Paytm may take a hit on soundbox pricing
Even as Paytm has been enjoying a quick run of over 30% in the stock market in the last few days, there could be some challenging triggers for Paytm. This comes from the fee that Paytm charges to merchant for the Paytm Soundbox, which announces the receipt of payments by shopkeepers, vendors etc. As soundbox competition increases with PhonePe offering soundboxes at a much lower cost, Paytm may be forced to follow suit. This was likely to hit the total revenues of Paytm nearly Rs400 crore if rentals are cut sharply.
While Paytm was likely to take a hit of Rs400 crore on the revenue front, the impact would be up to Rs500 crore on the company's EBITDA (earnings before interest, tax, depreciation and amortization). According to a recent report on Paytm by Macquarie, it was very possible that Paytm may be forced to cut the soundbox rentals to zero to take on the competition posed on this front by PhonePe. Hence, Macquarie, which has long been anathema for Paytm, has pegged the target price of Paytm at Rs450, nearly 40% lower from current levels.
As per the report put out by Macquarie, the impact of the sharp reduction in soundbox pricing in percentage terms would be 8% on revenues and 20% on EBITDA. It is estimated that, on an average, the fintech companies incur a cost of Rs25 per unit as the SIM card cost. If you add the back-end costs and other related costs, the total cost incurred by the fintech company providing the soundbox would be in the vicinity of Rs100 crore. Of course, the big game changer in the last few weeks has been the launch of soundbox by PhonePe.
The leader in the UPI interface, PhonePe, had launched the soundbox device only in July 2022 but had entered the market with an aggressively disruptive pricing formula. They were charging a monthly rental of Rs49 and an upfront cost of just Rs1 from the customers. It is hardly surprising that since its launch about 1 month back, PhonePe has already installed 100,000 devices and its order book is overflowing. Paytm remains the leader in the Soundbox, which it launched in 2020. Paytm has over 30 lakh soundbox devices installed.
Today, Paytm charges different rentals for different merchants and such rentals could range from zero to Rs125 a month. Obviously, the merchants who are paying the higher figure would naturally gravitate towards PhonePe. Paytm has said that PhonePe can afford to adopt such loss leader tactics since it is a unlisted company. However, it is no secret that in the fintech industry in India, all the players have acquired clients and expanded their reach purely by offering freebies to customers, which are in most cases not even sustainable.
The advantage is that a cheaper soundbox allows them to onboard customers. However, that is just the starting point. The real cream lies in up selling and cross selling other financial products to these merchants. For example Paytm now focuses heavily on giving loans originated by partner banks and partner NBFCs to these merchants. In the case of most of these merchants, the cash flows are there and it is just about broadening the relationship by offering more intimate products to these merchants like personal loans.
Paytm has been a big beneficiary of the soundbox infrastructure. Its disbursals of merchant loans to such soundbox holders grew at the rate of 178% to Rs565 crore on a yoy basis for the March 2022 quarter. Paytm does not have a lending book so the risk is still resident in the book of some bank or NBFC, while Paytm earns an attractive spread. In this entire industry, the eventual target is to lend to merchants and make a margin. However, it is in this particular business line that Paytm will face the real big challenge from Phone Pe.
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