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Profitability insight from Indigo & Paytm 💸
Quality of revenue >> volume of revenue.
Welcome to the 185th edition of the GrowthX Newsletter. Every Tuesday & Thursday I write a piece on startups & business growth. Today’s piece is going to 94,400+ operators & leaders from startups like Google, Stripe, Swiggy, Razorpay, CRED & more
Indigo made ₹762 Cr selling food & beverage business last year. Interestingly, it has a 70% margin on the food business. This will also happen to every single UPI player including Paytm. Here's the future👇🏼
The food analogy is the core to understanding how ₹10,000 Cr revenue companies can/ will/ should be built for the "Bharat" Janta. And the Indigo example shows. Of the ₹54,000 Cr, it made last year 13% was EBITDA → that's almost ₹7,000 Cr. Of the overall profits, the 70% profit margin from food & beverage contributed significantly.
Why should we care about this number?
Because that's the game Paytm is playing.
Let's segment UPI into 8 categories.
→ UPI (Peer to Peer/ Peer to merchant)
→ Lending (loans/ credit cards)
→ Payment gateways
→ Insurance (Life/ Medical/ Motor)
→ Travel (Bus/ Train/ Hotels/ Flights)
→ Investments (Stocks + Gold)
→ Events (Movie/ Concerts)
What is Paytm’s pathway to profitability?
First/ UPI (P2P/P2M) 💰
It makes no money for UPI apps even though the volume and # of transactions have massively grown over the years. They make only a portion of money from merchants using say Paytm payment gateways. But the margins are razor thin - similar to Indigo's margins on its core flight ticket sales business.
Second/ Lending ✨
Paytm disbursed ₹12,554 Cr loans in FY23. Assume a net interest margin (difference between interest generated from lending & interest paid) is close to 3 to 5% of the disbursed loan (upfront ~2.5% to 3.5% + 0.5% to 1.5% at collection), netting a margin of ~₹380 Cr. Please note, that Paytm Postpaid, Personal Loans & merchant loans are added to the bottom line.
Third/ Payment gateways 🛒
This vertical is extremely new at Paytm. It still made ₹1197 Cr from payment services in Q3'23 & netted ₹459 Cr in margins. Mind-bending Dhanda. This could be their version of Indigo's F&B.
Fourth/ Insurance 🚙
It has at least 12 million insurance policies (could not get updated 2023 data, found some data in their IPO filing) - a tiny start in a market where insurance penetration is way less than the global average. Plus 2-wheeler insurance is huge for Paytm.
Fifth/ Travel + Investments + Events 💸
Paytm is the 2nd biggest movie ticketing player after BookMyShow. Overall in commerce (travel+movie+gift vouchers), it made ~₹600 Cr net revenue on a base of ~₹10,000 Cr in the last 12 months.
Enter, the tailwind of UPI on credit 💣
Offering credit with RuPay cards on Paytm is the next step for capturing margins through its lending and payment Gateway business. In the next 3/4 years, these 2 will contribute > 50% of Paytm's net profits.
What does the future of Paytm look like?
Business models are more than just solving user problems. Certain dynamics can create walled gardens - like PVR not allowing outside food in Cinema Halls. What Paytm or Indigo is building is a walled garden.
Their future cashflows & profits will be decided by how well they can keep users within the walled garden using product hooks, use cases, regulation or even killing competition (ouch!)
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