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One 97 Communications Ltd
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[Audio Gap] should not be recorded or reproduced or distributed in any manner. Some statements made today may be forward-looking in their nature, however, actual events may differ materially from those anticipated in such forward-looking statements.This earnings call is scheduled for 60 minutes. It will have a presentation by the management followed by Q&A. [Operator Instructions] The presentation, a replay of this earnings call and a transcript will be made available on the company website subsequently.With this, I would like to request Mr. Vijay Shekhar Sharma to kindly initiate the earnings call.
Thank you. Thank you so much, everyone, for joining our quarterly call., I'm very happy to see that our business is exactly going in the direction that we have envisaged and it is really incredible to see the amount of technology, potential opportunity that is coming up in our business, and I am more hopeful than ever before that there is incredible amount of impact and business that we could do in next few years.With this, I have numbers to share here. In fact, as you may have seen, we have given a very narrated -- can we start the presentation, please? As you have seen that we have given an incredible amount of narrated detail there in our business, where you can see there really is different, different kind of details that we have put up there, and this is our presentation which is going to summarize. We'll tilt it towards more Q&A instead of just a business presentation because we have given a very detailed narration.The numbers that you're seeing here that we have year-on-year growth of 39% revenue which is driven by, as you can very well see, our payment and financial services business are definitely growing year-on-year in an incredible way. Commerce business, which is obviously dependent on many other seasonality and limitations have grown, but not in the same range. Our profit contribution margin has started to grow even further. So last time when we were looking at 51% as our contribution margin, we see this growth going towards 56%. And single thing that is behind it is the higher margin payment business and higher margin business for our credit and financial services business. And these are improvement that we're seeing in our margin. So if you see that we have growth, we have increased contribution profit and then also increased the margin out there. So it is a very healthy sign. We see there is a lot of opportunity here.Obviously, as you all know that it has created an opportunity for us, where EBITDA before ESOP has improved by INR359 crore before a year. And it is important to note that we have compared here INR52 crores with a number that previous quarter, because there was a one-off UPI incentive that had come. So to give you a more quarter-on-quarter correct normalized view, we have excluded the UPI incentive on this number.So overall, what it means is that we are on path, we are on our committed guideline of becoming free cash flow positive by the year-end, meaning we could start generating free cash. In fact, some of you may have seen the numbers. So we have added some cash in our reserves already. We are very sure that based on the market conditions and positive movement in payment, revenues and credit opportunity, we should be -- surely be able to deliver it before year-end. In fact, we are believing that it could go next level [Technical Difficulty]So, thank you so much. I would give it to Madhur to continue forward.
Thank you and welcome everyone. We'll to go to the next page, please.So this is on our payments business. Payments business has continued to scale up very nicely with improved profitability, like Vijay mentioned earlier. Our monthly transacting users, which is the number of customers who transact on Paytm app has gone up 23% year-on-year and continues to see an upward trend. Our merchant subscription business, as we have mentioned before, which is a key focus area, that has more than doubled year-on-year. In the last quarter, we added 11 lakh merchant subscriptions. So this is a product and offering that continues to find larger and larger addressable market opportunity. All of this has contributed to our net payment margin improving 69% year-on-year to INR 648 crores. Just to remind everyone, our net payment margin is money that we make on payment processing, which is the revenue minus what we pay to the issuer banks, that's the subscription revenue.So going back to payment processing margin, we had given a range in December 2022 that this is currently in the 7 to 9 basis points, and including UPI incentives with the 7 to 9 basis points, currently even without UPI incentives, which we did not record any of in this quarter, it is at the high-end of our 7 to 9 basis points guidance. So we have seen encouraging trends here. That is as a result of increasing GMV of non-UPI instruments, such as EMI, which is a big focus area for us, both online and offline, as well as increasing share of our payment processing for card transactions. We are also experiencing lower interchange cost for Wallet. As some of you know, there was an interoperability circular that had come out from NPCI, which is effective April 1. So as a result, that interchange cost for Wallet has gone down and interchange cost for -- I apologize, just give me a second, please. Our interchange cost for Paytm Postpaid also continues to go down due to better portfolio quality, which is a theme that we had touched upon in the last quarter's earnings. Our subscription revenue is a direct result of the growth in merchant subscriptions, which as I mentioned earlier, has gone from INR 38 lakhs a year ago to INR 79 lakhs in this last quarter.Next page, please. Now a little bit about our loan distribution business. Our value of loans distributed through Paytm platform last quarter was just under INR 15,000 crores, which is a number that we had published in our monthly operating metrics. So this is a number that you already have. And this has seen significant growth across all three products. So Paytm Postpaid is up 138%, personal loan is up 202% and merchant loan is up 232%. So we are seeing traction across all three of our products. As we have mentioned before, starting, I think, May '22 is when we explicitly called this out that our focus is on improving credit quality. One of the things that we're quite proud of is that the penetration levels are still very low, which means two things. One is that there is huge addressable opportunity ahead of us and also that we are very selective when we work with our lending partners on who gets a loan on Paytm platform. Another indication of this is that the portfolio performance for our partners has continued to improve. Specifically in Paytm Postpaid last quarter, we lowered the range for expected credit loss with our partners, and this quarter again, we are lowering the ECL rates range that we have given. Earlier it was 75 to 100 basis points, now it is 65 to 85 basis points. So we are seeing consistent improvement in credit quality as a result of a number of business initiatives that we have taken.We'll go to the next page, please. Our commerce and cloud business, the co-branded credit cards and advertising have driven growth in the commerce and cloud business. It is up 22% year-on-year, which is lower than our overall business, but it is still a healthy 22%. In our commerce business, just to remind everyone, we sell travel, movies and events tickets and deals and gift vouchers to customers. This GMV was INR 2,500 crores. It was up about 10% year-on-year. On a revenue basis, this was up about 12% year-on-year. The reason for the subdued growth was a decline in movie industry. So last June quarter, movie industry was seeing some healthy content. This June quarter has been lower than the previous June quarter. Also, there has been a decline in Play Store vouchers, which are sold at that entire industry, and we also sell Play Store vouchers, so that entire industry has seen a degrowth. On a Q-on-Q basis, I just want to call out that Q3 and Q4 are strong quarters for our events business. So there is that seasonality in our business. Q1 and Q2 are much more subdued because of the lack of holidays, festive season, as well as weather. So our take rates have basically come down to what we have guided earlier, which is 5% to 6%, whereas in Q3 and Q4 we see a little bit of a higher take rate.On our cloud business, like I mentioned earlier, co-branded credit cards, they are continuing to scale very well. As you know, about a couple of quarters ago, we started to give numbers for activated cards, that number has now reached 7.5 lakhs and our partnerships are doing very well. You may have noticed that we have launched a credit card with SBI, SBI RuPay credit card, Paytm SBI RuPay credit card, which was launched about a month and a half ago, and we also saw growth in our advertising business.Go to the next page, please. And finally, some of the growth drivers in our business. Clearly, mobile payments in India has still got very low penetration, particularly on the merchant side. We think that we are extraordinarily well placed in that business because the technology that we give to our merchants is very well accepted and the adoption is growing very fast, particularly Soundbox and Card machines. We're doing a number of other innovations in the payment ecosystem. UPI Lite, we were the first to launch the RuPay credit card on UPI, which we just mentioned, Multi-bank and Brands EMI aggregation. As I mentioned earlier, we are seeing uptick in that and that is contributing to higher net take rates as well. And Paytm UPI SDK for our online merchants.On the loan distribution side, we think that there is huge opportunity for growth, while we will continue to focus on ensuring superior credit quality for our partners. Further, there is good regulatory clarity on digital lending guidelines now in India. So that is also supporting the scale-up of loan distribution business. Last quarter we had mentioned that our target for this year is three to four new lending partners. On June 30, we did announce the first of those new partners, which is Shriram Capital. And I hope many of you have noticed that. Paytm Money has launched a new bond trading platform. We think that there is huge under-penetration in India for retail investing in bonds. So that's a business, which while it is very early and very small right now is a directional bet for us that we think that this is something that will play-out over the next several years. So we are proud to be one of the early players in that.With that, I'll hand it back to the moderator for Q&A. As Vijay mentioned, we have put a detailed earnings release and we have intentionally kept the presentation relatively short to allow as much time for Q&A as possible.
Thank you Mr. Deora. With that, we'll start the Q&A session of the earnings call. [Operator Instructions] The first question of the session will be from Mr. Sachin Salgaonkar from Bank of America.
I have three questions. First question is regarding your ticket size on loan. And clearly, Madhur, we could see you guys lowering ECL range, but while we are seeing that we are also seeing ticket size across every segment, which is Paytm Postpaid, personal loans, merchant loans is actually increasing, and perhaps in a meaningful manner. So I just wanted to understand how should we look at this.
So Sachin the reason for ticket size increase is that the renewal business is now maturing. We've been at this business -- merchant loan postpaid for three years and PL for more than 2.5 years. Both in PL and merchant loan, more than 50% of our business is coming from existing users and in postpaid about 65% of business from existing users. So lenders have a much larger comfort in giving a higher ticket size to people when they are disbursing the second loan or a renewal of the existing loan to the users. The new user ticket size continues to be the similar amount that was happening, let's say, a year or 12 months months back, but because the blended business has moved up, that's the reason ticket size has moved up.
So Bhavesh, directionally it might inch up a bit more also, right, going ahead?
Yeah. So it may, but that's not a metric that we personally track. It is basis the comfort the lender derives and what is their underwriting policy, but broadly our focus is that we should be -- as the book matures on every product there could be a stability point both in merchant and personal in particular that the existing customer renewal as a share of total business, could inch up to maybe 60%. So yeah, you could expect marginal increase, but Postpaid is a natural increase over a period of time. It will not see a dramatic increase, because they still continue to be a consumption-led product, not a life-led product.
Got it. Second question, the new FLDG norms are out there. I just wanted to understand any change of thought in terms of how you guys are looking at current business, and does that change incrementally something for you, i.e., in terms of getting a bit more partners as well?
Yeah. So I think this is a very welcome move from the regulator. It just reinforces that the overall regulatory environment is very positive and pro of building a digital lending infrastructure and credit business in this country. So we welcome this move with lot of positivity. Having said that, our belief here is that risk management is a job of a regulated entity. They understand risk and the heterogeneity of models that they have built over a period of time much, much better than Paytm would ever be. So our current model is not of taking risk, but helping the lenders to manage collections. We are committed to their model, we'll scale that business. Will it add and help in any new partners, because we've never given FLDG, we don't have any inertia in getting new partners. Like you saw Shriram Capital or Shriram Finance addition, you would see many, many more large institutions getting added to our overall portfolio of partners that we work with, without we offering any kind of FLDG. So short answer is this that our model that we continue to pursue will continue as it is. We are not exploring any FLDG models with our partners.
Okay. And is Shriram already onboarded, i.e., should we see contribution from next quarter onwards?
No, they're onboarded but they're into technology integration. So our aim is currently that we're looking at sometime in quarter three that they should go live.
Sorry, one more question I have. Last question on the software cloud datacenter expenses, clearly, we did see them declining and I presume this is because you guys have moved to a new platform. So just wanted to understand going ahead, directionally, this should continue to further come down as well, right?
Well, I think, as a percentage metric of GMV transaction revenue et cetera, it should continue to come down. But you're right that we did see the benefit last quarter of effectively exiting our old platform, which I think I mentioned in the previous quarter's call that we were effectively running two cloud platforms in parallel. So exiting the old platform did give us a one-time benefit. You shouldn't expect it to sort of continue to decline in absolute term, because as also the business scale grows, there are more transactions, more data, and so on, more [Technical Difficulty] required and so on, but as a percentage of revenue and so on you should expect for this to go down over-time.
The next question will be from Mr. Nitin Aggarwal from Motilal Oswal.
I have a couple of questions. First is like how many tie-ups are we looking to add now over FY '24-'25 to sustain this disbursement growth that we are reporting? And what is the outstanding loan book size with all the partners as on 1Q?
So, Nitin, I think last quarter also, we had mentioned that this year we are looking to add about three to four more partners. One has already been announced and the remaining couple of partners, we intend to announce over the next couple of quarters, that will help us to manage both the aspirations of the new partners who come in and the existing partners. And more importantly, it will provide the much-needed expansion of what those new partners bring to us. So this is something that we believe will happen. We could make some amendments as we go in the next couple of quarters in terms of adding more than what we are saying, but this is a minimum we will add.With regards to your second question, if you could repeat that please once again for me.
Outstanding loan book size.
See, the loan book, we actually don't track, because our commercials are based on disbursements and not on the loan book, but broadly what we understand basis the average maturity of tenure and the composition, if you are disbursing, let's say, INR 100, about one-third could be the AUM as a combination with all the partners, but this is more of an estimate. That's a range that you could take.
Okay. And of these three, four partners that you're looking to add, are you looking at banks also to come --
Yeah, you will see some announcements in banks also.
Okay. And the other question is like on the pending regulatory approvals. Any thoughts, what progress that we are looking over there for both the payment aggregator and the payment bank. And while we have mentioned that it is not affecting our business growth and overall aspirations, but as and when you get these approvals, how will things change in terms of the growth trajectory thereafter?
I think both are different approvals which are pending. So let me talk about the Payment Aggregation business. I think the last update that we'd given that there is approvals, which are pending with the government ministries et cetera. The process of engagement with them is already on. We'll file the application. That process is currently in the works. And whatever exchange of information has to happen is going on. And we remain hopeful that that process should end fairly shortly, and we should get the direction for further course of action in that area.Having said that, we've been explicitly guided by the regulator that we can continue to operate the business we were operating of Online Payment Aggregation that we were doing. And as and when we were to get any kind of communication from the Government of India, we shall keep them informed. So our business has not got affected, primarily for the reason that we've been in this business since a very long time, at least from 2017. So it's been about six years of doing payment aggregation business and being the leader in that business right from the beginning, we have had many, many customers who've been added in our system, and our focus has been to further deepen our relationship and penetration. And as you can see from both net payment margin and growth of GMV that that area of effort is really helping us. Yes, there is always an opportunity to add new clients. So we'll welcome as and when we get the approval to be able to add new clients. It will have a marginal impact on the growth of our business, not a material impact, especially in the online space because the online space, we believe, currently, most of the large clients already are there and the objective is to penetrate a lot more versus adding newer clients.On the bank side, that process is again on. As an associate of Paytm, the information we get from the bank is that the process of engagement with the regulator is on. Yes, it has taken a lot more time than we anticipated, but at this stage in time, we don't have necessary clarity as to when would the process be over, but we understand from the Paytm Payment Bank management that that process is operating very, very comfortably and should get over soon, but we don't have any particular timeline to those yet.
Okay. And lastly, just to again come back on the loan side. We have achieved an annualized disbursement run rate of close to INR 60,000 and there has been a bit of concern in the -- like, what we have seen after the regulator pointed out some discomfort on the growth in unsecured loans. So have you seen any change in behavior or underwriting with your partners and how sustainably can this value of loan, like, because you are already INR 60,000 crore a year, how sustainably do you see this growing over the next two, three years?
I think the focus of ours, right from the beginning, has been to ensure that we are able to originate the best quality portfolio to our partners and that approach of ours hasn't changed over the last three years. Yes, we have been reading in the press about the discomfort, which is particularly called out for banks, et cetera by the regulator. Our partners, thus far, haven't come across stating anything of a discomfort of portfolio that we've originated with them. So you will see even a personal loan product on quarter one, we have grown, while we ourselves believe that we should calibrate growth as we move forward, but we don't see the growth getting tapered off to a level wherein somebody showing discomfort. Our belief there is that there is an opportunity of the business if calibrated to the macro conditions of both of risk and reward ratio, whatever growth is then hence has an outcome desired, we will pursue that. You will see us being a lot more conservative in growing, because our objective, just like we have demonstrated in Postpaid, we would love to demonstrate the same in merchant loan and personal loans also that we can continue to grow at a healthy pace and also have a portfolio perform better than what we did last year. With that plan in mind, our focus will remain to get better portfolio and also a decent level of growth, but it will be calibrated looking at the macro.
The next question will be from Mr. Rahul Jain from Dolat Capital.
As you mentioned in this presentation that there is an increase in GMV from card and EMI which has helped in better payment margin. Just wanted to understand that do you see any possibility that we have just yet touched the QR-based payments through the debit side of the economy, but the next wave could be QR-based payment on the credit side through EMI, card, BNPL or whatever, and incrementally regulator also keep on talking about the under-penetration on credit and all that. So you think that could actually change the dimension in a different way and the 7 to 9 bp that we keep talking about could stay at a higher level and overall revenue per GMV basis could also expand materially?
And I'll ask Bhavesh to add post what I suggest here. Number one that you actually pointed out correctly that there is a incredible attention, there is an extra attention that is being put by regulators and every other payment provider or player, like banks or NBFCs to make credit on counter available at more and more number of times, and more and more possibilities there, whether it is led by credit cards. So the credit card acceptance on UPI QR. And then you can see the growth in the credit card spends, you can see the growth on BNPL equivalent, whatever, whether it is a large ticket or a small ticket on the counter is the growth direction. While the debit side has plateaued is not what I would say, there is a large amount of customer base still pending to come on-board. But definitely, credit is adding the flare of extra revenue and it will add the net bps margin continuously extra. We don't know how many people will actually have a credit access, and then in turn pay on counter using credit. But that is definitely going to be there. And Rahul, it is not just on debit, it's also on prepaid. So prepaid and credit are the flares that could add extra margin to payments in India. That is what I'd say.Over to Bhavesh for --
Yeah. I think I'll just supplement to what Vijay said with one simple statement. As the affluence and the aspiration of larger masses of India is growing, affordability of those aspirations or driving affordability becomes a very important element as far as retail is concerned. And we are clearly seeing trends which are not necessarily as available last year, be it online or offline. A lot many more brands, just not mobile phone brands, but even lifestyle brands and travel brands et cetera are seeking affordability. So it's a technology that Paytm is able to power on the ground, be it on online space or offline space and even QR space of being able to drive affordability. And that market has really helped margins improve. And as Vijay rightly said, we will see, irrespective of what is happening on the acquiring side of technology, be it QR or card machines or online gateway, affordability will become a very important driver for increase in payment margins and actually having the customer get the right deal with the merchants on a long period of time. So as India becomes more affluent and more aspirational, that shift is a three to five years shift. It will move a lot more with affordability and [Technical Difficulty]
Hello?
Yeah, Rahul, that is what answer is. You can continue with your question if you have.
Yeah, sure. Just one more question. So looking at this annual spend on your marketing expense, Q1 was [indiscernible]. There was some saving that we were expecting from non-renewal of some sports sponsorship contracts. So how one should look at for the year and for the future on this marketing expense side?
Yeah, there is no doubt about it. There was IPL et cetera, as you noticed, if you would have seen those things. So those are the kind of expenses that we had. But at the same point of time, instead of being more rupee value reduction, we look at it as a percentage of revenue direction because there is a tremendous amount of opportunity of acquiring consumers. We will be diligent and bothered about good quality customers. So Rahul, if you notice, Q-on-Q, our user growth has not been dramatically large than previously, and it is not because that incremental users have not come. Actually incremental user has been growing, we've been pruning and adding features which are related to safety, security on our platform. So we will continue to focus on consumer as a business also Rahul, and that is why I would say, even though you would have seen a trend basis it is more, but I think as a percentage of revenue, we would keep it at a particular level.
Just sorry, if I could squeeze in one more which is related to this headcount addition that we see, which I guess is largely for the onboarding of merchant, can you just explain why we need such a large pool? Is it because of new markets, new micro market and new geography that we keep going because if I see there is an absolute addition of a million on a run rate basis, then ideally the same set of people with some servicing requirement, but it should not grow very linearly because the people who would have already deployed may not be as busy with the existing base. So when we see that non-linearity in that?
Yeah, totally agree. And in fact, the interesting thing here is that we are expanding to new geographies. That is why there is a cycle of person getting onboarded, getting trained and getting full, let's say, productive in number of deployments, but we also see requirement of adding even more number of people, because mobile payment and opportunity of merchant accepting payment is dramatically growing to next level of geography level where we have reached today. I mean, I also want to share that we used to one point of time, like many a times we have added in these analysts call also discussion that what is the TAM for number of devices or subscription you can sell. And we continue to see that number actually growing once we reach that milestone where we see that what new kind of customer would come. So newer devices, newer markets, and newer merchant needs served by devices is the way forward for us. And in these, training those number of people and deploying those number of people is something that we continue to do and we will add keep adding. Like I told you in consumer and merchant, both sides, there is an extraordinary opportunity for next two years.
I'll just maybe add a small point to that which is, I think we had mentioned this last quarter, but over the last couple of quarters, we have really focused on enhancing the service as well. So there is a service team, which does a fantastic job of making sure that the merchants are getting really high-quality experience. So that has been an aspect of some of the growth, but predominant aspect is, as Vijay mentioned, which is we see opportunities to go deeper in the country and we are seeing an increase now in the net adds and it's not very noticeable yet. We're doing about 10 lakhs a quarter. Last quarter we did about 11 lakhs. So we are seeing that opportunity to grow a little bit faster.
Next question will be from Mr. Rahul Bhangadia from Lucky Investment.
Congratulations on a continuously improving set of numbers. Two things here. The revenue from financial services and others as a percentage to the loans disbursed seems to be trending downwards, and it has now reached about 3.5%. Could you help us with how we should kind of look at this take rates here or the commission here?
Yeah. Hi Rahul. So the last quarter we had mentioned that because of better portfolio economics on Postpaid, the interchange that we pay, which used to get added to the revenue of the lender and some part of it used to come back to us as gross income, because we have reduced interchange by almost 50 basis points last quarter. You saw an optically a number of take rate go down in quarter four, right. This quarter, the idea that we have been able to understand more strategically with our lending partners is that with the repo rates kind of plateauing, we did not want it to pass on the increase of repo which happened in the last quarter or maybe a quarter or two to the consumers, because we wanted to make sure that, a, we are able to maintain better portfolio quality and just ensure that our portfolio mix is more high quality than maybe of users who were on the edge and they were comfortable given the last year macro, but may not be comfortable given this year macro. So we've taken broadly a 0.1% upfront hit in our take rate on credit predominantly, which we believe that we will recover, similar or more, through the collection incentives, as portfolio performs much better, because the portfolio mix is better.On a trend line basis, we don't see this number go down. I think this number is the stable number that we can very comfortably see, because the repo is not changing. Hopefully, it is not changing, unless it changes for a long period of time, when we'll have to reverse the statement, but at this point in time we believe if repo remains where it is and our portfolio mix is now, I would say, largely optimum, the take rate should remain what it is today or maybe starting to inch forward in quarter three and quarter four. So clear assumption should be is that you could take between 3.5 to 3.75 on stable base cases.
3.5 to 3.75, obviously, also improves the incentives that you would be getting on collecting what you would have disbursed, let's say, six months back or one year back, right?
Yeah. It includes incentives that we collect of almost 15 months back, because merchant loan and personal loan is where the large part of the incentives come in, because this is where we have a larger part of incentives and collections. We have about 15 months back book.
Okay. And the other question was on this [Technical Difficulty]. Revenue from the subscription of merchant devices, would they still be of the order of 100 bucks a month, or you have given a broad range in the presentation. What would be the average number that we can go by?
So, net of GST, it is slightly more than INR 100 a month.
But that's about it, because you've given INR 100 to INR 500 range in the presentation, so, that's why --
So the Soundbox is slightly more than a INR 100. So you can take INR 100 slightly conservatively. And we have the card machines, which depending on the model, can be INR 300 to INR 500, but that is a much smaller percentage of the base. The Soundbox is a much larger percentage of the base.
Okay. So INR 100 is a good number to go by, net of GST?
Conservatively, INR 100 is a good number to go by for the overall base.
The next question will be from Mr. Piran Engineer from CLSA.
So a couple of questions here. One is just a follow-up on one of the previous participant's question, like really what happens to all the employees after three to five years because you, I think, almost tripled your employee count in the last three years or so since the IPO or maybe 2, 2.5 years. And once you achieve your penetration of Soundboxes in the next two years that the rate at which you're going will reach 1.5 crores Soundboxes in another two years. So what really happens to all these employees?
So, Piran, first of all, thank you for noticing that we have never stopped investing in our future growth and opportunity and it is an important thing as continued business we see. And we don't see it as an expenditure that is, let's say, this is one-off. We believe that there is a great opportunity to build a large technology distribution and obviously payment is one part of the technology. Then extending it to commerce in the next part of technology that we are working upon. And then later we could find out some other service and technology that we could give them. So we look at it as a distribution channel and moat for India's small micro entrepreneurs and companies and we believe that we will have different, different use cases at different, different stages of time. So as a direction while we are continuously adding, we will optimize it at a particular point of time when we see that there is not that depth of penetration coming in, or new person productivity is not that much, but right now there is all the reason to add even further.And secondly, like you said, what will we do is, in mature markets, let's say, in a large metro market, we have started to sell deals business, if you've started to notice that which is enabling more commerce. So there will always be hopefully something else, and if we don't find something which is palatable and used for revenue generation, we would happily optimize the number of people, but right now, for next two, three years, we see it continuously growing.
If I could just add one point. So you should see, for example, the device subscriptions, as the revenue stream and the technology which this distribution team is supporting today, we think the base cases that there will be new products and new technologies and new revenue streams that could be distributed to these merchants. So that's sort of a base case, and that's what we are sort of planning towards. I couldn't tell you what will be the killer product three or five years from now, I could give you a few ideas, but I couldn't tell you what the killer product will be, but that's where sort of our innovation comes in.
Okay. And just getting back to Vijay's point, can you give an example of -- like you said in metro cities you started engaging in different ways to improve commerce. So can you just give an example of what that would be?
Gift voucher is a simple example. We are selling gift vouchers of different and enabling it to a number of people.
So this will be even for your mom-and-pop, like Kirana stores?
They may do a deal, more than gift voucher. So there will always be some things.
So if you go to deals, there is a section on Paytm app for deals and cash-back. Within that if you go to there is an icon for deals, and then you can see restaurant deals, you can see retail deals. So restaurants will run deals with gift vouchers, retail stores will run gift vouchers. So that's something that is available on the Paytm app and that has scaled up tremendously on the supply side recently.
And that's because of your feet on street or is it more of B2B partners, like, I think you would tie up with Domino's and say okay, why don't you --
No, Piran, you should see there, there are standalone restaurants there, individual single restaurants. Then national restaurants are obviously there. We look at them as enterprise, and enterprise coverage is like you can see is driven by a particular size of the team, but this is definitely a individual store kind of thing.
Got it. Just secondly in terms of online merchants that we do payment aggregation for, just wanted to understand -- so one is that you get growth because, let's say, your online merchant is growing, let's say, Flipkart is growing whatever, 30%, 40% year-on-year, and [Foreign Language] you also to get that growth. Is there something we can do ourselves to, say, gain market share among all the payment aggregators that they tie up with? And if so, what is it? Is it more pricing led or do we offer more products, how does that space really work is what I want to understand.
Yeah, there are two line items, two key drivers of getting more share of wallet of current customer. Number one is, like you very well said, give more number of payment options. And number two is give better success rates. The pricing is now not a big factor. Incidentally, surprisingly, pricing is actually not a factor, because losing a customer for them is costlier than getting a few bps saved on the pricing. So contingent to the pricing value as a pricing, it is more led by better success rate, more payment issuance.
Got it. And just lastly a pertinent question for now. Any thoughts on Jio? I know it's a pretty broad-ended question. How they could disrupt the merchant lending part of it with their JioMart business is what I'm really alluding to.
I think there is a large market out there to be served by many, many more number of large players, and we believe that this country's opportunity is so underserved that we believe that in India many more big, from distribution to the book ownership, to the large Institute, every kind of space has opportunity for many, many large players. So we believe that there will be opportunity for everyone to co-exist and expand on opportunity. And I think everybody would address it from their standpoint of view. So there will be always an opportunity for everybody to win. And there is no -- surprisingly, the best part I can tell you in this business is there is no winner take all and there is no winning of someone means less for someone. So there is a lot, lot, lot more number of people, many more number of people needed in the industry to serve the small customers of this country.
Next in queue is Mr. Sameer Bhise from JM Financial.
One is on the indirect cost line, still growing 40%. Some thoughts there would be helpful. Should I go ahead or we take that first?
Sorry. Feel free to finish all your questions and --
Yeah. Secondly, on the number of merchant loans during the quarter that stays flat QoQ. Is it purely seasonality?
You could complete the question and Bhavesh is here, he will take this question.
And finally, on Vijay's comments with respect to, one is, employees kind of sales staff on the field kind of spread geographically. Can you indicate what kind of number of towns or cities would they be spread across? And finally on potential use cases, say, three to five years down the line or revenue streams down the line, any examples would be useful if you can highlight that. That's all from my side.
Bhavesh?
Let me take the non-indirect cost question and Madhur can step into that. See, from a purely a merchant lending Q-on-Q piece that you mentioned, again, I want to repeat, we're not chasing a metric which is number of merchants taking credit or value. Our metric is always that we are able to service the demand out there with the best interest of the portfolio for lending partners. Having said that, as the book is maturing, we're getting a lot more business which is very high credit quality of existing merchants taking more versus the newer merchants coming on the play. Quarter one generally is that period of time when newer merchants are less interested with credit because they really plan the business. And Q2 and Q3 onwards we see a much higher demand, and we will see the newer merchants taking more loan and hence, total number of merchants taking loan will increase, but our focus is always to make sure that we are able to retain our existing merchants and merchant loans and obviously ensure we are giving them more, both from a portfolio construct and attention and quality of book.To your location fees, to question of Vijay, yeah, we currently have close to 500 locations, depending upon what product you're dealing with. Our idea here is that if you were to come back last year in the same quarter, we would have been closer to 400. So we kind of added about 100 locations over the last 12 months. Our thinking here is that QR is the first destination product, paper QR and then Soundbox follows and then card machines. So we are obviously delivering QR in much higher number of locations because we also do DIY QR et cetera and Soundbox will follow. So that will be the demand that we foresee over the next two to three years really on the devices side to keep growing and hence, our sales force will keep growing.Madhur, you want to --
Yeah. On the other indirect expenses, there's sort of no one straight explanation to it. There's a number of -- this is the other within the indirect. So it captures a number of our smaller expenses and unfortunately that number is a little bit lumpy. I do expect this number to come down over the next couple of quarters.
Okay. Finally, on the use case opportunities over, say, three or four years?
I don't think we want to get too far ahead and get into sort of speculate zone, but I think the best example that you can think of is that seven or eight years ago when we first launched QR code in India, QR code was the technology, and now four years ago, we started to make devices with the technology. And like Vijay mentioned, we are now seeing an additional opportunity in deals and gift voucher solutions. We've also mentioned in the presentation that we sell loyalty software to our merchants. So those are the things that we're working on. They are not as big in terms of number of merchants or number of subscriptions as QR code is or as devices is, but there will always be -- we are big believers that merchants, when they have more technology and especially if we are able to connect them to our customers, because we have a huge customer base as well on our app, will benefit in many ways. They will benefit on the payment side for sure, but they will also benefit on -- basically being able to grow their business, which is what we call commerce and cloud. So we will discover new and new things, just like we've discovered deals and gift vouchers, is something that we will hopefully scale going forward.
Fair enough. And if I can just squeeze in one more. Could you give some quantification of what has been the gain on the interoperability circular norms with respect to payment margin?
Yeah. So Sameer, the circular came in only in April. There is a bit of head protocols, which the network wants both acquirers and issuers to achieve. So all the market participants, including Paytm Payments Bank will issue as wallet is currently in the dev state and certifications. So I guess, actual benefit can start to accrue end of quarter three and quarter four. It's too early to say, but there will be benefit, but actual benefit can be seen only in quarter three, quarter four.
Okay. So still more upside likely.
I won't use the word upside, because I think the way I would say this piece is it just increases the acceptability of Paytm Payment Bank Wallet, and hence gains more reasons for users who use Paytm Payment Bank Wallet and that wallet product has been growing in spite of growth in UPI, the Wallet product has been growing. It will have further reasons for users to use Wallet because its interoperability will now be across QR codes and payment gateways. So I think more than revenue and the net payment margin impact to it, I guess, that there will be much more benefit of further penetration use case enhancement for Wallet, which will result in long tail result in some benefits also.
We have Manish Shukla from Axis Capital with the next question.
First question, as you look to add more lending partners, do you see you trying to do more type of products or just these three products you think are good enough?
Yeah. So, Manish, I think it's a good question. Our focus is that there is a fair amount of penetration which is still left, if I were to use the word, on the Paytm platform, in other words, industry to further do what we can do in these lines of products. And our current focus is to work with our partners to leverage their understanding of risk in various geographies and their technology capability to build scale. So we're not looking at adding new products but there could be some variants, if I may use the word, of customizing a personal loan or a postpaid, or a merchant loan, but if your question is will we start doing, let's say, mortgages or loan against property, the answer is no. So there will be variants of these products, because we still feel we're in early growth stage of building scale in this business.
Sure. And as it pertains to lending, in the past you've mentioned that two by two constraints, that is not more than two-year tenure, not more than two lakh ticket size, you see that limit those restrictions getting -- let's say, increasing those limits going forward?
Yeah. So we're not increasing limits. I think there is a life cycle of a credit customer. What we have seen is that that is a sweet spot where we're able to get the best return for risk versus reward. Both win-win for lenders and for ourselves. The more higher you go, there is the rate negotiation, but the risk is much lower. So the margin relatively reduces. So our focus has been where we can make the best risk-reward ratio. Currently it's two by two. If we do believe in future, there is an opportunity to have a balanced risk-reward ratio for, let's say, as an example, I'm making -- I'm not giving you a guidance, but I'm making a simple statement, three by three, yeah, we will look into it with our partners. But at this point in time, our focus is to build majority of book under two by two.
Okay. Sticking to loans, looking at the ECL data, just curious, the ECL on PL and merchant loan is almost similar, whereas merchant loan is a daily debit product and PL is a purely unsecured product. So why should the ECL in the two should be same?
Yeah, so I am not sure. This is a risk. This is a portfolio performance question, I'm not sure if it has anything to do with the tenure. But see, PL as a product is largely hinged on users who are looking it as a cash in the bank, where the merchant is actually leveraging that payment inflow that he is getting on a Paytm QR or a Soundbox. It just happens to be that both ECLs are largely pivoting to a similar number, but the return on both products are very different. The personal loan business is operating at 16%, 18%, 20% IRR, whereas the merchant loan products is operating, maybe a couple of percentage points higher. So the return on a merchant loan product, both for lender and us is higher, while with the same ECL. And PL marginally is lower than the merchant loan. It is just a coincidence that both of them are trending similarly, it's not by design.
Okay. And really the last question, the new Paytm SBI RuPay card, are the revenue metrics for these materially different than the other cards that you originate?
No. With SBI, the commercials are similar. The product has a much better acceptance. So if you were to say that if there are 100 people looking for a credit card of Paytm SBI, and now would that 100 increase to 200? Yeah, it could increase to 150, because this product offers the customer the choice to link it on a UPI handle on Paytm app and be able to use it across QR codes of Paytm and other QR codes. So acceptance is the moat of this product, not the commercial. So we will be in a position to give -- expand the market together with SBI of more users wanting to move into a RuPay credit card and link them on a Paytm app and use it across QRs. So hence, in terms of value of total gain that we will get at a cumulative level will be much positive, but the per unit economics is largely similar.
Given the scheduled time of the session, we'll take three more questions. Any questions we cannot address in this session, we request you to please write into ir@paytm.com and we'll be addressing those questions. The next question from the session will be from Mr. Vijit Jain from Citi. Vijit, your line is unmuted.
I think Vijit got dropped off.
The next question is from Rahil Shah.
I just have one question. Directionally, how do you see -- when you see, like -- expecting PBT to break even, excluding ESOP cost? So, just your views on it.
So we're not giving sort of forecast, I think --
No. I am definitely not expecting that. Just from your perspective, so directionally from a business point of view how do you see it improving from here on? So just a tentative.
So again, that would be guidance which I don't think it's appropriate to give on a call like this, but I think if you're seeing our EBITDA trajectory, and if you look at our December presentation, we have mentioned what the growth drivers of our business are, we have also given indications for where we see some of the costs going forward. So for example, we have said that cost of building the platform should be growing at about 15% to 20%, and so on. And we've also given indications of when does ESOP costs start to reduce, which is around second quarter of FY '25. So when all of those things sort of come together, then there should be a rapid translation of EBITDA to net income, and that's sort of broadly how those numbers look.Rahil, are you still there?
Hello.
Rahil, are you still there? Please go ahead.
No, that was it from me. Am I audible?
Yes, thank you.
The next question we'll take is from Mr. Jigar Valia from OHM Group.
Sorry, my connection was bad. If this question was already answered I'm sorry, but I just wanted to understand, couple of things on devices and on the net payment margins. On the devices side, are you having better success in terms of moving people to higher value devices or are you also having better success in kind of getting most of your device footprint to actually pay up a subscription fee? I'm just wondering if the revenue increase that you've seen on a Q-o-Q basis in payments is driven more by devices or is more of a payment instrument type of phenomenon.
Go ahead, Madhur.
So if you look at the net payment margin and if I could answer it that way, I think we've provided commentary that the payment processing margin has also improved significantly. And the reasons for that is -- one is we are seeing a lot of increase in EMI and cards, where we make substantial net payment margin. Obviously, we are seeing increase in UPI and Wallet and all of those things as well. But more recently, we have seen an acceleration in EMI and cards. So that is one factor.The second factor that we mentioned is on the cost side, with the interchange cost for both wallet and postpaid, for slightly different reasons, but we have sort of described that in the earnings release. The growth of subscription is a factor in the revenue, but it is not the predominant factor.And maybe to answer your question and to perhaps clarify, all the merchants who take devices from us pay us a subscription. So they are all on a subscription plan, very, very small percentage of cases run certain offers and so on, but merchants who take devices actually pay us a subscription fee. So you can pretty much assume that all of the 79 lakh merchants who are using our devices or have a subscription from us, are on the subscription plan which generates revenue for us.Does that answer your question, Jigar?
Actually that was Vijit's question. Jigar is yet to ask. Jigar, please go ahead and ask your queston.
I got confused. I apologize. Vijit has dropped off again. So we will maybe talk to him offline. Jigar, please go ahead.
First question is on this average take rate, as our trend has kind of been trending down, and this time it was kind of a bit of sharing on the repo rate hike. Incrementally, the present rate should be a steady rate or you should look at it as our -- the trend kind of continuing for some -- a bit while more before it stabilizes?
So Jigar, I just had mentioned to a similar question previously, I think this is more calibration to not passing on the increase of the last repo rate to the user, and kind of absorb it within ourselves and the lending partner. So there is a small blip of about -- dip -- 0.1% hit in take take rate, but there will be more than compensated, maybe in a long hour of 12 to 15 months on collection incentives. Your portfolio will be dropped because you are choosing much better customers at a marginally okay rate. Having said that, we believe this is the kind of the bottom of the take rate because there is no more further repo rate increase which is expected to happen. If that is the reality, then you can assume this is broadly the range at which we are operating. This from, here on, in a couple of quarters, we'll just start to see this move on.
Other is on the MTU increase, this quarter has been less. I mean, we've been increasing by five every quarter. This time it's been two. But for us the focus is more on the penetration in Soundboxes, and devices have been doing fairly better. So, incrementally, should this be the run rate that we'd look at that instead of adding five, maybe two to three could be the run rate going ahead and incrementally there should be more Soundboxes and accordingly probably one can factor slightly more on the depreciation or the cost as far as devices are concerned?
I think the two answers are a bit different. Our strategy on user and strategy on merchant are different strategies and obviously not kind of competing with each other. So let me first answer the merchant part to you. The merchant part, we remain very confident, both that the infrastructure that we have created of adding more sales force and the product upgradation that we've been able to make, you could see in this quarter, we were adding about a million devices a quarter, now we adding about 11 lakh, 1.1 million. Our belief here is, maybe on a quarter-to-quarter basis, this number will be 11 lakhs or marginally more. So device trajectory will be decently on an upward gain, and we remain confident for not just this year but even next couple of years that this penetration will keep increasing.On the user side, we have had a very clear-cut focus to continuously increase user experience, both in terms of how our app is used by the users to make payments and also the security features. We've been very acceleratedly working on giving newer app versions to our users over the last, maybe, three to four months. And we took a bit of a clear call in quarter one of this year, just to begin with this, that we would like all our users to be using our latest app version, which has better UI, better features, better product experience, speed and better security, et cetera. That resulted in maybe a couple of million users who did not upgrade to the latest app version, not being transacting on the app. Now this is we know a temporary issue. We don't see any negative trend on new user addition or retention of our existing users. This is more of a product upgrade that we would like all our users to use. And hence in this quarter, we've seen marginally, a couple of million users getting lesser. I don't think this is a trend to multiply over the next few quarters. We believe this should continue to grow the way we've grown last year over the next couple of quarters.
Okay. One more was on the payment processing. So clearly payment processing charges have gone down -- net payment income of this, because of the mix, EMI and cards and non-UPI instruments. So if you can share what is the mix overall for us right now, and are you seeing it as a kind of a trend, or it's again kind of a blip and it should again go back in favor of UPI immediately or short term? But is there something wherein you can see this increase in non-UPI and EMI cards picking up well? Actually, is there anything?
Jigar, there is no dip in UPI. It's that other instruments have gone up, because we have deployed more devices. So more devices means that we can acquire more card payments and credit-related payments, but UPI has dipped is not the fact.
The UPI continues to grow well on our platform. But what we're seeing is that other instruments are also now growing at a higher rate than they were previously, especially because of the success that we're having on card payments and EMI payments, both online and offline.
Understood. Depreciation, largely should continue at a slightly higher rate, given the traction is little better?
So the depreciation, we do depreciate the devices quite conservatively. So for example, the Soundbox is depreciated over two years, even though the life of that device we think is longer. So we should see the depreciation last quarter as a bit of a base. And as we expand the platform, or we expand the merchant base, rather, than we should see that continuing to inch up.
The next question we'll take is from Mr. Saurabh Kumar from JPMorgan.
So just two questions. One is what is the contribution of the distribution business in the overall financial services pool and how has that been trending? And the second is on this unsecured lending, so if there is additional price competition in the market, because all the banks and NBFCs are going here, who absorbs the ROA hit? Will there be a chance that Paytm again kind of takes some part of that, or do you think that you have the ability to pass this on to the lending partner? These are the two ones.
So let me take the second question first and then come to the first question. See, there is, as I said previously also that there is a balance of risk and reward. Our belief here is that a good business is built where that both partners are making money, which is Paytm as an LSP, a lending partner, as a regular entity. The consumer has to love the product and hence, sticking on to the narrative of two by two and sticking on to the narrative of giving the best product experience gets you the upside.Having said that, I want to be very clear in my assessment that if this is the end of repo increase, I don't think anybody has to suffer with regards to any compression of revenue that they are making. If, for whatever reason, we will see in the future repo was to go up again, right, then we will have to calibrate to how much to be passed on, how much to be retained et cetera, because this is the peak of the repo, in my opinion. Beyond this, if you really pass on to users higher interest cost, you may see deterioration of portfolio, which is not the focus here. Right?So we don't see any margin compression happening on the current state. If the repo was to starting come down, which maybe, let's say, in quarter three or quarter four, we will only see marginal increase of portfolio mix and marginal increase in our revenues coming out of that thing. On the first piece, if you could repeat the question would be great, because then I can contextualize the answer to that?
Okay. So Bhavesh, just on the second piece, my question was irrespective of the repo, let's say, so the bank started using PL rates because I mean, we have seen repo rates increase, but PL has not gone up. So my question was essentially, due to competition if it comes down what happens? And the first one was, what is the contribution of the non-lending in the distribution business? You're stockbroking other piece in the insurance distribution in the overall financial services revenue and how has that been trending.
Bhavesh if you allow me, I'll take the first question quickly and then you can please explain the impact of repo rates and competition, and so on. So Saurabh, in our Financial Services and Others revenue, depending on the quarter, roughly 85% is related to the loan distribution and collection business. I should point out, and we have sort of a large explainer on this in the earnings release that the MDR that we earn on Postpaid does not go into the Financial Services and Others within the payment business. And all of the credit card, co-branded credit card business that we do with HDFC and SBI and others, goes into the cloud part, right? So you're looking at 85% of that Financial Services and Other revenue being related to loan distribution and collection for those three products, excluding the Postpaid MDR.
And it will be growing at the similar lines as Financial services, or slower or --
Currently, it is growing at now roughly the same pace. Over the last couple of years, the share of loan distribution and collection has grown, which is what might be obvious from the fact that that business has scaled up from being really very small three years ago, to be one of the largest revenue drivers for Paytm.
And Saurabh, to your point again with competition increasing, we haven't seen actually, to be very honest, competition increase in less than two years and a 2 lakh ticket size business because a large part of the banks are actually focused on more high ticket and longer tenure. There the competition is a much higher competition, and currently, we are not in that space of offering our ticket at longer tenure. So in this space, it is more to do with what is the right risk-reward, I'll again repeat that you could actually pass on and try to earn a much larger revenue share for yourself or with a partner, but maybe originate not the best credit quality in the system. So this is less of a competition issue, but more of a portfolio mix issue. And hence, we don't see that there is a challenge on the revenue that we or our partner earns in this cohort. Yes, in a larger cohort, there could be some competition and some challenge.
And now for the last question of the session, we'll take it from [indiscernible].
Two questions. One is, of the 3.5% to 3.75% that we get for loan distribution and collection, how should we think of the split between the two activities? And the second question is on the same lines. For our collections, in a scenario whereby, let's say, the vendor judges collections to be deficient, are there any penalties which can exceed the 3.75% that we earn combined on loan distribution and collections?
So Anand, we've always maintained that point of view that we don't offer any kind of guarantees. The lender is free to decide whom they want to underwrite, what is the loss that they want to zoom in the commercialization of this model, and whatever is the upfront they intend to pay us and what they want to pay us as a collection incentive. Let's say, an example, the lender has a 5% expectation of loss and the loss was to be 6%, that 1% belongs to them. If the loss is 4%, then 1% belongs to Paytm, because we are spending the effort and the cost to be able to collect on that account. So we don't have any kind of liability, explicit or implicit, to be able to get anything in our system with the portfolio performing worse off than what they anticipated. And so I'm just mindful of repeating this piece, and now that with FLDG et cetera coming into play, obviously, there will be many more lenders who will take FLDG et cetera from different partners, and we'd like to deal with that model differently, but our model remains what we've been able to communicate here in our system.
And how should we think of the split between, let's say, distribution and collection services?
Yeah. So different products have different maths. Postpaid has lesser distribution -- I would say there is MDR, there is convenience fee et cetera, but I'll give a simple answer. As an aggregate, you could see about 0.5% to about 0.75% of current disbursement coming as collection incentive and the rest coming as distribution.
I think we are way over time. But I'm conscious that there are probably more questions and we have run out of time. So please, I'll request everyone who still have questions to feel free to write to ir@paytm.com and one of us will come back to you over the next few days. In any event, speak to you over the next week. I'll hand it back to the moderator.
Thank you Mr. Deora. So with that, we come to an end of this earnings call. Thank you for joining and for your questions. And as Mr. Deora said, please do write into ir@paytm.com for your pending questions. Thank you.
Thank you, everyone.
Thank you very much.