One 97 Communications Ltd

NSE:PAYTM

Earnings Call Transcript 2023-Q2

[Operator]

Thank you for joining, and a warm welcome to Paytm's earnings call to discuss its financial results for the quarter and half year ended September 30, 2022.

From Paytm's management team, we are today joined by Mr. Vijay Shekhar Sharma, Founder and CEO; Mr. Madhur Deora, President and Group CFO; Mr. Bhavesh Gupta, CEO of Lending and Head of Payments; and Mr. Anuj Mittal, Vice President, Investor Relations.

Before we start a few standard announcements, this earnings call is meant for existing shareholders of Paytm for potential investors and research analysts to discuss the company's financial results. This call is not for media personnel. If any media representatives are attending this call, request you to kindly drop off the call at this point. The information to be presented and discussed on this call should not be recorded, reproduced or distributed in any manner.

Some statements made on this earnings call may include forward-looking statements. Actual events may differ materially from those anticipated in such forward-looking statements.

Finally, this earnings call is scheduled for 75 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 online subsequently.

With this, I would like to request Mr. Vijay Shekhar Sharma to kindly initiate this earnings call.

[Vijay Sharma, executive]

Thank you, and hello, everyone. Good evening, good morning. I'm very happy to welcome you all for our earnings presentation for our quarter ending September 2022. As you may have seen, we've had a good quarter, as teams have performed very, very well on focusing on our commitment to target breakeven by second quarter of next year before ESOP cost, as you know.

I will give you a little bit of summary of the business model once again that we acquire customers, and we have 80 million transacting customers. And these customers, in turn, bring us merchants, and we have 30 million merchants, who in turn work and give commerce services to consumers. This makes our business model core business to acquire customers on payments, and in turn, because this gives us insight, ability to distribute and a great brand name, we work with our lenders to distribute credit.

So as you will be aware, over the period of time in last 4 quarters, we have trimmed, since IPO, tremendous amount of businesses and focused on key business areas and [ prominent ] many business line items, and made it very clean and clear that we acquire customers for payments and distribute loans from our credit partners.

In fact, our payment business, which is based on our merchant side business model where we deploy QR codes for merchants to enabling them for soundbox or giving them for various devices and enterprise payments, we have expanded into online omnichannel merchant, which is an approach that the market is taking shape towards. I believe the payment will become more and more omnichannel, where companies are going to be -- online companies are going to be significantly offline and offline companies are going to be online.

Case in point, Flipkart, with whom we work, has lots of online business. We also help them take off-line payments because there is a lot of cash on delivery of that. So this is something we keep an attention to and then merchants use our platform, which we call consumer payments, to collect payment. So technically, online merchants use our app to collect payments. If you notice, our payment business, which is core payment business, thanks to a model where we have added subscription and UPI MDR, which we don't account for yet in our business model [indiscernible]. So subscription and MDR revenues mostly and a little bit of platform fee.

So these revenues right now that you are seeing on the right side are inclusive of MDR, subscription and select customers' platforms fee only. The government's giving of UPI subvention revenue is going to be driven only in the quarter that we get that money. So these are the revenue line items that we ended up making absolutely for payment-payment and enabling commerce and cloud service also grew very healthily year-on-year. And as you can see, this is a business that is 55% up year-on-year, INR 1,550 crores.

We believe the payment stack is this a stack where we help merchant take payments in different, different avatars, locations, occasions and opportunities and enabling them for commerce. This stack makes for a scalable, large, growing profit and profitable business model for payment and enabling cloud commerce business.

Credit business, as you are aware, is based on the foundation that our abilities of digital lending sourcing and cross-selling partnership with our lending partners and over the period helping them collect the loans, make this business model, I call it, typically fund management that this is a part where we get fixed fee. This is a part we get sort of a portfolio performance or carry, if you will. So you can imagine that this business model has an inherent compounding because when we disburse the loan, we get a certain percentage, but our ability of collecting, our ability of effort of collections enable us to get sort of a portfolio performance bonus on that.

Important thing to note is that in last quarter, RBI came out with clarification around digital lending, sourcing and EMI servicing collection opportunity. Paytm's business model was completely looked as clearly following the suggested guidelines. So we are very happy to tell you that we have been able to include every delta incremental, whether small or large, in the business model, and business model was very, very much aligned to how regulator sees it.

We continue to believe that this loan disbursement and collection business for India will play an important role in democratizing credit. If you remember, at one point in time, RBI leverage public sector banks, then created private sector banks, then created NBFCs, and now we believe different buckets of credit requirements were satisfied with that. And today, the digital lending, lending service provider as LSP RBI calls them, which is what Paytm is here, will generate and create new opportunities for disbursing digital credit.

As you are aware, our digital disbursement are typically small ticket loans, and we internally call these 2 businesses as INR 2 lakh and 2-year tenure kind of loans, where [ average ] [indiscernible] are 1 lakh plus 1 year and 150,000 plus 1 year. And this is what the typical ticket size anyways remains in personal loans, merchant loans.

And for the postpaid, which is where customers get an overdraft limit from lender to spend, it is typically now averaging around [ 14, 500. ] The good part, in my opinion, is that while these are incredible year-on-year growth, they are a very small fraction of our customer base, which is in availing all 3 services for us. And it is -- there is an incredible amount of headroom for our disbursement opportunity quarter-on-quarter, and we continue to see, post reclarification, a reconfirmation from RBI that this business model and this workflow is how regulator expects. It has now opened doors for many more lenders and many more partners to continue to join us and expand this business.

I would now call upon my colleague, Madhur to expand and give you a summary of overall business and the numbers. Madhur?

[Madhur Deora, executive]

Thanks, Vijay. Welcome, everyone, to our earnings call. I'm very proud to report that we had a very strong quarter. Our revenue growth, as you would have seen from our earnings release, was 76% year-on-year. And our EBITDA before ESOP cost improved by 61% year-on-year.

Just to get into that, revenue from operations was INR 1,914 crores, so just under $1 billion run rate. Our contribution profit continues to improve. It's at 44% of revenue. A year ago, this number was at 24% of revenue, so a significant step change over the last 12 months. And even on a quarter-on-quarter basis, we have had a slight improvement and we're currently doing INR 843 crores of contribution profit.

Our EBITDA before ESOP cost is really starting to see operating leverage come through. So INR 166 crores of revenue, less than 10% of revenue as a loss. And our -- it is a nearly INR 260 crore improvement from a year ago and over INR 100 crore improvement from last quarter. So by all measures, a significant improvement in EBITDA performance, and we expect -- and for the last 2 quarters in a row.

Operating highlights that Vijay already talked about, value of loans disbursed, INR 7,300 crores, up nearly 6x, and even a quarter-on-quarter basis continues to grow at a very fast flip. And merchant subscription, which is our payment devices primarily, at 4.8 million devices, 3.5 million added over the last 12 months and obviously faster right now.

There is a breakup of revenue, the basis point of the stages that we have seen platform expansion and increased monetization across businesses. So this is not 1 or 2 businesses carrying the overall performance. Our Payment Services business is up 56% year-on-year and up nearly 10% quarter-on-quarter. Financial Services obviously growing a lot faster, driven by lending. And Commerce and Cloud grew 55% year-on-year and 14% Q-on-Q. Some of you may have noticed that there's a small amount of other operating revenue here. This has to do with basically a fund that RBI has which promotes acquiring side for eventual payment infrastructure, and we are one of the beneficiaries of that. So it is payments revenue, but our auditors asked us to put that as Other operating revenue rather than as Payment Services revenue. So that's where it is.

Our contribution profit, like I said, a year ago was 24% of revenue. Now it's at 840 -- sorry, 44% of revenue, so both in absolute terms and even as a percentage, a significant increase. The 2 main reasons for this, payments for us is now more profitable. You would have seen that our net payments margin has grown to INR 443 crores per quarter, significant improvement in that, and we'll talk about that a little bit later. And clearly, there is a benefit from high-margin loan distribution, giving us better mix.

On the right-hand side, we're very proud of the fact that we continue to invest in our business in 3 main areas: technology, sales and marketing. So for example, a year ago, we had INR 94 crores of investments in our sales team or spend in our sales team every quarter. That number is now INR 172 crores. So despite increasing the investment, which we believe is important for long-term scale and growth for Paytm, we are able to show operating leverage in both from 63% -- Internet costs at 63% of revenue, down to 53% of revenue, so significant improvement due to operating leverage.

All of this translates into strong EBITDA performance. EBITDA, like I said, has gone down by 200 -- EBITDA losses has gone down by INR 260 crores a quarter, due to huge operating leverage. And our EBITDA before -- EBITDA margin has improved from negative 39% to negative 9%. So 30% margin swing in a single year due to focused execution. And as you have figured out by now, 20% of that was from contribution margin improvement and 10% of that was from luxury and indirect expenses.

Just to get into the payments business a little bit, again, payments, we, as you know, disclosed that payment services to consumer and payment services to merchant, the growth of both these businesses is roughly the same: 55% year-on-year for consumer business that is basically due to our growth of MTU and GMV; and on the merchant side, 56% growth, which should yield INR 624 crores. And the reason there was subscription and MDR revenue from off-line merchants. We did see a meaningful growth in revenue from online merchants this quarter as well, primarily because of some early festive in e-commerce, so some of the big sales that happened in September and so on.

As Vijay pointed out earlier, we don't have UPI incentive recorded this quarter, consistent with our methodology last quarter. We only record UPI incentives when it is confirmed by METI. Net payment margin is up 5x year-on-year to INR 443 crores. And in addition to the revenue momentum, which is the main reason for it, we continue to focus on reduction in payment processing charges, and that's why we get the significant uptick.

Some key operating metrics for payments. Our MTU is up 39% year-on-year, so strong performance there continues. That is driven by sort of increasing customer acquisition at relatively benign tax but also an improvement in customer retention. Our GMV was up 63% year-on-year, like we mentioned in the last quarter. Our primary focus in our payments business is to have profitable revenue rather than GMV as a metric. So there's enough and more GMV that one can go out and get. The key thing is, can you make revenue until you make net payment margin off of it. So that's what we optimize for. And as we had mentioned in the last quarter, we got rid of some business that we did not feel either generated as revenue or net payment margin or have significant upsell opportunities. Despite that, we're up 63% year-on-year.

We'll continue to trim business that we don't make net payment margin on, but we will continue to become -- try to make our payments business more and more profitable. Merchant subscription, we have talked about that. We are now at 3.5 million.

With that, I'll hand over to Bhavesh, who should take us through the next few slides, please.

[Bhavesh Gupta, executive]

Yes. Thank you, Madhur. Good day, everyone, good morning. Our lending business continues to show good results. As you can see that we ended our revenue from financial services, the predominant part of the financial sale revenues coming from lending, while our equity broking business and insurance business also started to contribute. We had 4x growth from INR 89 crores last year same time. We added INR 349 crores. And the important part here is that our entire focus continues to be on a lending business aligning to the new guidelines. We were always aligned, as Vijay said in his opening statement. We had to make some adjustments that we made to be absolutely aligned to those pieces, and we are happy to inform that there was no disruption in the business. Our business continued to perform exactly for every single day in the same manner. And our BNP business, personal loan business, commercial business continues to demonstrate the strength of the opportunity that we have into the Paytm platform.

Next slide, please. Yes, coming to the numbers here, postpaid personal loans and merchant loans, the good information about here in this business area is that all the 3 businesses are now showing tremendous growth. We are seeing postpaid, which has moved up 5x. We're now disbursing -- we disbursed actually INR 4,000 crores. And if you look at the September run rate basis, this business is obviously looking at a very healthy growth rate. It continues to demonstrate great penetration for merchants, and I'm very happy to inform that we have now added 15 million merchants who accept Paytm Postpaid between offline and online. This is arguably the largest acceptance of any credit instrument across any funding sources in the industry. And we do see a very large amount of merchants, both on and off-line, coming towards getting into this 15 million addition, and we hope to see this number continue towards [indiscernible] [ 20 million ] and beyond in the next couple of quarters.

On the fact that postpaid is just still 4% of our MTU, that's the headroom that we see. And we do see new acquisitions continuously happening in a manner that we were seeing in, let's say, 2 quarters back. So there is no let down of new customers getting onboarded on Paytm Postpaid. And hence, it gives us tremendous confidence that this growth of Paytm Postpaid will be as robust as we've seen in the previous quarters.

Coming to personal loans. I think personal loans has been growing very, very nicely on a small base. But if I look at June '22 and September '22, from there also, it has almost doubled its business. Now there are 2 reasons behind this massive growth of personal loans. One, as the Paytm Postpaid business is maturing, we are finding that our lenders are getting very comfortable seeing the mature book of the Paytm Postpaid business and often on personal loans. So almost half of our personal loans have been disbursed to customers who have running Paytm Postpaid loan in one of our lending partners. So the journey and the entire customer appreciation of the product is extremely simple, and that's giving us a good growth trajectory, and that is continuing because Paytm Postpaid is continuing. We will continue to see PL also continue on the back of Paytm Postpaid.

The remaining 50% is the customers who are directly coming and applying for PL on our platform. And we also see that trend actually being a nice trend because these are consumers who are looking for a bit higher ticket size amount and they are seeking for something which is instant. And as you understand, that 24/7/365 days is the positioning theme for Paytm PL, and that is giving us a good headroom and head start.

So we, again, don't see any issue with the TAM. It is hardly less than 1% of our MTU as personal loans. And there is a fairly decent amount of headroom ahead for us while we are now almost averaging INR 900 crores plus per month on PL and we're clearly seeing good traction moving ahead for ourselves.

On merchant loan, there was a bit of a concern 2 quarters back when we were in COVID, how would merchant loan grow, et cetera. I think that's behind us now. The quarter behind June saw the first focus from our perspective and lender's perspective in getting the risk capital back in merchant loan. And this quarter was absolutely bang on. We saw great momentum, great acceptance from merchants in seeking merchant credit on the back of great device growth that you see, almost [ 1 million ]. This number is actually getting good traction, and I can very clearly see that in coming quarters, merchant loan will continue to see great momentum on the back of our devices story. So all in all, overall disbursement business and even the collection performance that we talk about in the further slides has been showing great momentum. And we don't see this momentum very slow down.

We do see calibration happening by lending partners, which is more initiated by ourselves because we do understand that quality of portfolio for lending partners is a more important obligation than just giving the business. As a result of that, every month by design, we work with our partners to take out the last cohort, 5% cohort in our businesses, and make sure that, that cohort is not getting renewals for the next month, so that the portfolio quality is maintained the way it should be maintained. So all in all, a good story for us on the lending side.

This is the portfolio side. This is purely indicative slide, as we always mentioned, from a lending perspective for accumulation of all and new partners. As we are the collection outsource partners for our lenders, this is an indication. There has been no change that we have seen over the last 2 quarters in this business. The bonds rates, the recovery rates in bucket one, the resolution rates on gross credit losses and the expected credit cost continues to be the way the lenders are expecting.

I can also confirm, while the ECL numbers called out are the numbers that you written, the actual credit loss performance is better than these numbers. But we continue to maintain a conservative stand and so do our lending partners in making sure that they are providing enough for the credit losses, looking at the macro headwinds or otherwise, and hence, the risk appetite and the risk portfolio will be built on this piece.

So even on the portfolio, we're seeing very good signals, and we're not so far seen any kind of macro headwinds impacting the portfolio, and that is giving the strength to our lending partners and new lenders to come onboard and expand this entire business portfolio with Paytm.

[Vijay Sharma, executive]

Thank you, Bhavesh. Just in the last couple of slides, we want to cover Commerce and Cloud revenue. Our commerce business is up about 50% year-on-year. Travel merchants continue to do well. Our entertainment merchants typically have a seasonally weak quarter in Q2, both on movies and events side, so that has some impact on our quarter-on-quarter performance. Cloud business, on the other hand, continues to do very well, 58% improvement year-on-year to INR 252 crores.

We have started to see some early signs of recovery in advertising revenue. We did mention in the last quarter that there was a meaningful amount of pullback. So just towards the end of Q2, we started to see some recovery, but also it's too early to tell that it will continue for the next several quarters. On the other hand, we do see both in our credit card distribution as well as on our cloud revenue, so those businesses do well.

And finally, we just wanted to summarize and leave this with you, which is our improvement in EBITDA before ESOP cost is continuing while continuing investments in scale and growth. So what we focus on is 3 main levers: one is platform expansion so that we have high monetization capacity down the road; our monetization engine is working, which is revenue growth across all businesses; and finally, on profitability, improving our unit economics while generating operating leverage as we continue to invest in our business, and that is giving us improvement in EBITDA before ESOP cost.

So that's all I had. And I'll hand it back to the moderator, who can help us with Q&A.

[Operator]

[Operator Instructions] We'll take the first question from Mr. Vijit Jain from Citi.

[Vijit Jain, analyst]

I have a couple of questions. One, on the personal loan side, Q-o-Q has the growth come from outside of the postpaid base of customers? I ask that because I recall last quarter, the share of postpaid customers was 50%. This quarter, it's 40%. I'm just wondering if there's greater growth from outside that base? That's one. And I'll just come back with the next question.

[Bhavesh Gupta, executive]

Sure. Thank you, Vijit, for the question. So your observation is right. Actually, it is on number of loans because we have grown much, much larger than the previous quarter. Percentage looks that 40% has come from postpaid, but there's nothing material has changed. One, definitely a material change which has happened, as the personal loan book has started to mature more, and I mentioned about this last quarter also, earlier, broadly, we were doing about 10% approximately out of existing personal customers when they close their loan are new loan lenders. That percentage has now started to inch more total to 15%, 17%. So that has been -- and that ticket size is a bit larger. So hence, the value of loans coming from existing personal loans customers has increased, but the postpaid number of loan penetration into overall PL has remained the same. So it's more mathematical outcome, but no material change in terms of the customer adoption of the product.

[Vijit Jain, analyst]

Got it. My next question is in terms of overall lending partners, is that number at 8 right now same as last quarter? And could you share what percentage of loans disbursed? Is [indiscernible] the partner with the highest share among those 8?

[Bhavesh Gupta, executive]

Yes. So the number is actually 9. We've got 3 card partners, and we bought, I think, about 5 or 6 lending partners. We don't actually disclose the share that we do, but I can definitely mention to you that we have partners across this category who do personal loans, postpaid and merchant credit. So there is not one partner who's taking the lion's share of this business. There is a material distribution basis, the lenders' appetite on how much business they want to take. But currently, it is reasonably well distributed amongst the partners that we have.

And to your other question, we had announced publicly that we've added one more lender, which is Piramal Enterprises. Hopefully, we will take them live sometime in quarter 4, and we have a decent pipeline of new lending partners that intend to get onboarded to leverage the Paytm ecosystem and the platform for credit. And we obviously welcome all the new partners coming on board, and we will be adding them in due course of time.

[Operator]

The next question we'll take from is Mr. Saurabh Kumar from JPMorgan.

[Saurabh Kumar, analyst]

Am I audible?

[Operator]

Yes, you are.

[Saurabh Kumar, analyst]

Okay. Just 3 questions from my side. One is the indirect cost reduction, which we've had for at least -- I mean the cost control we have, how should we think about the indirect cost growth from hereon? The second is, if we look at the EBITDA trend, it's very clear that you put on positive or EBITDA neutral at least maybe by March quarter, so will that be a fair assumption to be making? And lastly, on the credit card business, could you just target a comment on what's the card [ processing ] velocity at this point of time? And how should we think about it?

[Vijay Sharma, executive]

Thanks, Saurabh. Maybe I'll take the first 2, and Bhavesh could take the third question. So on our indirect expenses and EBITDA, maybe I'll take it together. We, obviously, have given EBITDA guidance for breakeven, which is September 2023 quarter. Compared to the time when we gave that guidance, we are ahead of our plans, but we would like to maintain our September 2023 guidance for EBITDA breakeven.

On indirect expenses, in particular, obviously, our focus is to make sure we reduce our EBITDA losses as for the guidance that we have given. But when we do see opportunities, and we do see many opportunities to invest in our business for short and medium-term growth, we do take those opportunities. While our last quarter number was relatively flat on indirect expenses, you would have seen that on a year-on-year basis, we've actually increased our indirect expenses by 47%. So we do make -- continue to make investments in our business. And we have the sort of luxury of being able to do that because our revenue and contribution margin are performing really, really well. So we can achieve both objectives of reducing our EBITDA while continuing to invest in indirect expenses where we see high ROI. Bhavesh, you want to take the question?

[Bhavesh Gupta, executive]

Yes, sure. So Saurabh, on the card business, we are very excited in building our cards business. It's a very nascent business that we started about 18 months back. We're very privileged to have 2 of India's largest issuers as our partners: HDFC Bank and SBI Card. And hence, our portfolio of cards business has shown robust growth. While we've not declared actual numbers, but we -- I can only suggest to you is at this point in time, that business is operating much beyond our expectation in terms of customer adoption, coming on the back of the fact that the customer value proposition, which is powered by our issuing partners and obviously powered by Paytm platform usage, is really giving us good customer quality with our issuer are very happy with, and we are seeing very high scale of the card business.

What we believe, it is that our aspiration to build at least 1 million cards a year on issuing side, maybe over the next 12 to 18 months, continues to remain as strong as ever, and we would be guided by that as we build this card business. And hopefully, in the future, as we feel that it is now a material side of our business, we would like to disclose more details about it.

[Saurabh Kumar, analyst]

So target 1 million cards in 12 months, is that your guidance, right?

[Bhavesh Gupta, executive]

No, I'm saying we continue to aspire to build 1 million cards over the next 12 to 18 months. And that's the aspiration that we would like [indiscernible].

[Operator]

The next question we'll take from Mr. Kunal Shah from ICICI.

[Kunal Shah, analyst]

So firstly, again, to touch upon this question with respect to the postpaid. In fact, when we look at the overall direction in terms of the number of loans disbursed, in fact, normally, it used to be in the run rate of say, 2-odd million, but now this quarter, it seems to be slightly on the lower side. So just want to get that change in terms of on the postpaid, why it's just like 0.6-odd million? And how should we look at it, because it's hardly like 7%, 8% kind of a sequential growth?

[Bhavesh Gupta, executive]

Yes. So Kunal, we had to make some adjustments with regards to new digital guidelines, which we had called out very clearly, which meant that the -- our lending partners and ourselves, we had to make adjustments in terms of fund flow. That clarification took time from the regulator. I think it came in about 40, 50 days later on, that the entire fund flow has to be reorganized in this manner, which was the way we were doing and hence, that is a disruption that we saw in the last quarter. But it is from a new customer origination and acquisition perspective, we continue to see very robust growth. Every month, we're onboarding more than 400,000 new postpaid customers. So that hasn't stopped. It was just a recalibration that we called out in a specific call that we had done that we align to the fund, which took some time for us to align and clarification, which is now behind us.

[Kunal Shah, analyst]

Okay. So when we look at it now, incrementally, the run rate should get back towards that number. So this was just a quarter's disruption, and that's more or less corrected?

[Bhavesh Gupta, executive]

Yes. So very honestly, we don't track this on that basis that how much is postpaid doing in terms of number of new incremental loans. We track on basis on new customer acquisition. I can definitely confirm to you that our new customer acquisition on postpaid will be highest ever that we've seen thus far, and we'll continue to have the same trajectory. What will that mean in terms of new customers converting their postpaid lines to actual loan is a matter of conjecture, which will happen as per the customer expectation for the next quarter. It should broadly be the same range, but I can't comment actually will be 2 million or 1.5 million or 2.5 million, but it will be in that range for sure.

[Kunal Shah, analyst]

Sure. And secondly, with respect to the direct cost on the promotional cash back and incentives. So whatever would be the incremental which is there for the quarter, maybe almost like more than 30% kind of sequential price out there, any color that you can share in terms of how much would be related to the payments and how much would be towards the rolling out of the financial services or maybe enrolling more of the customers for that service? And how much would be towards e-commerce here?

[Vijay Sharma, executive]

Bhavesh?

[Bhavesh Gupta, executive]

Yes. So actually, the cash back is split into predominantly into 2 parts, which is that we do cash back on our payment services. There is some customer incentives that we also used to pass in September for promoting postpaid at different online merchants on behalf of vendors. So that cash back increased because postpaid of the GMV was very high in the last quarter. That cash back saw a rise. But what we figured out very clearly now with our partner set is, if that is -- that is actually a payment charge. So from next quarter onwards, that will start showing in the payment charges. So that postpaid incentive will all move to payment charges. So it is predominantly the increase that you see in the last quarter is driven by postpaid.

[Kunal Shah, analyst]

Which is driven by postpaid, yes?

[Bhavesh Gupta, executive]

Postpaid, yes.

[Madhur Deora, executive]

Kunal, one more thing I'd like to add here. This is -- your question was [ link it ] in, let's say, payments, commerce and financial services. So postpaid because we are accounting for it as a payment, so incur post payment charge from next quarter. So we will see payment charge line item. But the commerce part, incidentally, we internally have a key KPI that it should not be more cash back than the margin. We've talked about in our previous earnings also, where our commerce business continues to operate with profitability as a target, and it has achieved profitability, complete operating full cost loaded profitability. And like you said, we -- I mean we don't have it immediately available that this much was for payment, this much was for commerce. In payment, the cash backs are given only as an incentive to the new customer. If you are a first-time customer, we give you incentive to try out different services. But if you are an old customer that is reduced dramatically, and that is how the cash back and marketing expense were reduced over the period.

[Kunal Shah, analyst]

Sure. and lastly, in terms of e-commerce now that maybe with the opening up of all the activity levels and the situation stabilizing, and now we would get a more sense in terms of how the overall [indiscernible] is, say, for Paytm with e-commerce. So sequentially, I think there was a dip. But otherwise, how should we actually see the traction with respect to e-commerce business going forward?

[Bhavesh Gupta, executive]

More or less, under all commerce, we do 3 kind of commerce. One is led by shopkeepers, commerce dealing with vouchers that shopkeepers enable. Second is ticketing commerce, which is led by movie trade, Cinemarc and all these commerce. The movie part has not come back, by the way. We want to still tell you that movies footfalls have not happened yet. So one of the important driver of the commerce, movies have not happened. Third is advertising, which is definitely not just -- because we treat credit card as advertising. So for us, it definitely has grown. And like I said, the first part, where we help the shopkeepers has grown and travel has grown but not movies.

[Operator]

The next question will be from Manish Shukla from Axis Capital.

[Manish Shukla, analyst]

Firstly, what does it take for a merchant to start accepting BNPL, because that number is growing very fast, have now 15 million merchants. So what does a merchant need to do to start accepting BNPL?

[Bhavesh Gupta, executive]

So Manish, the merchant has something called a Paytm for Business app. On the Paytm for Business app, the merchant can subscribe to this service. Depending upon the category of the merchant, there is a charge to merchants to accept. And it could also be given free if you are a very, very small merchant and we would like to enable that merchant for Paytm Postpaid. The moment the merchant accepts the terms and conditions for Paytm for Business app, it is -- the merchant is onboarded. If the merchant meet status criteria as defined by this team because the credit instrument where the merchant is allowed to go through risk criteria. So that is how the entire onboarding process works. It's completely digital and it is obviously DIY for the merchant.

[Manish Shukla, analyst]

So the number of devices, we are at 5 million, and acceptance of BNPL is at 15 million. Should we think of that 15 million as a potential universe where you can cross-sell devices?

[Bhavesh Gupta, executive]

Yes, I think that could be one of the ways, because these are materially decent-sized merchants, then only they meet that risk filter and also they need the classification for themselves to accept a credit instrument. Yes, so you could say that could be an opportunity, but not an exact opportunity. But yes, that could be an opportunity for us.

[Manish Shukla, analyst]

Okay. Moving on to platform fees, could you tell us how does the platform fee work and what percentage of your users might be paying platform fee at the moment?

[Bhavesh Gupta, executive]

See, platform fee as a part of our overall revenue is a small number. We, for our various categories when customers come on the Paytm app, right, for doing certain set of connections and activities, let's say, movie booking or doing some recharges, et cetera, there is a small fee, which is limited on a cohort of customers for -- because we offer them various other value-added services, including and not limited to things like bill reminders, AutoPay, et cetera, et cetera. And hence, these customers subscribe to these services and they end up paying a platform fee. But purely from a rupee quantum of this charge, that charge is still very immaterial to the overall revenue that we made from payments.

[Manish Shukla, analyst]

Has there been any communication or otherwise from the regulator or the government about this platform fees being levered because in some sense, technically that makes UPI as not a free service, right?

[Bhavesh Gupta, executive]

No. So I just want to clarify, Manish. There are 2 different parts. There is no platform fee that we're charging to merchants when we're giving them any kind of earning source. Some of the competitors do that in the online space. We are not changing those kind of fees, et cetera. This is -- the fees that a consumer is paying when they are trying to consume certain services on the Paytm platform, the regulator has very clearly called out on what services you can charge and on what services you cannot charge. But once they have allowed us to charge, we are charging on them. So it's completely compliant to the regulatory guidelines.

[Manish Shukla, analyst]

Okay. And the next question, the -- in response to an earlier question, you said that the -- starting next quarter, accounting will move from cash back to processing charges. Is it material enough for you to fall into report a sequential decline in net payment margins?

[Bhavesh Gupta, executive]

Madhur, do you want to take that?

[Madhur Deora, executive]

Yes. It is a material number, but our net payment margin sort of continues to grow. So it will have some impact, but we don't think it will lead to a drop in net payment margin per se.

[Manish Shukla, analyst]

Okay. And really the last question, any update on your payment aggregator application with the Reserve Bank?

[Bhavesh Gupta, executive]

Yes. So the payment aggregation, which is our Paytm payment services license, is in progress. Whatever engagement that we had to do with RBI has happened. As you can see publicly that various other PAs have started with a license. We do believe that we should also be getting our own license in due course of time and pretty soon.

[Operator]

The next question we'll take from Rahul Bhangadia from Lucky Investments.

[Rahul Bhangadia, analyst]

Congratulations on a great set of numbers. Just one question. What should we expect the CapEx rate to be in -- on a run rate basis, I see H2 last year and H1 this year were reasonably higher than what we used to see before.

[Madhur Deora, executive]

Yes. So Rahul, most of our CapEx is related to Soundbox and devices. And as you know, we have ramped up -- ramped that up, and we have continued to talk about there being a large opportunity there. So currently, I think we're doing somewhere between INR 120 crores to INR 150 crores a quarter on overall CapEx. As I said, vast majority of that is related to devices. And you should expect that to be broadly the level over the next few quarters.

[Rahul Bhangadia, analyst]

So roughly about INR 400 crores to INR 500 crores per annum [indiscernible] we should expect?

[Madhur Deora, executive]

INR 120 crores to 150 crores a quarter, INR 500 crores to INR 600 crores a year.

[Rahul Bhangadia, analyst]

Yes. And the related question would be, what would be the depreciation policy here? Because now we are running a run rate of about INR 400 crores of depreciation per annum, and we are doing a CapEx of INR 500 crores or maybe INR 600 crores. What's the policy that we are looking at here?

[Madhur Deora, executive]

Yes, the philosophy that we took on depreciation is that we wanted our depreciation to be -- so we want the depreciation rate to be faster than the average life of a device. So for Soundbox, we depreciate it in 2 years. For a card machine, we depreciate it in 3 years, which we think is at least 20% to 30%, if not more, less than the average life of the device. And the way we price this is a payback period which is better than the depreciation period for the device. So we try to be conservative on each one of these things. But to answer your direct question, Soundbox is at 2 years and card machines is for 3 years.

[Operator]

The next question we'll take from Mr. Sameer Bhise from JM Financial.

[Sameer Bhise, analyst]

Can you talk a bit about the GMV per MTU metric? I think last couple of quarters, probably we have not alluded, but how do you think about it over the medium to long term?

[Madhur Deora, executive]

Basically, the reason why we don't refer to that number is because effectively we have a total GMV number which is all transactions which are processed by Paytm. And in some of those cases, that is being done by the MPU numbers that you see. But in some cases, that is actually not being done by that MTU number. So for example, if I have a card machine at a retail shop or at a petrol pump, they might be accepting credit card which does not belong to our MTU. And same thing would happen in the online world, same thing could happen when you -- somebody uses a third-party app, the scan of Paytm QR.

So there's a fair amount of GMV in that business which is unrelated to the MTU base that you see. So sort of taking the GMV divided by MTU is probably not sort of slightly apples and oranges. And as a result, we sort of don't calculate that and get that number because it may be misleading to think that it is this MTU which is generating that GMV. Does that make sense, Sameer?

[Sameer Bhise, analyst]

Yes. Probably I'll take it off-line as well. Secondly, there's a news article on RBI giving some clarifications or response on the IT audit. It would be helpful if you could give us some sense on that.

[Madhur Deora, executive]

So we actually have in our earnings release given a statement on this. So I'll just refer you to that. In summary, the Paytm Payment Bank Management has told us that they have received the IT audited report and RBI's observation on the report. As per the preliminary assessment done by them, most of the observations are around continued strengthening of IT processes -- IT outsourcing processes and operational risk management, and the bank is in the process of responding to RBI. And they're just obviously very, very highly focused and prioritizing the conversation with RBI to make sure that we are fully compliant and better in spirit. And yes, so that's sort of the update that we have. And obviously, if we have more updates, we'll share them with the stock exchanges. But I'll just refer you to the note that we have in the earnings release, which sort of gives you the complete picture.

Opportunity to also mention that we have shared in March '22 when this issue first came out, that we believe that the measures that were imposed by RBI on PBBM will not impact Paytm's business' overall business. And the fact that you see the NPU performance and the revenue growth performance of Paytm since then, it sort of confirms that our initial assessment was correct. And we don't see any sort of material impact on Paytm's overall business due to the cost of the RBI measure on Paytm Payments Bank.

[Operator]

Next in queue will be Rahul Jain from Dolat Capital.

[Rahul Jain, analyst]

Congratulations on very strong execution. I would just like you to help me on arriving at potential areas for us to get EBITDA neutral and beyond. So firstly, from a payment processing charges perspective, this is the first quarter we see relative optimization in this line item as a percentage of payment services. So can we conclude that easy optimizations or relatively [ is it picking ] in this cost item are behind us and it will be -- that we see right now would be would be optimized further on a very smaller level? That is question number one.

Second, in this quarter, we saw other marketing expenses seeing a big drop. So is that a drop already baked in from a run rate point of view, or some of the savings have come in the second half of the quarter, so we would see this cost going down further in the upcoming quarter? And maybe in general, if you could share what would be the areas where we could see this savings coming and turning.

[Madhur Deora, executive]

Yes. On your first question, maybe I'll answer it at the contribution margin level, Rahul. We do continue to obviously look for small and big opportunities to improve the profitability of each of our businesses. So we continue to do that. But I think it's fair to say that we sort of went from single-digit contribution margin 2 years ago to 24% a year ago to 44% now. So clearly, that sort of trajectory, which was what we call the step change in contribution profit, we don't expect that anywhere close to that sort of pace to continue. But we will -- we do and will continue to look for opportunities to do certainly small improvements, if not big improvements, in each of our businesses. We do also expect to continue to benefit from some mix effect, particularly from lending business because lending is growing and is expected to continue to grow faster than our overall business, and lending is higher margin than our payments business, for example. So we do expect some mix effect -- positive mix effect to come from that as well.

On your second question on marketing, like we had mentioned in the last quarter, we did have a jump in marketing costs last quarter for because of cricket sponsorships because we had IPL as well as cricket matches last year -- last quarter. This quarter, we did not have that. And as a result, our marketing costs went down. A chunk of marketing costs, not all, but a chunk of it is sort of lumpy, right, especially when you start getting into those sponsorships and so on. So we did not have that this quarter, and we expect that to get a lower level going forward.

Having said that, I will say that if there are opportunities for us to invest in user growth, whether it is through promotion and [ same day of our ] marketing, which is having good ROI, we'll continue to do that. That will not take us away from our path to breakeven and our path to creating a long-term, very profitable business. So we'll absolutely achieve that. But if there are opportunities for us to invest in, say, efficient marketing, whether it is through cash back or through APL or through any other mechanism, we would continue to do that and to achieve our profitability targets.

[Rahul Jain, analyst]

Right. So just to conclude from your thought, is it -- can you say that, hereon, the growth would be more -- sales optimization or profitability will be more revenue driven rather than cost optimization driven?

[Madhur Deora, executive]

I think it's fair to say that revenue growth as well as high -- growth of high-margin revenue such as lending will be sort of next big uplift to contribution profit. But I will point out that we have a large payments business which is generating significant net payment margin. So even small improvements in that, when they drop to the bottom line, they can be very significant from a bottom line standpoint, right? So if we're doing INR 443 crores a quarter of net payment margin, then even a 10%, 15% improvement in that can have a significant impact on the bottom line, right? So just -- because the number is actually now quite large. And working on continuing to improve that number, there's a very, very high ROI for us.

[Operator]

The next in queue is Mr. Piran Engineer from CLSA.

[Piran Engineer, analyst]

Congrats on the quarter. Just on your lending business hosted on BNPL, if I'm a customer who's paying some fee, and I think 1/3 of the customers were DELITE customers don't pay any fee, how long does it take for me to get upgraded to a DELITE customer status, assuming that I don't default, of course?

[Bhavesh Gupta, executive]

Piran, there is no time-led formula. I think the different lenders have different appetite. But I could say between 6 to 9 months of vintage of performance, continuous performance, the lenders revisit both the limit and the risk classification. And there could be a set of customers who could be upgraded or downgraded. So it is not that once you are a DELITE customer, you remain always a DELITE customer. There is a small portion, I would say, which is downgraded also, and you could also be upgraded. So it is a continuous process, but that ratio or the share of DELITE to LITE to MINI broadly remains rangebound.

[Piran Engineer, analyst]

But -- yes, that's also probably because you're still growing and a lot of your incremental customers is, we say, LITE. And I just assume as customers mature over time, maybe next 2 years or 4 years, and of course, if they are paying, you should have more DELITE customers than LITE. And if that happens and the take rate's reduced, will you pass it on to the banking partner? Or will we have to absorb that?

[Bhavesh Gupta, executive]

So Piran, it's a matter of conjecture, which is fairly long ahead of our time at this point in time. I do believe that 2 things will happen. And I think I had mentioned this earlier. Number one, we don't see for at least a couple of years to come, because just 4% of our MTU when MTU also growing, that our new customer acquisition engine is going to slow down. And I just mentioned in a previous answer that we are seeing very robust growth every month now, more than 400,000, 450,000 users getting added to postpaid. So we don't see that slowing down. And hence, the overall share of DELITE, LITE, et cetera, will remain broadly rangebound.

The other thing that we also will see over a period of time is that the merchant looking at the impact of Paytm postpaid to his sale and hence, the increasing the MDR will also be a revaluating opportunity, which will very easily offset any drop in conveniency if at all it has to happen. So that's the way the entire business model is going to play out.

At this point in time, the business model -- actually for the next 12 to 18 months, I don't see any cleaner business model. Albeit may only have an increase in revenue, especially coming from MDR because more and more merchant acceptance, especially enterprise mergers resulting in higher MDR is the trend that we already see.

[Piran Engineer, analyst]

Okay. Okay. That makes sense. And on your merchant loans, what would be sort of the TAM of this business? I understand it's just like whatever, 1% or 2% of the merchants have a loan right now. But practically speaking, what percentage of merchants couldn't be onboarded on merchant loans at just 1, 1.5 lakh size?

[Bhavesh Gupta, executive]

Sure. I think it's a very good question, Piran. The simple answer, the way we look at this piece is merchant owns derivative on devices merchant because largely 80%-ish of our loans are given or taken by our devices merchant. So we index our entire merchant business to devices merchant, where that number is approximately at 4.8 million, growing about 1 million a quarter. And what our belief is, once our merchant has taken a device, 6 months forward, their probability of getting eligible becomes very, very high. And give or take, we see about 50% of them keep getting eligible 6 months forward.

So as we continue to remain very bullish on adding more and more devices, we obviously remain very, very bullish on adding more and more merchant loan. Having said that, at current point in time, we have approximately 1.5 million merchants who are white listed to be given credit and have a prequalified offer on the app from various lenders, broadly amounting to about USD 2 billion of disbursal that we can do. So the TAM of current itself is very large. And as we add more devices, the TAM will keep increasing.

[Piran Engineer, analyst]

Okay. Sorry, you said $2 billion?

[Bhavesh Gupta, executive]

Yes. About 1.5 million, 15 lakh merchants are currently prequalified by lenders. Approximately, as you know, that number is about INR 1.5 lakh per merchant. So that's the amount, about INR 15,000 crores to INR 20,000 crores of value.

[Piran Engineer, analyst]

Okay. And just lastly, in your earnings release, you mentioned about some seasonality in the cloud business. If you can just clarify what that...

[Madhur Deora, executive]

We mentioned seasonality in our commerce business. And typically, Q2 for entertainment is seasonally weak. In fact, we have said specifically for entertainment business there's seasonality. So entertainment in Q2 is generally weak because of monsoons and so on. Also, this particular quarter, not a regular season situation, but this particular quarter the content lineup was very weak, and we have a sort of relatively good content that we had in movies also just didn't work as well as it was expected to. So as a result, both movies and events had a seasonally weak quarter.

[Piran Engineer, analyst]

No. So Madhur, I get that. That was on commerce. But if you refer to your write-off only, I don't know which page, there's no page number here, but I think Page 12 of the PDF, this is a seasonally strong quarter for PAI cloud. And clearly, since because last 3 quarters, your revenue is in the range of INR 190 crores to INR 220 crores and now it's shot up to INR 250 crores.

[Madhur Deora, executive]

I shouldn't have said seasonally strong, it just was a strong quarter because cards did well, advertising did a little bit better, PAI cloud did well. So I think there, we didn't mean to say it was seasonally strong. It was just a strong quarter. Actually, we have not said seasonally strong. We just said it is driven by a strong uptick in our credit card distribution. Yes, you're right, and a seasonally strong quarter for PAI cloud. And not even with season, it just happened to be a strong quarter.

[Operator]

Next question we'll take from Mr. [ Anand Bhavnani ] from [ Maiduke ]

[Unknown Analyst]

Congratulations for a good ramp-up in the Lending Services business. If you could give us some color on other financial services that you would want to explore as the lending business kind of continues to gain momentum and it's stabilized, what other financial services are on your priority list?

[Vijay Sharma, executive]

Anand, we do Paytm Money, which is a stock brokerage and mutual fund distribution, and we also have insurance distribution and brokerage business. So these 2 are the other lenders.

[Unknown Analyst]

So on those, can you give us some color as to what you're targeting in terms of numbers and what kind of TAM?

[Vijay Sharma, executive]

We call them future bets because there is a tremendous amount of technology development and brewing up that it requires. So they aren't materially large. As you can see, the numbers yourself, it is led by [indiscernible]. Most of the revenue is on [indiscernible].

[Unknown Analyst]

Got it. Secondly, on our expected credit loss, in case of merchants, I see the number is higher than in case of postpaid. So just wondering, I would have assumed that merchants, because they are a lot more look at it on a particular pot and because they probably have a device and everything, they will probably be lesser present risk.

[Vijay Sharma, executive]

Anand, when a loan is defined as a portfolio and lender side, as a part of that definition of loan portfolio, they put expected credit loss as a number. It has nothing to do with expected actual credit loss. That credit loss is called net credit loss. Meaning this is -- when you start a business, you say, this is my customer education cost, this is my credit loss, this is my revenue. So expected credit loss is a number that lender puts in definition of their book of this kind of loss, which has actually nothing to do with whether the loan performance will be based on that amount. What we're seeking is net credit loss, which is in the presentation and otherwise, we always share as a detail in subsequent slides.

[Bhavesh Gupta, executive]

And Anand, if I can just supplement to Vijay's piece, one -- there are 2 different products. BNPL is a INR 4,500, INR 5,000 short-term consumption credit for 30 days. The chance of default is far, far lower by way of default for INR 5,000, whereas the merchant loan is a 1-year 14-month, 1.5 [ FB ] product through daily installments deducted through [ pay-in ] settlements. So the IRR and the income that the lender makes are very different, and what customers pays in postpaid is hardly much lesser than what they pay merchant. So from a risk-adjusted return, merchant loan even at a 5% expected credit loss, while the actual credit level just had more than that, but expected credit loss, the return for lender return for Paytm is much higher versus a Paytm Postpaid.

[Operator]

The next question will be a repeat question from Mr. Vijit Jain.

[Vijit Jain, analyst]

Just a housekeeping question alluding to one of the comments earlier made. So when a customer scans Paytm QR code to make UPI payment from a competitor app, in this instance, in this particular transaction, there is no scope for monetization, right? And is this a particular transaction included in Paytm's UPI, GMV when the regulator and PCI reports it on their website?

[Bhavesh Gupta, executive]

So Vijit, there are monetization definitely included. So if you're looking at monetization from a device precision perspective or from a lending perspective, that monetization agnostic to which app is being open to pay to the merchant. Right, so it could be coming from a competition app and paying to a merchant, the merchant still needs a subscription service because you need recalculation at the shop. And obviously, that GMV the merchant is actually collecting is being processed through us, and that is available to us to underwrite through all the new partners to the credit, so [ absolutely ] the problem. And this GMV is called out as P2 GMV also in definition of NPCI and [ hence to deliver ] for discount of incentives below INR 2,000 at different points in time.

[Operator]

And with that, we come to an end of the Q&A session. As mentioned, a recording of this call and the presentation, a transcript fully put online on the company website. So thank you all for joining.

[Vijay Sharma, executive]

Thank you. [Foreign Language].

[Madhur Deora, executive]

Thank you, everyone.

[Bhavesh Gupta, executive]

Thank you, everyone. Good day.