Challenges faced by One97 Communications (PayTM)

Globally, Fintechs have corrected sharply. The price to sales growth ratio (PSG) of Fintech companies is declined to 0.07x-0.35x globally. 

Challenges with the lending license: 

To gain scale and size, Fintechs need to go beyond distribution and lending for which they require licenses. With the RBI recently raising issues with PayTM payments bank and Chinese investors’ stake being more than 25% in the company, the probability of PayTM getting a banking license seems to be lower, which will stop its ability to lend. Given this, and competition from other Fintechs in the payments space, it will be difficult for PayTM to generate free cash flow for a longer period.

The regulations on digital payments and BNPL by RBI, stricter KYC, and compliance norms will not be favorable for the development of fintech companies in general, and will potentially bring down unit economics and growth, which will impede PayTM’s growth and profitability.

Valuations: 

The crucial challenge while valuing Fintechs or new-age companies is their negative earnings and Free Cash Flow (FCF). Hence multiples are based on sales numbers – the level of subjectivity here can be very high. Hence, multiples for such companies can correct very sharply. 

The company continues to gain market across payment verticals and there has been a steady improvement in contribution margins. Contribution profit is defined as revenue from operations less variable costs.

The management of the Company said that it has clarified that the RBI’s recent restrictions are on account of IT and KYC-related issues and not due to data access or localization concerns.