Paytm’s Vijay Shekhar Sharma has saved his seat, but his litmus test begins now


Indian Market
by 5paisa Research Team Last Updated: 2022-08-23T11:38:02+05:30

Vijay Shekhar Sharma has won his most recent battle. But his war is not over yet. The 44-year-old Sharma has managed to retain his position after coming close to being ousted as the chief executive officer at One97 Communications, the parent company of fintech major Paytm.

While he did face angry shareholders at Paytm’s first annual general meeting (AGM) since its listing, for now an overwhelming majority of them—99.67% to be precise—backed him to keep running the payments company.

This is despite Paytm’s much-hyped debut at the bourses bombing badly last year. Its shares are now trading 65% below the initial public offering (IPO) price, and are unlikely to recover the lost ground anytime soon.

Sharma has kept his job against all odds. The AGM has cleared his reappointment as Paytm’s MD and CEO for five years. He had been reappointed to the posts in May, drawing sharp criticism from proxy advisory firms.

All three India-based proxy advisory firms—Institutional Investor Advisory Services (IiAS), Stakeholders Empowerment Services (SES) and InGovern Research Services—had recommended that minority shareholders should vote for Sharma’s ouster as the chief executive officer.

Governance concerns

The advisory firms cited several reasons for opposing Sharma’s reappointment, although the steep drop in the share price wasn’t one of those.

InGovern said the main problem was that Sharma was not liable to retire by rotation as director. “As far as the share price performance is concerned, Paytm is not a unique case. All new-age companies have seen their stock prices tank from the highs,” said Shriram Subramanian, founder and managing director of InGovern.

“Also, most of them happen to be non-profitable. MFs and insurance companies are still trying to understand how and when these companies will turn profitable,” Subramanian said, per a report by Business Standard.

Indeed, like Paytm, shares of other new-age tech firms such as Zomato, PolicyBazaar and Nykaa are down sharply from their highs.

Meanwhile, SES objected to concentration of power in the hands of Sharma and his “excessive” remuneration, particularly ESOPs. Sharma has nearly 46% of the ESOPs issued under Paytm’s 2019 ESOP Scheme.

“Although there is no legal bar on the chairman of the company from holding executive position, SES is of the view that the company should have separated the position since combining both positions may lead to concentration of powers in the hands of a single person,” it said in a note.

SES also noted that Sharma’s economic benefit from ESOPs would amount to about Rs 1,962 crore at a share price of Rs 810 considering he was given stock options at Rs 9 per share.

“SES is of the opinion that a director’s performance should be benchmarked against the individual’s performance target as well as company’s overall performance, and therefore the remuneration to an ED must include a variable performance-based component,” the advisory firm said.

On his part, Sharma has said that his stock options grant will only vest after Paytm’s share price remains above the IPO price “on a sustained basis”.

IiAS laid more emphasis on Paytm’s poor performance post-listing.

“In FY22, the company reported a cash loss of Rs 1,200 crore and losses in the first quarter of FY23 are high. Sharma has made several commitments in the past to make the company profitable. However, these have not played out. We believe the board must consider professionalising the management,” IiAS said.

The shareholding math

The last time proxy advisory firms had asked shareholders to vote out a promoter was seven years back when they wanted Tulsi Tanti of Suzlon out.

While Sharma has done better than Sunil Gurbaxani of Kerala-based Dhanlaxmi Bank and Jawahar Goel of Dish TV, who were both booted out of their jobs as managing directors, the math was overwhelmingly in his favour.

Mutual funds, which mostly always go with the advice of proxy advisory firms, hold less than 2% shares in One97 Communications. Individual shareholders, who hold 17%, rarely care to actively vote in AGMs. That perhaps saved Sharma.

Among the other major shareholders, 24.88% of the shares are held by China-based Ant Financial. Japanese investor SoftBank’s Softbank Vision Fund owns a 17.46% stake while venture capital firm Elevation Capital controls 10.6%. Sharma held an 8.92% stake as of June 30, according to stock-exchange data.

But by saving his job Sharma has won only half the battle. On paper at least, it does little to help turn Paytm’s fortunes around.

Long road to profitability

At the AGM last week, Sharma said that Paytm was on track to achieve operating profitability by September 2023. But this might just be wishful thinking on his part, as Paytm’s numbers look far from impressive.

In the first quarter of FY23 Paytm’s consolidated loss widened by 69% year on year to Rs 645.4 crore, even though revenue from operations jumped 89% to Rs 1,680 crore.

Sharma’s optimism could be coming from the company’s sequential numbers. On a quarter-on-quarter basis, the fintech platform’s loss declined 15.3% from Rs 762.5 crore, making Q1 FY23 the third consecutive quarter with a sequential decline in loss.

Paytm’s EBIDTA loss (before ESOP cost) loss narrowed to Rs 275 crore in Q1 FY23 from Rs 332 crore a year earlier. On a sequential basis, this was a 25% decrease from Rs 368 crore reported in Q4 FY22.

Paytm says its revenue is growing mainly on account of an increase in subscription revenue with growing number of payment devices, growth in bill payments due to more monthly transacting users (MTUs), growth in disbursements of loans by its partners through its platform, and increase in commerce revenue.

The biggest contributor to Paytm’s operating revenue was its payments and financial services business with 74% share. The segment registered a 95% growth to Rs 1,246 crore in Q1. The commerce and cloud services segment contributed about 20% to Paytm’s operating revenue at Rs 331 crore, up 64% YoY.

Paytm said the Q1 results show that its strategy is well in place, with improvement on unit economics, better expense management and increasing mix of higher margin businesses, steering it on the path to profitability. It also said it was “well-funded” with net cash, cash equivalent and investable balance of Rs 9,411 crore as of June 30.

Brokerages’ call—Buy or sell?

To be fair to Sharma, brokerages seem to be changing their view on the company. Soon after it got listed, several top global brokerages and financial services firms like Macquarie had given the counter a thumbs down.

But earlier this month, Goldman Sachs reaffirmed its buy call on Paytm.

Goldman Sachs said that a recent discussion paper by the Reserve Bank of India on imposing charges across various payment systems will have minimal impact on Paytm. But it added that key risks to Paytm include growing competition, regulatory changes, slower-than-expected adoption of digital payments, potential risks to lending volumes, and slower-than-expected scale-up of commerce, cloud and financial service revenues.

Goldman Sachs’ outlook is, however, at odds with that of Macquarie, which in May said that the stock will go as low as Rs 450 per share.

Macquarie’s coverage of Paytm has been keenly followed ever since it first came out with its initial report on the listing day on November 18, 2021. Paytm had floated its IPO at Rs 2,150 per share. Macquarie initially set a price target of Rs 1,200 on Paytm. It slashed the target to Rs 900 in January, Rs 700 in February and Rs 450 in March.

Last month, Sharma told Bloomberg in an interview that he was seeking to reset Paytm, to make it profitable and to make it the first Indian internet company with $1 billion in annual revenue by the end of the current financial year.

“We’re earnestly chasing the $1 billion goal,” he told Bloomberg. “For me, the public listing was a sort of graduation, and taking Paytm to break-even and to profits gives me a clarity of purpose.”

Life often gives us a second chance. For now, Paytm’s shareholders have given Sharma his second chance. He should hope to steer his company out of the woods, and quickly at that. If he fails, a third chance may never come his way.

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