’s internal goal to double the transactions on its platform, we forecast a base scenario of 100% revenue growth for Paytm for fiscal year 2019 and an aggressive growth scenario of 200% growth. You can modify this number by clicking on the blue dot here.

Losses Reduce As Expenses Fall

Paytm’s losses as a % of revenue have declined over the years, as the company’s expenses on advertising and promotion decline and it enjoys operating leverage. Falling expenses indicate that the company is on a path towards profitability; however, as it targets significant growth in the next few years, the company is unlikely to focus on profitability in the near term.

Strong Growth Prospects Can Lead To Significant Upside In Valuation

Based on One 97’s revenues for 2018 and its valuation based on its latest funding round, the company commands a revenue multiple of 25x. Our base case scenario assumes that Paytm’s multiple will decline to 20x in 2019 as the company achieves some of its growth milestones and future growth slows down. Based on our base case, Paytm’s valuation could reach about $20 billion.

However, given that the industry and region in which the company is operating is in a high-growth stage, if Paytm is able to stay ahead of competitors and maintain its growth momentum, it could maintain its relatively high revenue multiple. You can modify any of our assumptions and estimates for Paytm and gauge the impact of changes on One97’s valuation.

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