One 97 Communications Ltd Management Discussions

MANAGEMENT DISCUSSION AND ANALYSIS REPORT

Macroeconomic overview

Mobile payments in India have grown tremendously in the past few years. We believe that there is ample scope to further deepen penetration as customers and businesses are adopting affordable and easy-to-use technology.

We believe these consumers and businesses can be served through world-class, technology-led, mobile payment and financial services.

India continues to be one of the fastest growing economies globally, and is expected to grow at a CAGR of 7-9% over next five years, according to RedSeer and broker estimates. Key drivers of economic growth will be (i) rising consumption, (ii) favourable demographics with a large working population, and (iii) growing urbanisation.

Industry overview and Outlook

Multiple developments over the past few years have helped build Indias payments landscape, be it innovations in mobile payments infrastructure, continued regulatory support, or government initiatives to push for increased consumer and merchant acceptance.

Given the increasing shift towards a cashless economy and user preference for transacting via smartphones, mobile payments continue to scale rapidly. This is further boosted by the growth of mobile commerce and services. As a result, unique online transacting users, transacting for services such as online banking, mobile top-ups, in-store payments etc. are expected to grow from 250-300 million in FY 2021 to 700-750 million by FY 2026⁽¹⁾.

Paytm remains central to the growth of payments across the country. We offer a suite of payment solutions to both consumers and merchants. Consumers have a wide variety of use cases on the Paytm app, such as bill payments, recharge, adding funds to wallet, money transfers, etc. Paytm enables both consumers and merchants to use a variety of payment instruments to make and accept payments. This enables merchants to use Paytm app traffic and expand their businesses, making for attractive cross-sell opportunities especially in our loan distribution business.

Non-cash payment methods remain under-penetrated in India, when compared to other countries. The value of card transactions (credit card + debit card) remains at c.7% of GDP in FY 2023, lower than developed countries which have higher penetration at 30%+ of GDP. Including mobile payments such as UPI (P2M only), this ratio is c.18%. As per estimates from brokers, most of Paytms TAMs are expected to grow at 20%+ CAGR over the next five years. Broker research estimates the digital payments TAM in India to be USD 650bn in FY 23 (merchant payments only; cards + UPI), having grown at 41% CAGR since FY 17. They forecast Indias payments TAM to grow at a 23% FY 22-30E CAGR to reach USD 2.3tn by FY30E.

By FY 2026, retail lending is expected to be a US$1 tn market, and MSME lending is expected to be a US$600 bn market (Source: RedSeer). Across such traditional financial services products, India has growth opportunities aided by technology and rising digitization to increase access and reach. Industry research estimates that the total BNPL market in India stood at US$3 bn in FY 2021, of which US$2 bn was through online channels, while remaining US$1 bn was through offline channels. They forecast the BNPL industry to grow at 65% FY 21-26E CAGR to reach US$35 bn (c.14% of credit spends) by FY 2026E. Of the US$35bn, they estimate online channels to constitute US$24 bn and the remainder US$11 bn from offline medium.

Our Business Model

We offer a comprehensive suite of payments services to consumers and merchants and leverage our ecosystem to cross-sell high-margin financial services as well as commerce and cloud services.

Our payments business is an important customer and merchant acquisition tool, and in turn, an attractive funnel for other businesses such as credit distribution and enabling commerce businesses.

The large size of our distribution network coupled with data insights from payment and commerce businesses, allows us to distribute high-margin financial services such as small ticket credit to our consumers and merchants. For consumers and merchants, we offer various lending products, with our financial institution partners, such as Paytm Postpaid (BNPL), Personal Loans and Merchant Loans.

Payment Services

On our app, consumers can use a wide selection of instruments, such as Paytm Payment Instruments like Wallet, Paytm Postpaid (BNPL) as well as third party instruments like cards, net banking to make online payments for a variety of use cases. Consumers can also make online payments on third party apps and in-store payments through QR codes and devices.

The increased adoption of payments use-cases has resulted in our Monthly Transacting Users (MTU) growing 27% YoY to 9 crore during Q4 FY 2023. The full year average for MTU was 8.2 crore, up 36% from 6.1 crore in FY 2022.

On the merchant side of our platform, we help our partners grow their businesses by providing solutions that allow them to accept payments through a wide variety of instruments and by deploying devices that help receive payments and with reconciliation. We earn about Rs.100 to Rs.500 per month per device.

• Entry level merchants can use a free Mobile QR to accept payments, typically using Paytm Payment Instruments or UPI.

• Small retailers can upgrade to Soundbox devices which allow better reconciliation for merchants, and generate subscription revenues for us.

• Our mid-sized and large retailers also use our card machines which enables them to accept mobile and card payments, thus generating both MDR as well as subscription revenues for us.

• For Online and Omni channel merchants we offer a robust payment gateway product allowing merchants to reliably accept payments across all channels, From these merchants, we earn MDR revenues and platform fee.

Driven by increased user and merchant engagement, we witnessed a massive growth in our GMV, which for the full year FY 2023 at Rs.13.2 Lakh Cr, has grown 55% YoY from Rs.8.5 Lakh Cr in FY 2022.

Financial Services

Financial Services business consists of loan distribution (in partnership with lending partners), as well as insurance and wealth management offerings.

Loan Distribution

As part of our loan distribution business, we operate a technology platform with capabilities across the entire loan lifecycle including origination, loan management and collection to provide seamless credit access to our consumers and merchants through our financial institution partners. Lending partners are able to work with Paytm to service a segment that previously did not have access to this type of financing. In addition to handling distribution, we also collect loans on behalf of lending partners, by leveraging our technological and digital capabilities, which ensures that our collection business is a low-cost process.

Our lending business continues to scale providing attractive upsell revenues. Our lending partners disbursed over 4 crore loans through our platform in FY 2023, a 163% growth over FY 2022. The value of loans grew 364% to Rs.35,378 Cr in FY 2023, from Rs.7,623 Cr in FY 2022.

Commerce and Cloud Services

To help our merchant partners grow their business by leveraging Paytms consumer traffic, we offer them services like ability to sell tickets, deals and gift vouchers to customers. In addition, we also provide advertising, and loyalty services. In the Commerce business, we generally earn 5-6% take- rate on GMV.

The distribution of co-branded credit cards falls under our cloud business. As of March 2023, we have a total of 589,000 active cards with SBI Card and HDFC Bank. It is noteworthy that 90% of customers who obtain a credit card through Paytm remain active users driven by the variety of use cases on the Paytm App. This enables us to generate upfront revenue on card activation and receive a portion of the interchange fee for the lifetime of the card. We see a strong runway for growth in this business, especially given the upsell potential from payments and lending consumers.

Business Update and Outlook

FY 2023 was a strong year for us. In April 2022 we had shared that we will achieve operating profitability (i.e EBITDA before ESOP) by September 2023. We were able to achieve this three quarters ahead of plan in the quarter ended December 2022. This performance was driven by

(1) sustained growth in revenues on account of platform expansion and increased monetization;

(2) better profitability in the payments business as well as increased contribution of high growth, high margin businesses such as loan distribution, and (3) disciplined cost management and better operating leverage.

We report our revenue under two lines, (i) Payment and Financial Services, and (ii) Commerce and Cloud Services.

Total revenue has grown from Rs.2,802 Cr in FY 2021 to Rs.7,990 Cr in FY 2023, growing at a CAGR of 69%.

Payments revenue has grown from Rs.1,981 Cr in FY 2021 to Rs.4,930 Cr in FY 2023, growing at a CAGR of 58%. Payments business forms 62% of total revenues in FY 2023.

Revenue from Financial Services & Others have scaled up rapidly at a CAGR of 246% and were Rs.1,540 Cr in FY 2023, compared to Rs.128 Cr in FY 2021. Financial Services & Others now accounts of 19% of total revenues in FY 2023.

Revenue from Commerce and Cloud segment stood at Rs.1,520 Cr in FY 2023, growing at a CAGR of 48% from Rs.693 Cr in FY 2021. This segment is 19% of total revenues in FY 2023.

Our revenue from Payment services grew 44% to Rs.4,930 Cr in FY 2023 from Rs.3,432 Cr in FY 2022.

This includes revenues from the use cases such as bill payments and top-ups on the Paytm platform. These revenues are primarily from, (i) the transaction fee that we charge our merchants based on a percentage of GMV, and (ii) consumer convenience fees that we charge our consumers for certain types of transactions.

We also earn revenues from our comprehensive offerings of online and in-store payment acceptance services such as Payment Gateway, All-in-one and Dynamic-QR, POS, and Soundbox. These revenues are primarily from, (i) the transaction fee that we charge our merchants based on a percentage of GMV and (ii) recurring subscription fees from merchants for certain products and services, such as Paytm Soundbox and card machines.

Payments has two margin drivers - Payments processing and Subscriptions

Our payments business has two distinct margin drivers - payment processing and subscription. In payment processing, we make a net margin (i.e, revenues earned from processing payments less charges incurred on such transactions) of 7-9 bps on the Gross Merchandise Value (GMV). We earn revenues on processing all kinds of payments, including those made with UPI (Unified Payments Interface), in the form of incentives from the government.

Apart from earning revenues on processing payments, we also earn subscription revenue from merchants who use our payment devices, such as Soundbox and card machines. As of March 2023, our merchant base has grown to 3.4 crore, with deployed payment devices increasing to 68 lakh from 29 lakh in FY 2022, thus accelerating our subscription revenues. Merchants use our devices not only for accepting payments but also for fraud avoidance and reconciliation services.

Net Payments Margin, defined as payments revenue (on payment processing as well as subscription revenue) less payment processing charges is a key indicator of profitability in this business. Payments profitability has improved significantly over the years, with net payments margin growing 2.9x YoY to Rs.1,970 Cr for FY 2023. Improvement in payment profitability is on account of increased monetization in the payments business as well as optimization of processing charges.

Financial Services and Others include revenues that we make from our financial services partners or consumers from our financial services offerings, primarily lending. Revenue from financial services and others grew 252% to Rs.1,540 Cr in FY 2023 from Rs.437 Cr in FY 2022, primarily driven by 364% YoY growth in the value of loans processed in FY 2023 to Rs.35,378 Cr, from Rs.7,623 Cr in FY 2022.

Commerce and Cloud Services:

Our revenue from Commerce and Cloud Services grew 38% to Rs.1,520 Cr in FY 2023 from Rs.1,105 Cr in FY 2022. We further split our Commerce and Cloud Services revenues into the following lines, (i) Commerce Services and (ii) Cloud Services.

In commerce services, we generate revenue by levying a transaction fee to our merchant partners and/or a convenience fee to our customers, typically linked to a percentage of the transaction value of use cases such as ticketing for travel or entertainment and deals.

In cloud services, we generate revenue by charging our merchant partners a fee (subscription and volume linked) for utilizing our cloud and software solutions and our advertising partners, depending on the scale and type of campaign.

Contribution Profit

Driven by improvement in Net Payments Margin and increased share of high margin financial services business, our contribution profit grew 160% to Rs.3,900 Cr in FY 2023 from Rs.1,498 Cr in FY 2022. As a % of revenue of operations, our contribution margin was 49% in FY 2023, up from 30% in FY 2022.

EBITDA before ESOP

Our indirect expenses have grown 35% to Rs.4,076 Cr in FY 2023 from Rs.3,016 Cr in FY 2022. Our EBITDA before ESOP increased to ( Rs.176) Cr in FY 2023 from ( Rs.1,518) Cr in FY 2022 with 160% growth in our contribution profit and 35% increase in indirect expenses. Our EBITDA before ESOP margin (as % of revenue) was (2%) for FY 2023 as compared to (31%) in FY 2022.

Discussion on financial performance with respect to operational performance

	in Rs. crores, except percentages
Particulars	FY 2023	FY 2022	FY 2021	Y-o-Y A
Revenue from Operations	7,990	4,974	2,802	61%
Payments & Financial Services	6,385	3,858	2,109	66%
Payment Services to Consumers	2,105	1,528	969	38%
Payment Services to Merchants	2,739	1,892	1,012	45%
Financial Services and Others	1,540	437	128	252%
Commerce & Cloud Services	1,520	1,105	693	38%
Commerce	615	374	245	65%
Cloud	905	731	448	24%
Other Operating Revenue	86	12	-	615%
Total Direct Expenses	4,090	3,476	2,440	18%
Contribution Profit	3,900	1,498	363	160%
Margin %	48.8%	30.1%	12.9%	1,870 bps
Indirect Expenses (excluding ESOP expense)	4,076	3,016	2,018	35%
% of Revenue	51.0%	60.6%	72.0%	(963) bps
EBITDA (before ESOP expense)	(176)	(1,518)	(1,655)	(88%)
Margin %	(2.2%)	(30.5%)	(59.0%)	2,832 bps

Details of Key Consolidated Financial Ratios

Particulars	FY 2023	FY 2022	FY 2021	Y-o-Y A
Debtors Turnover Ratio	7.99	8.17	5.81	(2.2)%
Current Ratio	3.12	3.22	3.43	(3.3)%
Debt-Equity Ratio	0.02	0.02	0.09	9.7%
Operating Profit Margin (%)	(26.5)%	(52.0)%	(69.4)%	49.1%
Net Profit Margin (%)	(22.2)%	(48.2)%	(60.7)%	53.8%
Return on Equity Ratio (%)	(13.1)%	(23.2)%	(23.3)%	(43.6)%

* Interest coverage ratio has not been computed as earnings available for the interest payments are negative for the current and previous financial years

* Inventory turnover ratio is not applicable for our business

Drivers for Growth and Opportunities

Our ecosystem allows us to address large market opportunities: We have built one of the largest payments ecosystem in terms of number of consumers and merchants in the country. Customers use various payment services that we offer and merchants use us to accept payments and grow their business. We also provide financial services through our financial institution partners, particularly lending. Payments is a universal need for consumers and merchants, and provides us an attractive way of acquiring, retaining and monetising customers and merchants. It continues to give us very high engagement, and in addition, we believe we can make substantial revenues and profits in payments. Digital distribution of credit is a very large and scalable profit pool in India. Our ecosystem allows us to address these multiple large market opportunities at scale and gives us multiple growth vectors.

Our network effect creates sustainable advantages for us: We believe that our brand, distribution, insights, technology skills, and the scope of our ecosystem give us an advantage to grow our business through, (i) cost-effective acquisition of consumers and merchants; (ii) reinforce our platform by building higher engagement and stickiness with consumers and merchants; and (iii) build high monetisation products at low cost of acquisition.

Our product and technology DNA: Our technology stack is built ground up and integrated across all aspects of our ecosystem. We are the only payments company in India that, together with our affiliates, owns each layer of the payment stack. This allows us to integrate our payments offering seamlessly with other offerings. Similarly, for financial services, our technology infrastructure is built on a stack that is owned, controlled and written by us, our respective subsidiaries or associates. Our technology ownership and scope of our ecosystem has allowed us (and our associates, and financial institution partners) to offer services such as Paytm Wallet, Paytm QR, Paytm Soundbox, Gold investments and Fixed Deposit, Paytm Postpaid, Merchant Cash Advance and FASTag. All of these products aim to improve the experience of consumers and merchants who use it in our ecosystem.

Enabling regulatory environment: In our view, the regulatory environment in India remains constructive and supportive of digital payments and financial services. RBI in its Payments Vision 2025 has reinforced the themes of enabling growth of digital payments across multiple instruments including UPI, PPI and cards. Regulatory compliance remains a key focus for us as an organization.

Internal Control Systems and Risk Management Framework

In a rapidly evolving business, technical and regulatory environment coupled with dynamic consumer demands and growing competition, our risk profile is also evolving constantly. Our Company is cognizant that effective risk management is core to a sustainable business. We have therefore adopted a dynamic risk management framework that functions under the oversight of our Audit Committee and Risk Management Committee.

Anti-money laundering and Counter-terrorism Financing Risk Management: To ensure clean day- to-day operations, we have instituted comprehensive on-boarding and risk management practices, which include appropriate anti-money laundering policies and procedures.

Investments and Acquisitions Risk Management: To ensure that our investments and acquisitions are strategically complementary to our business, we have an identified team of professionals who manage our portfolio in alignment with the Companys growth plans.

Business and Operational Risks

Macro economic environment: We continue to monitor and adapt to any macro-economic condition that affects our customers and merchants as it could also have an impact on our business. We will continue to do all that is necessary and in our control in such scenarios.

Financial: We continue to focus on improving profitability while making disciplined investments in areas such as hiring additional personnel, broadening our marketing and promotional activities, and expanding our products and services. There could be growth in expenses as we continue to expand our business operations. During the course of the business, we may offer performance guarantees or undertakings/indemnity to certain organisations/PSUs in relation to business tenders or contracts. In the past, the Company hasnt observed any material claims on account of issuances of such guarantees.

Pace of technology innovation: We make significant investments to constantly improve the scale, stability and functionality of our technology. Failure to maintain best-in-class technology infrastructure could harm our business and prospects.

Cybersecurity: Our platform incorporates multiple layers of protection for business continuity and to manage cybersecurity risks and data security breaches. We use analytics and machine learning to ensure optimum automated fraud detection during transaction processing. Encrypted data transmission using security protocols and algorithms ensures confidentiality and prevents leakage of confidential customer data. Data and technology infrastructures are vulnerable to cyber attacks, as any such incident could damage our reputation and brand and substantially harm our business.

Regulatory: We are extremely focussed on ensuring compliance with the statutory and regulatory framework, and are continuously strengthening our compliance processes and management depth as some of our businesses are subject to a fast evolving regulatory landscape.

Competition: We consistently invest in enhancing our platform and customer-centric services in order to maintain our leadership. Our industry is extremely competitive, and consumers and merchants have multiple options.

Litigation: We have a dedicated team to manage litigation risk and engage external consultants where necessary, thereby ensuring minimum impact of materiality. As a Company (or key management) we may be subject to legal proceedings, including ongoing litigation in tax, civil or other matters.

Material developments in Human Resources

In FY 2023, we had an average of 32,798 on-roll (29,503 active on-roll) and 1,589 off-roll employees worldwide, inclusive of all subsidiaries.⁽¹⁾We also engage contractors to provide us with a temporary workforce. None of our employees are represented by a labour union. We have not experienced any work stoppages since our incorporation.

Employee costs (excluding ESOP cost) as a % of revenue, moderated to 29% in FY2023 from 33% in FY2022. Our Employee costs (excluding ESOP expense) at Rs.2,323 Cr in FY 2023 grew 43% from Rs.1,623 Cr in FY 2022, as we strengthened our sales channel to drive penetration of our high margin use cases such as merchant subscriptions and lending. We are also investing in our product and technology team to help scale our platform to support the next leg of users and transactions.

Sustainability and Supporting our Community

In our mission to bring half a billion Indians into the mainstream economy, we are governed by our values of serving the community, and maintaining trust while moving fast, responsibly and focusing on the underserved and unserved. Not only do we solve for our merchants receiving digital payments via various sources, and in turn, engaging more users, but also receive seamless access to micro-credit, business payment solutions and wealth management, safely.

Paytm is committed to sustainability and is dedicated to ESG. The companys sustainability efforts include reducing its carbon footprint, promoting financial inclusion, and supporting local communities.

Mobile Payments: Paytm has played a significant role in promoting mobile payments and reducing the reliance on cash transactions. By providing a seamless and secure mobile payment experience, Paytm has contributed to greater financial inclusion and transparency, reducing the environmental impact associated with the production and circulation of physical currency. Products like Soundbox devices allow better reconciliation for merchants, hence enhancing their trust in digital payments.

Financial Inclusion: Paytm has been instrumental in promoting financial inclusion by providing access to financial services to individuals who were previously excluded from the formal banking system.

Through its digital wallet and other services, Paytm has enabled people to store, send, and receive money digitally, empowering them economically and reducing inequalities.

Paytms commitment to ESG principles goes beyond its business operations. The company actively engages in social and environmental initiatives to drive positive change. It supports various social causes, including education, healthcare, and disaster relief.

Engaging Users on Social Causes

As one of Indias largest digital platforms, we take pride in being able to mobilize our ecosystem participants in times of social and disaster relief. During the year we have continued to raise social awareness and raise contributions from our users to aid the Central and State governments, as well as independent local bodies, by enabling online payments to their preferred non-governmental organization or any other platform. Paytm Foundation also facilitated a fundraising initiative to the Odisha Chief Ministers Relief Fund to help the victims of the Balasore train tragedy.

International forums for Sustainability

We proudly represent our country on international forums working for sustainability. Since December 2017, our Founder, Vijay Shekhar Sharma, has been the United Nations Environment Programmes ("UNEP") Patron for Clean Air, and helps drive greater environmental action and awareness to advocate for UNEPs global #BreatheLife campaign - a major initiative on air quality seeking to influence policy and citizen action for a healthy future. During the year, UNEP and Paytm foundation have launched a national-level action-oriented forum for India, involving the regulators, national & international philanthropic organizations, international development agencies & the corporate sector. This forum intends to identify the needs, gaps, and solutions to the problem of air quality in India and will ensure project implementation in a structured manner with a yearly action plan.

Our Founder is also on the Advisory Board of the Green Digital Finance Alliance. The Alliance was set up to address the potential for digital finance and fintech-powered business innovations to reshape the financial system in ways that better align it with the needs of sustainable development.

Laptop Donation - Shikshit Bharat

"Shikshit Bharat" an initiative started to promote education and support the overall development of underprivileged children in India. The initiative aims to provide access to quality education, infrastructure, and resources to children from economically weaker sections of society. The focus of the initiative is on building and establishing computer labs, and other educational facilities like e - libraries to create a conducive learning environment for students.

Paytm Foundation donated 160 laptops and created an impact in the lives of more than 2500 students. These laptops were used to equip children with essential life skills and vocational training, empowering them for better opportunities in the future. Encouraged by the success of this initiative, we have plans to further expand this initiative, which aims to bridge the digital divide faced in the country.