One 97 Communications Ltd

NSE:PAYTM

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for joining, and welcome to Paytm's earnings call to discuss our annual results for the full financial year, which ended on March 31, 2023.

From Paytm's management, we have with us today, 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.

A few standard announcements before we begin. This call is for existing shareholders of Paytm, potential investors and research analysts. This call is not meant for the media. If any media representatives are on this call, we request you to kindly drop off at this point.

The information to be presented and discussed here should not be recorded, reproduced or distributed in any manner. Some statements made today may be forward-looking in nature. Actual events may differ materially from those anticipated in such forward-looking statements. Finally, 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 our website subsequently.

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

[Vijay Sharma, executive]

Thank you. Thank you, Keshav. And dear shareholders, thank you so much for joining our call. I'm very happy that we have announced our second successive and continued quarter of EBITDA profitability before ESOP. Obviously, we have said it earlier, we are aiming for Paytm to become free cash positive in the near future. And all this profitability and attention to revenue, which drives quality revenues, which drive quality profit has been possible because of our incredible team, business teams. I am especially [indebted] to their attention and their realignment, disciplined assignment of resources that we pursued in last year and their amazing efforts and deliveries that made us successful like this.

I also want to share that I'm very proud to see that our teams have been continuously adding more leadership positions, and we are continuously adding our new teammates there. And all this is because we believe that India is offering an incredible, incredible opportunity. I will talk about further growth towards the later part of the presentation.

Before I start this presentation, I want to draw your attention to a tweet that we have done from Paytm handle and filing that we have done to BSE about our business KPIs of April 2023. Many of you may or may not have seen it, so please see it. If you have any questions to that, we would be very happy to be part of the same also. With this, I welcome you to this incredible landmark quarter that we had in the last quarter of last financial FY '23. We got UPI incentive, all of that in the last quarter. So we accounted for that.

In this presentation, we have tried making it as much possible in the details and without taking the last 3 quarters' numbers. So all the numbers that we are reporting as expected, they are including of the 4-quarter UPI incentive. And in the quarterly numbers, we tried showing you mark-to-mark exactly how the quarter number would have been if the UPI incentive was not at this quarter number. So we are trying that. I'm sure you will be very careful and attentive towards the numbers that we're showing.

Like I said, we're repeating that because of the UPI incentive, a whole year got achieved in last quarter. We are giving you reported numbers and mark-to-market numbers in these numbers. Madhur and Bhavesh will specify when they talk about payment overall. With this, as you know, that we by a whisker missed a rounded off number here, and we did INR 7,990 crores, which is 61% year-on-year growth. We are very happy to report that we have internally kept key target that we will continue to grow on a particular number in top line because of the opportunity in payments and credit.

I want to use our payment here because if you notice, our payment business, which is INR 4,913 crores. And 2 years back, it used to be around INR 2,000 crores. So there is a tremendous amount of growth, and we continue to see, thanks to the new monetization methods, like subscription revenue, like Soundbox, et cetera, devices, et cetera, revenue, and we have now added commercials towards enabling commerce. So we continue to see payment in line item of our revenue and merchant relationship continuously growing. And we are very happy to announce that we have been able to achieve more than 2.9x the growth, meaning it is clearly 3x that you would have seen in the last 2 years.

And this, like I said again and again, it is all because the payment is maturing for the merchants. Merchants are making sure that there is a digital payment, mobile payment on their shops, which gives them opportunity to take up premium products also. So it's a model like premium model, where merchants get 0% MDR and which is immersed to us from government, then through UPI payments, various UPI payments. And then we have subscription revenues and extra charges for other payment instruments. So this is what is growing the payment business.

I also want to point out that I believe that UPI has started going towards monetization of MDRs. Different payment instrument will come on UPI. Till now UPI used to be known as bank account led payment. And now bank-account-led payment is, well it's free if you saw the prepaid wallet instrument has an [interest] in MDR. Meaning the issuer that is us Paytm, let's say, our Paytm wallet is being used on somebody else's QR, the merchant side QR will have to pay us. What we earn is called interchange. What they charge the merchant is called MDR. And the delta between them is the revenue that the QR company keeps.

So here it is that QR payments from bank account are free, which we believe will remain long-term free and then other payment source or jump like wallet is getting visibly going to get benefit of universal inter-portability and acceptability and will also generate some revenue for us.

So the core thing that I'm trying to point out is that you can see that UPI payment instruments will have different, different payment MDR or charges to the merchant or they may not have merchant charges because somebody who's offering the payment service to the merchant could absorb it.

So let me not say that merchant will be charged or not. Let me say that issuers will get share. That is a better way to look at for you guys. I'm very happy that our payment team has done great market penetration. As you guys are aware, we are a merchant side business. We always call payment when you are paying a merchant. So yes, our P2P business numbers are not that great as a market share. We are very aware of it. But at the same point, we were proud to say when it comes to the merchant, whether consumers making them into the merchant or merchant choosing a payment solution, Paytm is the market leader here.

Now did we do this, and one of the line items that we started growing in 2020, which was about credit, which is part of our Financial Services business, has done very, very good, as you can see and further details are coming in due course. I think the government of India and regulators have very much clearly focused on expanding the disbursement of credit using digital means here. The idea here is that how can different small loan ticket size or various other loans or large ticket also be digitally enabled to be distributed. The keyword is digitally distributed. It is not just about the organization internally managing digital process, but it is about how they can be digitally enabled to distribute. So whether you see conveniences of KYC, conveniences of document and civil scores, et cetera, and the processes, [digital] lending guideline, clarity, all those things are towards that.

And we took a clear advantage and we pursued more clarities. And you're seeing that year-on-year, this number is growing. We continue to believe this will be a key number and key performance number for us to focus on.

And third line item, which is our Commerce and Cloud services. It has a little bit of -- I mean, annually, it is showing growth. But importantly, because as you understand, the commerce is an activity which is festivity driven and so on. So there will be quarterly different swings. But at the overall level, our Commerce and Cloud business, which includes advertising, marketing and because we distribute co-branded credit cards, so we call it marketing. The key word here is we don't call it credit because there is no credit relationship or disbursement relationship that I have, we have purely co-branded card disbursement model. So we account for it there led by credit card, distribution co-branded credit card distribution. This is continuing to grow.

So commerce and disbursement of credit card will be the key drivers and they are happening here. So this year, we are -- as you will see that we have last quarter numbers coming up soon to be shown to you, you've seen it, are very, very good. I'm very happy to say that we are focused on not only the revenues, but we are also focused on EBITDA at all.

Obviously, we are talking here EBITDA before ESOPs so that there is no adjusted misunderstanding here. It is because the charges of ESOPs, which we have clarified in different time and reports out there. The nice thing that I want to tell you is that in 2 years, when we have grown our revenues by 2.9x, our margins have also improved by 57%. We are -- we, in last quarter, even had shown how good this number has been profitable actually. So we are very, very hopeful that we would continue to improve and improve on EBITDA over the period and in contribution.

I'll give it to Madhur, our CFO here, who is going to talk about quarterly, and then I'll come back on the rest of the business. And Bhavesh will talk about payments in time. Thank you.

[Madhur Deora, executive]

Thank you, Vijay. Good morning, and welcome, everyone. So it's my pleasure to walk you through our quarterly earnings.

So led by our revenue growth that Vijay briefly talked about, a 100% increase in UPI incentives on a year-on-year basis. So last year, we got about INR 90 crores of UPI incentive. This year, we got INR 182 crores of UPI incentive.

Our performance has been extremely strong. And last quarter, we delivered EBITDA before ESOP of INR 234 crores. Just to dig into that, our revenue for the quarter was INR 2,334 crores. Our revenue growth is 51% year-on-year, so extremely strong revenue growth. Out of this INR 2,334 crores, INR 133 crores pertain to UPI incentive for previous quarters that we happened to receive in the last quarter. So we have tried to normalize for that.

So if you exclude that INR 133 crores in our growth, the number is INR 2,200 crores and our growth is 43%. Our contribution margin has grown dramatically. This trend continues over the various quarters that you have been tracking us. Over -- on a year-on-year basis, our margin improvement is 20%. We delivered INR 1,283 crores of contribution margin.

But once again, if we take out the INR 133 crores for previous quarters, then that number is INR 1,150 or 52%. So we have seen expansion in this number in this quarter again.

EBITDA before ESOP expense improved by INR 602 crores on a year-on-year basis. A year ago, we were at INR 368 crores negative EBITDA. This year, last quarter, we were at INR 234 crores positive EBITDA. And we've had a margin improvement of 34%. But once again, if you make that adjustment of INR 133 crores that I talked about, we delivered INR 101 crores of EBITDA before ESOP cost and a margin of 5%. So continued expansion in our EBITDA.

And as we just said, other than some extraordinary circumstances, we expect to be EBITDA positive going forward to start generating free cash flow very, very shortly. Going back to the core business model of payments and loan distribution and collection, where we are seeing expansion of our platform. Our average monthly transacting users has grown 27% year-on-year. So we're doing about INR 9 crore average monthly transacting users last quarter.

Our merchant subscriptions, which is primarily and including our payments devices business, has grown to 68 lakh merchants. So there's a huge expansion of technology adoption by our merchants. And over the last few quarters, we have been relatively steadily adding about 10 lakhs a quarter, and we have mentioned that we expect that pace to continue or maybe even go up a little bit.

On the back of our payments business, we leverage our ability, our brand, our distribution, our data insights and our technology to distribute loans. And obviously, as you know, we help our partners collect those loans as well. Last quarter, as you know, we did INR 12,500 crores of loan dispersals, and we are seeing significant Y-on-Y and Q-on-Q growth here.

A little bit about our breakdown of revenues. Our payments revenue was nearly INR 1,500 crores. It grew 41% year-on-year. But once again, adjusted for the INR 133 crores that we talked about earlier, that number was 28%. Our financial services revenue grew to INR 475 crores, driven by the increase in our lending business. Our commerce and cloud business on a year-on-year basis went up 23%, and we'll talk about that some more.

On payments revenue, like I mentioned, 28% year-on-year growth. Our net payment margin has really been a continuing improvement story as we are focused on how do we monetize payments better and how do we keep our costs under control. So our like-for-like payments revenue, like I said, is 28%. Like-for-like net payment margin after taking out payment processing cost is INR 554 crores last quarter. And if you add back the INR 133 crores, then you get to the reported net payment margin number.

So while we think the INR 554 crores is the relevant number, we have given you the INR 687 crores as well just that you can tie it back to our financials. This, as you know, is comprised of 2 main line items. One is net payment processing margin.

In December, we said that this number is at 7 to 9 basis points. And we do expect that to, over time, go to 5 to 7 basis points. But we're happy to report that currently, we are at the high end of the original 7 to 9 basis points number that we have indicated we are at currently. And we are not seeing downward pressure. In fact, we are seeing various opportunities to keep working on this and improving this. And of course, our merchants, the 68 lakh merchants pay us for the subscription revenue, which also continues to scale very quickly.

I'll turn it over to Bhavesh to talk about the lending business.

[Bhavesh Gupta, executive]

Yes. Thank you, Madhur. Good morning, everyone. On the lending side of the business, we continue to see decent momentum in growth, both in the consumer and merchant loan distribution in the month of -- in the quarter 4.

Important to note here is that we're now getting more secular growth across 3 businesses. Merchant loan as a business, [CSG] performing much better on a smaller base because last year was a COVID year. If you look at quarter-on-quarter, we've said in the past that we'll continue to calibrate our growth as we see the entire scale of business become larger and better because our entire focus is not on volume of disbursement, a look at portfolio. And I'm happy to inform you that while we grew our year-over-year business by 253% and quarter-to-quarter again by almost 25% to INR 12,554 crores, each of the individual line of businesses also have been growing almost in the same similar range bond model, especially personal loans and merchant loan businesses, which are extremely profitable both for us and for lending partners. And postpaid as a business also is profitable and it provides us a great funnel to upsell both personal loans, merchant loans and credit cards.

I want to draw your attention on the graph on the right side, the table. The focus that we've been demonstrating very clearly here is that we have a very large MTU base and the MTU base grew by 27% year-on-year basis. In spite of that, our focus has been to make sure that a very limited set of users and merchants are getting access to credit, meeting the appetite of our lending partners. And more importantly, we set for ourselves a very strong portfolio governance model wherein while our lending partners could assume an elevated loss provisions.

But in our case, we are having a more conservative view, that we would not like any distribution of credit origination platform to perform beyond our own credit expectation, which is far more conservative than lender expectation. And in that context, as you can see, that our penetration to MTU continues to be very, very low, indicating 2 things: a, the runway of opportunity for us is significantly larger than what we have exploited. And b, we continue to grow and be very selective on both postpaid merchant loans and personal loans on our system.

The portfolio in quarter 4 performed better versus Q3. We have been very calibrated in making sure that the entry rates, which is basically the portfolio constructed with our focused on. Personal loan entry rates dropped by almost 1%. We were operating more close to 11.5% on a blended basis. Now we are in range bound between month on month to 10.5% to 12%. Those kind of pieces are more closer to about 11-ish.

Postpaid also we're seeing enter rates drop. They're now closer again to 11-ish percent. But we continue to believe that these will only become better because we further tightened our models of underwriting with our partners because we're seeing very decent growth happening. On overall basis, our expectation is that the portfolio quality will remain stable and maybe we will be in a position to have a much better portfolio quality being demonstrated in the subsequent quarters.

We've already seen, especially in Postpaid, that from the last quarter wherein our expected credit loss by lending partners used to oscillate between 1% to 1.2%, it has dropped down to 0.75% to 1%. And we feel very comfortable and so does our partners that this particular ECL for postpaid, which is almost 50% of a chunk of a loan business, will continue to perform like this or even get better.

So all in all, I'm happy to inform that we continue to demonstrate good growth in terms of distribution of credit and, at the same time, get much better portfolio performance than expected by lending partners. And as we look into the next year, our belief it is our focus will be a lot more on portfolio quality, given elevated interest rates in the market than growth and hence, be able to maintain profitability of this business much better in spite of the fact that we will calibrate our growth as we see the overall interest rates scenario far more closely and the overall credit scenario far more closely into the next year. Back to you, Madhur.

[Madhur Deora, executive]

Thanks, Bhavesh. I'll just talk about the Commerce and Cloud business. As you know here, we have 2 broad set of businesses. One is commerce, where we sell travel, movies and events tickets and deals gift vouchers to our customers.

Last year -- sorry, I apologize. Last quarter, we did INR 2,185 crores of GMV in this business, which was up 22% year-on-year. This is despite the fact that as you may be aware, the entertainment side of business, especially movies, has not completely come back to pre-COVID levels and it's still seasonal and it goes sort of up and down depending on the quality of the content.

We did see a slight decline on a quarter-on-quarter basis. This is because, like we mentioned in the last quarter results, we do events business, some of them on a sort of full stack basis, which is to say we have very high take rate on those, but we also have very high direct costs. That business is seasonal. It usually peaks in Q3 and it comes off a bit in Q4, and Q1 and Q2 are more subdued. So we've also indicated that our take rate, which over the last 2 quarters has been closer to 8%, should revert back to 5% to 6% as we sort of experience the seasonality.

On the cloud side of business, just to remind everyone, we offer advertising, marketing loyalty services to various enterprises, and we also distribute co-branded credit cards. So while our co-branded credit card businesses continue to scale very well, we have now 5.9 lakh activated credit cards with our partners as of March 2023. And this business continues to scale well both in terms of new card issuances as well as spends.

So we saw an increase in that. But we did see a decrease in our Marketing Cloud business. Just to remind everyone, our Marketing Cloud business is where we provide marketing and upsell services to telecom companies and enterprises. There's a business that Paytm One97 has been in for over a decade. That business is not a very fast-growth business, and it has been sort of under some amount of pressure. But I would just like to point out that this is -- overall, now it is less than 3% of our revenue.

So it's not particularly material in terms of overall growth rates and so on. And finally, we are launching a co-branded RuPay credit card very soon. So we wanted to take this opportunity to make everyone aware of that.

And with that, I would like to hand it back to Vijay to talk about the growth drivers and ramp.

[Vijay Sharma, executive]

Thank you. Thank you, Madhur. The RuPay credit card will be really interesting, as you guys understand, RuPay credit card will come on UPI here also. So we've been trying to work it out. And I want to point out what is on the right side to you. This is a dynamic QR device that we have refreshed as a portfolio. This is a device that is integrated with -- you might have seen in various stores out there when you go to large enterprise stores, the billing -- it is integrated with the billing cost. And when the merchant generates the bill, it automatically dynamically shows the QR.

And obviously, the Paytm QR, it allows postpaid, wallet and everything else to be accepted. And obviously, other UPI apps can also pay. So I'm very happy to tell you that as a part of device portfolio, that is what we've done as refresh.

Secondly, we've done our Soundbox, which is a very legendary device. I mean, the amount of love that we get for Soundbox from merchant consumer is incredible. We continue to enhance and invest on hardware. We want to remind you that we treat it as one of the key portfolio offering of our services.

We launched 4G enabled device, 4G enabled device, meaning that it can run faster, better battery efficiency and so on. So we now have 7 days of battery backup kind of industry leading backup. And I'm very proud to tell you the thing that Bhavesh's team did in the market is that even though there were many companies which thought that they will throw in the market free device. But because of the cost, because of servicing, because of feature, it didn't even see the day and we actually continue to grow more and more in market.

Incidentally, what we are seeing is that when more players come, the product becomes more mature and the market and market understands it and then superior products wins. So for us, we are seeing that there are many people who are launching Soundboxes, and that is growing our opportunity in the market. And I put the word growing our opportunity because ultimately, this product is an outcome of last 4 years of R&D and efforts, and now that it is made software hardware-wise completely by us. So it is something that people will take time to even understand.

Here it is in the technology. We also launched our new technology platform. And it is very important for me to tell you that this was a key milestone behind the scene. This is where the engineers were invested. And I want to share that we are going to release some engineers from here, but we would assign them to the other business and technology.

So when I remember in December, when I had done and we have done an analyst call, we had suggested that we are sort of sorted out except for standard in our increase in engineering technology. The good part is that this technology platform will take us to 10x more transition at current scale. I mean, obviously, we are handling hundreds of billion dollars for merchant payments. And I'm calling it out, this is a merchant payment because P2P technology owned by P2M Bank. It has not helped to us. And it is P2M payment, which is much in the payment platform that I'm talking about.

The beauty of this is that this is 100% initially developed technology, including risk operations and operational risk, et cetera. And that will actually take us next level because I don't think the kind of features that we have added people are seeing them today. Obviously, artificial intelligent, AGI will play an important role here for us in this -- especially for protective frauds, et cetera.

I'm very happy to announce that our fraud rates and as they call it, fraud to sales rates are not industry leading, but startlingly incredibly better. Whether we talk government or regulators, they are very happy seening what we've done and how we have started using artificial intelligence in our business. So this is our payment update on systems for merchants.

You all are seeing that we have launched UPI Lite. If you have not, please use the Paytm app, and now more banks have started coming on UPI Lite, so it is scaling. UPI Lite enables payments of small amount without requiring a payment more or less. It is not offline, just in case, but it doesn't require pin. And the balance is maintained on the device side instead of to the banks.

So the bank lag failures are sorted out. It is even better. So we've launched it. And we have already 55 lakh customers on it. We've done transactions in crores. So it is taking up very, very well. And on the consumer side, we have Wallet interoperability. We've been waiting for this to come for long. What it does is that it allows us to get Paytm wallet accepted on all the UPI QRs.. Although we are the largest QR or largest acquirer of merchant, but still, there is a tremendous large potential merchants whom we would want our Paytm instruments or wallet, et cetera, to go, and that is what we are expecting.

It is not -- it is commercially live or agreement-wise live, et cetera, et cetera. But everybody has to launch. So you expect it to take at least, I would say, 2 quarters for material important contributions to show up in our numbers, et cetera. And that also brings that now the wallet has grown. So you can understand that wallet, UPI, everything. Now the Paytm instruments are as uniquely available, and we'll have advantage of being merchants available across every merchants that will allow us to invest even expanding more in merchant acquiring and consumer growth.

I want to call out consumer growth investment here because of the extra profits that we have started to make while we will continue and we are -- we said it in previous quarter and earnings also that what we continue to invest, we continue to commit to incredible market opportunity, which requires us to expand and invest in consumable growth.

We believe this will not be materially costing us in our profitability. So in other words, our profitability and revenues continuously grows even when we will do these investments. It's an important thing.

Finally, as you all are aware that our business of financial product distribution, and it is led by credit. So we are signing up large NBFC banks, and we have a couple of them which are very, very interesting in the queue. But as we are aware, it takes a lot of technology for the partner to become Paytm partner. In fact, I want to share one extra thing here that in last month, month of April, one of our lending partners went through significant IT outage.

And because of that significant IT outage, they were not able to disburse loans to the many of the customers whom they sort of had disbursed earlier loans, so not top-up loan or potential loan. So if you see our April numbers, especially, I think in the merchant case, they are seemingly flat out there. And it is because there is a lot of technology stress on our partner continuously remains.

So we are adding more number of banks and NBFCs. And in fact, some of announcements are queued up before next quarter. So you will see that. And I think whether you look at payments on merchant side, whether you look at payments on consumer side, whether you look at our credit disbursement, these are the core businesses.

In addition to this, like I said, we are enabling AGI. And I don't want to call it AI only. I want to call it AGI intelligence here. The reason that I'm calling it out is because that is incredible technology that I believe will change how we use the server-side components.

For example, like you're talking to a server, which is configuring and you have a workflow. And then instead of this, you can talk to it. So give you an example here. So many of us are old Internet users. So imagine Internet being navigated like Yahoo! directly and search on Yahoo! directly versus search like Google that you can search what the destination has. Now that lead is what I'm talking AGI is for the business.

And we are committed, and we are investing and have started investments already. So you will see that there is a large amount of products which are AI first or AI enabled coming from our family.

And the best part, like I said, is that we don't need to allot extra dollars because our platform that we got expanded here is giving us opportunity to expand on that side.

With this, I want to say thank you, and we look forward to get as many questions and understandings that you seek. And thank you for sampling. And I see very, very detailed narrations about our business, which are getting clear and fairer. So thank you so much for that. I look forward to the questions.

[Operator]

Thank you, Vijay. We will now proceed to Q&A. [Operator Instructions] With that, the first question of the session will be from Ankur Rudra from JPMorgan.

[Ankur Rudra, analyst]

So first question is on the payments business. We've seen one of your peers scaling quite rapidly in recent times with a similar product. I think you referenced that. Is there any pressure on subscription charges for the Soundbox portfolio or the net payment margins from this?

[Vijay Sharma, executive]

No, no. Actually, we've been inflecting increased opportunity. It is increased opportunity because more number of merchants take our Soundbox there. It's the product maturity and product pricing has been actually, I mean, the market moved to the pricing that we were giving. So Ankur, let me say this, it was priced 0 and over the period became same priced.

[Ankur Rudra, analyst]

Okay. Second question on Financial Services. I did notice that the effective take rates on the loans for the quarter has become a bit muted versus what we saw in the previous periods. Is this due to any change in collection incentives or changes in the take rates from your partners?

[Bhavesh Gupta, executive]

Yes. So Ankur let me clarify this space. You're aware that in our business model, our lenders keep some elevated provisions, right? Because they don't know at the scale at which we operate what actually will be the last date. So we are also fine that they can keep elevated provisions.

Now what happens over a period of time it is, as they see the portfolio perform, especially in a product with short-term credit like Postpaid, and the portfolio performance is much, much better than what they were keeping elevated provisions. We try to work with them to bring the provisions more closer to the actual provisions.

Now that is what has actually happened in Q4. That expression of product like Postpaid, given the steady and improving quality of the loan book. We've seen the lenders are becoming more comfortable with portfolio quality. And hence, they have reduced the excess provisions that they were keeping on this portfolio, thereby reducing our opportunity to build them more and collect over a period of time.

So the EBITDA doesn't change. The gross revenue that we used to build them because we're keeping higher provisions, that has gone away to -- in the product like Postpaid. That's the reason you're seeing a margin drop in take rate. But our overall EBITDA remains the same or actually become better.

[Ankur Rudra, analyst]

Okay. And this is connected to the change we see on a quarterly basis on your ECL, your balance rate, et cetera?

[Bhavesh Gupta, executive]

Yes, yes. And that is what I pointed out in my previous conversation, that we were having a lender steep in ECL of -- expected ECL, if I may use the word, of 1.2% in Postpaid, which is a drop to 0.75%, right?

So our intention is that the lender should be far more comfortable and not be keeping a lot more elevated provisions. So in Postpaid, because it's a 30-day product, they have now become extremely comfortable. And hence, they need to keep extra provisions to look at any kind of deviation quarter-on-quarter has reduced significantly, right? So that is the reason why the entire revenue, gross revenue kind of is build less, whereas the net rate -- net revenue continues to be higher for us.

[Ankur Rudra, analyst]

Okay. Understood. Just a last question on the tech upgrade, Vijay, you referenced. Is there any kind of capitalization for the tech platform upgrade that we should expect in the accounts?

[Madhur Deora, executive]

There's an extremely small amount of people cost that we have capitalized. I think it's about INR 3 crores or INR 4 crores a month for the period in which for about a 12-month period in which we have done the build-out of the new technology system. So yes, there is an extremely small amount of capitalization that we -- that our auditors have asked us to do.

[Ankur Rudra, analyst]

And this would be over a period of roughly how long would the capitalization?

[Madhur Deora, executive]

So it's historical as for about -- it was done for 12 months, roughly 12 months. So just to be clear, the tax system that Vijay talked about, I'm assuming you're talking about the first bullet point on the growth driver age, which is our -- what we internally call the 2.0 system. That is now completed.

We had done a press release on this. I think it was back in February. Maybe it was early March. So that entire project took about 12 months. And over that 12-month period, we did about INR 3 crores a month. And we're not doing that anymore because the project is finished.

[Operator]

The next question is from Jigar Valia from Ohm Group. Sorry, we lost you for a second.

[Jigar Valia, analyst]

Congratulations on the great performance. A follow-up question with regards to the take rate, the net take rate. So if you can help understand that now there is less need for the buffers of provisions that the lenders need to keep. And accordingly, we can kind of also invoice them a little lower. So we can map the gross take rate and which we can see the pattern. But if you can help understand the net take rate and it would get adjusted under which line item on the expense side, if you can help.

[Bhavesh Gupta, executive]

So there is no expense side adjustment to this entire thing. What ends up happening here is that, as we've explained the business model earlier, that there is a distribution revenue, which largely then is unaffected by any change of portfolio, and then there is a collections revenue.

Now if you are keeping a much higher provision for collections that the portfolio may not perform as well as we believe it will perform, we will build over a period of time. Now in -- what is happening in a product like Paytm Postpaid. Because a short-term product, the portfolio performance is very well established. So we bill less and hence, we get less. So only on a gross-to-gross basis, it will optically appear that our take rate have gone down. But if you look at the contribution profit or the EBITDA that remains same or marginally actually better.

[Madhur Deora, executive]

Maybe I'll just add, if I understood your question correctly. So what Bhavesh described as bill less is in the payment processing cost line.

[Jigar Valia, analyst]

In the payment processing cost line. So got it. That was what.

[Madhur Deora, executive]

So for example, if this trend was to continue and we were to further make changes, then the payment processing cost would go down marginally and the revenue side of it would go down marginally.

[Jigar Valia, analyst]

Got it. And this should lead to a contribution margin to be higher than 50%, which used to be earlier because of this accounting, probably it shouldn't slightly upwards of 15% and stay there?

[Madhur Deora, executive]

Yes, it does. Because you make the same amount of money on a slightly lower revenue base, it should -- the contribution margin upwards. And there are also some sort of tax and other efficiencies that we get out of this.

[Jigar Valia, analyst]

Got it. And on a net -- on the gross take rate, should -- if it is right now, say, come close to 3.5% type of calculated levels, would that on a blended basis, that would be a more steady state sustainable number rather than 4% plus?

[Bhavesh Gupta, executive]

Yes. So Jigar, yes to that question. But what we've seen that this will oscillate depending upon which business contribution we're doing more versus less. So there are quarters like in quarter 4, Postpaid was marginally higher than 50%, and Personal Merchant loan were like a 45%. So if the Personal loan and Merchant contribution a bit more, the 3.5% become 3.75%. But yes, the better way to do it is that it will oscillate be between 3.5% to 3.75%.

[Jigar Valia, analyst]

Perfect. That helps. Last question from my side is.

[Vijay Sharma, executive]

Apologies. Bhavesh. Let me just add to that. That payments MDR that we get from Merchants on Paytm Postpaid, that is recorded in payments revenue. Because all MDRs regardless of which instrument that is recorded there.

So while you're absolutely right in tracking this sign and dividing it by the dispersal revenue to get to a trend line, I just did want to point out that what we report as financial services revenue is not all revenues related to all product loan distribution products. The MDR from Postpaid does come under payments revenue.

[Jigar Valia, analyst]

Understood. Just a last question from my side. Is it possible to, on a pro forma basis, give the UPI incentive for Q1, Q2, Q3? Because having just for Q4, again, it makes it noncomparable. You've tried to be as elaborate as possible, I understand, but maybe on a pro forma basis.

[Madhur Deora, executive]

so Jigar, maybe with the disclosure that we have, I can help you. That we have said that out of the INR 182 crores that we got for the full year, INR 133 crores versus previous quarters, which means that INR 49 crores was for Q4. So if you were to back out that INR 49 crores from our reported number, which is INR 101 crores, then you get to INR 52 crores of EBITDA, excluding the incentive for Q4.

So if you exclude even the Q4 UPI incentive from Q4, then the number that get is INR 52 crores. So.

[Jigar Valia, analyst]

Got it. Excluding the UPI, it is comparable. I cannot map the UPI incentive for Q1, Q2, Q3 separately. That's it.

[Madhur Deora, executive]

Yes. So the INR 133 crores, you can broadly assume that it was growing at 5% to 10% quarter-on-quarter, right? So the last quarter number, I don't have the exact last quarter number, but I think it was closer to INR 45 crores or INR 50 crores.

[Jigar Valia, analyst]

Understood. Thank you very much.

[Madhur Deora, executive]

So it's relatively evenly split. But of course, some Q-on-Q growth amongst those 3 quarters.

[Operator]

Next in queue is Suresh Ganapathy from Macquarie.

[Suresh Ganapathy, analyst]

Am I audible?

[Madhur Deora, executive]

Yes.

[Suresh Ganapathy, analyst]

Yes. Okay. So just to understand this better on this take rating. So what you are seeing from an accounting standpoint is, yes, when your provisions in the Paytm Postpaid business is better, better than expectation and the loss rates are lower, your revenue line item shows a lower take rate. But at the same time, the payment processing cost also comes down. So net-net, on an overall basis, it remains more or less the same. It doesn't affect the overall EBITDA. Is that the interpretation right, from an accounting standpoint?

[Madhur Deora, executive]

Yes. Suresh, it would be the same, perhaps slightly better. The profitable stay more slightly better.

[Suresh Ganapathy, analyst]

So part also just to again repeat part of it gets adjusted in a lower downward revision in the financial services distribution line item, and part of it will get adjusted in the downward division in the payment processing cost. The payments costs, the payment processing charges, right? That will also come down.

[Madhur Deora, executive]

I wouldn't think of it as splitting it into 2 parts. I mean, Bhavesh, you can add. I wouldn't take on splitting it in 2 parts. What we are saying is that the cost impact is seen in the payment processing cost line item and the revenue impact of nearly the same, perhaps slightly lower, is seen on the revenues -- the financial services revenue side.

[Suresh Ganapathy, analyst]

Okay. So the overall EBITDA doesn't change much. Okay, fine. The second question is can you let us know totally how many partners you have on the lending side, banks and NBFCs? And if you can give the proportion, it would be great in value terms.

[Bhavesh Gupta, executive]

Yes. So Suresh, we have 7 partners today, 2 banks and 5 NBFCs. Unfortunately, we do not have the, I would say, approval from our partners to declare individual disbursement values, et cetera, et cetera. So -- but I can give you this part that large part of our business -- our business is fairly well spread. It's not concentrated to 1 or 2 partners.

While some partners are very comfortable doing postpaid NPLs, some are more comfortable in Merchant loan. But if they are comfortable doing our business, they will do that business materially with us and not a very small portion. And having said that, we also are now in the midst of adding more partners, and we will be announcing some of the new large NBFCs and banks in due course of time, starting from June.

[Suresh Ganapathy, analyst]

Okay. And it's not possible to share the share of the largest partner also?

[Bhavesh Gupta, executive]

No. So we don't have the, what can I say, agreement with our partners to share either their portfolio in specific. Some of the time they ask, can you share a particular lender portfolio, et cetera, or the disbursement value. Because some of these are listed entities, as you understand. So if they were to declare individually their announcement to investors, we'll be more than happy to share. But we currently do not have the approvals from these people.

[Suresh Ganapathy, analyst]

Because the simple math says that the share of on an average basis is 15% per partner, right? So I'm pretty sure that it is not going to be 15% uniformly across 7. So there is a possibility that a partner will be greater than 20%, there was at a simply do the math. So just wanted to understand that.

[Bhavesh Gupta, executive]

Yes, Suresh you are right. Understand that not every partner does all our businesses. So let's say partner A will do only postpaid and PL because that's generally the combination. But then we have partners who only do PL and they do a lot of PL. So if I'm doing, let's say, INR 1,400 crores, they could be doing 50% of the PL volume with us, and they do another 2 partners doing 25%, 25% each.

Similar in merchant loan. There are partners who will do 50% of merchant loan with us and then another 3 partners who will do 15%, 20%, 20%, et cetera. So depending upon their risk appetite and where they're strategically they want to calibrate their ROA, et cetera, they pivot on the business. And it is not kind of uniform, what you're saying is right. But it's not very concentrated also. That's the comfort I can give you very clearly.

[Vijay Sharma, executive]

Yes. Important thing that I want to add to what Bhavesh was saying, Suresh, here is that our internal KPI is that as soon as we start crossing 2 digit of their distributed disbursement, we start to make it that we need to add or that divert transactions or request of loan disbursement to some other people.

So our continued aim is to remain single-digit distribution of their overall book.

[Suresh Ganapathy, analyst]

Okay. And then just [2 and 5] that you're talking about, HDFC Bank is not included, right, because they are just a credit card partner?

[Bhavesh Gupta, executive]

No, they're included. Because credit card, while we book that in our cloud revenue, it is a business which is driven in these are lending partnerships. And we also are currently in conversation with not just HDFC, but other banks to do more credit card distribution and loan distribution.

So we're kind of not differentiate between the businesses when it comes down to banks.

[Suresh Ganapathy, analyst]

Yes. But then Bhavesh, this is 1 and 5 and not 2 and 5 because HDFC Bank doesn't give a single rupee of that INR 5,000 crores of loans that you have dispersed this quarter, right? I mean, this month, rather.

[Bhavesh Gupta, executive]

Yes. .

[Suresh Ganapathy, analyst]

So in that [indiscernible] so it's effectively 6 partners giving you that INR 5,000 crores that month and not 7 partners because HDFC bank doesn't have any lending relationship with you guys?

[Bhavesh Gupta, executive]

That's one way to look at it. But we have with each partner, including the bank, we have agreements to do multiple products, but it is a sequence of events that we go with. Currently, we are doing cards, but obviously in the future, not just with HDFC, but with other banks also. We intend to do loan businesses with them. It's just how technologically we want to sequence the scale up with each partner.

But you said it right that if you were to do a mathematical assessment. Mathematically, we can divide it by 5 or 6 partners that we currently have within the INR 4,400 crores of business.

[Suresh Ganapathy, analyst]

Yes. So that comes out to almost 20% per partner, right, on an average, if we do the simple math. So that's the only concern here. Okay. No problem. It'S fine. It's pretty clear.

[Bhavesh Gupta, executive]

The only clarification also, Suresh, is that as you understand it equally well. While on gross disbursement basis, it can appear that we are doing as INR 1,000 crores or INR 800 crores per partner. But because 50% of this business is pretty in postpaid and are just being in stock in 30 days, from our PUM origination perspective, the number is 5% to 6%. So it is not a contribution at all.

[Operator]

Next in queue is Bhavik Dave from Nippon.

[Bhavik Dave, analyst]

Am I audible?

[Operator]

Yes.

[Bhavik Dave, analyst]

Congratulations on a good quarter. Just 3 questions. One is on the operating expenses and the specifically indirect expenses that we have, the INR 1,000 crore odd number is like kept it like flat for like 4 quarters now. Just wanted to understand how should we think about it? Can this be controlled or can grow in a reasonable way versus our revenue? I just want to understand a positive revenue it's come up from [16 to 45]. How do you think about this line? That's question #1.

[Madhur Deora, executive]

So Bhavik, a couple of points on that. So one is on employee cost, we do have appraisal impact in Q1 of every year. That's something that will be there and should be factored in.

The second is, like Vijay mentioned, given how well our monetization engines are working, both on payments, on lending as well as in commerce and cloud, and the way our contribution margin and EBITDA is growing. We do see opportunities to continue to invest in merchant acquiring sales as well as on the marketing side. But we're not going to grow this -- we're going to grow this in line with revenue or not -- obviously not as fast as revenue, but we're going to grow this to support revenue and to make sure that monetization is coming out of that as opposed to significantly ahead of that.

So as we grow as a platform, we will make investments in sales, marketing and obviously technology and plus the appraisal impact. But we're very conscious that we want to get to higher EBITDA profitability and cash flow profitability. So -- and we believe we can do both of these things in line with each other.

[Bhavik Dave, analyst]

Great. That's useful. Just one understanding clarification. In terms of promotion and cash back incentives, and I see that number quarter-on-quarter has come off. Is it like purely seasonal? Or is there something more to dig into? Because our MTU and devices and all other things are growing and customer acquisition is quite healthy. Then this promotional cash back incentive number, obviously, we can't compare it last year or 2 quarters back because we had the payment processing built that was reclassified. But from a quarter-on-quarter basis, it's just purely basis the seasonality, right? That's the way to think about it?

[Madhur Deora, executive]

I think there is a bit of seasonality in there. Because in Q3, when we have festive-related sales, we do support some of our online partners and those sorts of things. There's a little bit of seasonality in there. But I think it is also fair to say that we are very sharp about the promotional cash-backs as a company. And so we do think that unless something dramatically changes on the monetization side, taking the number of something like 2.5 to 3 bps is probably the right -- sort of right level for our scale.

[Bhavik Dave, analyst]

Understood. And sorry, just to dig a bit deeper. The other expenses part, like that number remains reasonably elevated. What exactly would be the 1 or 2 large elements of that, INR 190-odd crores that we have this quarter?

[Madhur Deora, executive]

Yes, I assume you're referring to other direct expenses.

[Bhavik Dave, analyst]

Yes, yes, yes, correct.

[Madhur Deora, executive]

So part of it is because of the events business, like I mentioned earlier. That in the events business, there are certain events that we do where we have very high take rate, but we also have very high direct expenses. So all those events are profitable.

But so in the last quarter and this quarter, you would have seen an elevation in that. If this revenue from events goes down in Q1 and Q2, then you would also see a reduction in other direct expenses. So that's one part of it.

The second part of it is some of the collection cost related to the lending business also grows there. So while we're bit more efficient in collections overall, but because we have the scale up of the -- in amount of disburses amount of collections that we do, some of the costs related to that also going to other direct expenses.

[Bhavik Dave, analyst]

And the event-driven revenue line items will come in the commerce bit, right? We've not seen any major increase there this time around? So I was just wondering the cost may be a little rated higher than what you would have anticipated. And sorry, one last point on this same -- on the expense trend is the sales employee force that we have is like now normalizing in the 28,000-, 29,000-odd number of people. The productivity remains broadly at like 12, 13 devices per month kind of number for individuals.

Do you think that this number will remain in this 28,000, 30,000 range or will increase materially from here? Are we having the right number of people to add that 1 million odd devices every quarter? Is that the fair way to think about it, that they are reasonably productive and this is how it will go about or it can be improved from here?

[Madhur Deora, executive]

[indiscernible] But I must say meticulous [indiscernible] so over to Bhavesh.

[Bhavesh Gupta, executive]

So Bhavik, the productivity, obviously, is an area that we continue to work on. And it's in and our business is more of a function of technology, how much technology we can give to our front-end tier that they are time to onboard a new merchandise faster, right? And that's a very large in our focus that we are able to bring in. And I can tell you some metric that it used to be x number of minutes and now has grown by 20%, and every quarter, we intend to bring it down. That's the product that we keep building on.

But what you've seen here is that both our expansion in geography, the demand for a product like Soundbox in Tier 3 and Tier 4 is also very large. So we will hopefully drive more productivity as we've been driving. But we also are now expanding. And hence, our belief here is that this 1 million boxes that we were able to grow last year secularly, this number can be moved a bit more. And if there is an opportunity, and we believe that there is, we'll expand our sales yield further.

[Bhavik Dave, analyst]

Perfect. And last question, sorry, the data point. On subscription revenues, what will be that number this quarter? We use in that INR 170 crore, INR 180 crore range, INR 180 crore odd range? Where will it be this quarter?

[Madhur Deora, executive]

So it continues to inch up with, not inch up, it could use to grow with the number of devices deployed. So it has gone up about 15%, 20% quarter-on-quarter.

[Operator]

The next question we'll take is from Sachin Salgaonkar from Bank of America.

[Sachin Salgaonkar, analyst]

I have 3 questions. Firstly, Madhur, I would like to understand what is the kind of a steady state contribution margin and steady state adjusted EBITDA margin one could look? Because clearly, you guys have seen a strong improvement in contribution margin even at this quarter, even adjusted for the accounting change, you're seeing a bit of a margin improvement. So I just wanted to understand that.

[Madhur Deora, executive]

So I think on contribution margin, Sachin, we have come a long way from where we were even 2 years ago to now. And we believe that payment profitability and the mix of lending -- well, though we don't believe that's the payment profitability and the mix of lending has contributed to that. So we think that on contribution margin, this is probably roughly the right level with some room for improvement in both on payment side as well as some lending just because of the mix effect of lending growing a bit -- growing significantly faster than payments or conversions now.

So we think we'll see some upward trends there, but it won't be as sharp at all as we have seen in the last year or 2 years. On adjusted EBITDA, it's hard to sort of talk about a steady state because now we have sort of reached this level where we have a certain amount of revenue, call it $1 billion for last year, INR 8,000 crores for last year and about INR 9,000 crores for the last quarter run rate. We have 50-plus percent contribution margin, and we have a certain fixed cost base.

So then it just comes down to operating leverage in the business, which we think is very, very significant going forward because almost everything that we have built this technology line and there's significant amount of efficiency that we can get out of that. So I think that the operating leverage story will continue for many, many, many years, which is also to say that adjusted EBITDA should continue to move upwards for many, many years as long as we are seeing operating leverage.

[Sachin Salgaonkar, analyst]

Okay. So Madhur, to look at it the other way, the next couple of years, there's room for this margin to -- adjusted EBITDA margin to move to around 10% plus?

[Madhur Deora, executive]

I don't want to give a specific number here, but yes, there is room for adjusted EBITDA margin to keep moving up as we get more and more operating leverage. What I know is that our projections for this year assume significantly higher revenue growth than indirect expenses growth, right?

So when you sort of put that in the model, with -- even if you put steady-state contribution margin, even if you don't assume any improvements in that, it translates into meaningful EBITDA expansion.

[Vijay Sharma, executive]

So I'll take a little next level, Suchin here, that the word that I used in the beginning of the call, AGI, which is towards artificial general intelligence, which means that lot of work that humans do for us from on-boarding to the customer care, to the fraud detection to the every decision that we make. There is a large operations team also we have. And I'm going to say not only those will get efficiently done using the AGI that we are adding as machines. It will also make us scale to another level of solutions.

And now I also see trends where other companies which have not been able to scale technology like this, they are starting to falling behind us. In other words, the we will become scalable with not linear cost and the market will grow and competition will probably reduce to fewer players. That is why Madhur is saying that there is a space for it.

[Sachin Salgaonkar, analyst]

Got it. Pretty clear, Vijay. Second question, when we look at your depreciation and amortization, clearly, we've seen a sharp increase on a Y-o-Y basis. And one understand it's mainly on the back of Soundbox. And to earlier Bhavik's question, I guess you guys gave a bit more clarity in terms of the outlook of the Soundbox. So is it fair to assume that this number will continue to increase? Or are we coming at a point where this might peak at some point maybe this year and then it could stabilize?

[Madhur Deora, executive]

We do depreciate devices for financial accounting purpose quite aggressively. So 2 years in the case of Sandbox and 3 years in the case of devices, which we also think is significantly more aggressive than the useful life that we can get out of these devices. And as a result, we have seen this big increase in depreciation with the scale at which devices have gone.

We do have extremely ambitious plans to continue to expand devices in the country over the next 2 or 3 years. We think that there's clear runway to be able to do that. So I think depreciation number itself, you should expect for that to sort of continue to grow. Last year, it grew 100% year-on-year. So clearly, it won't grow at that level. But you should expect that CapEx translating into depreciation will be a factor in our net income.

[Sachin Salgaonkar, analyst]

Got it. And last question. I wanted to know your thoughts on the recent comments by already on credit on UPI. How could we look -- what could be the impact of that on the overall Paytm business?

[Bhavesh Gupta, executive]

See, Suchin, it's a very welcome move in totality. The fact that India has significant opportunity for small term credit. Any disbursement, which can be made more friction at the seamless, which is what the intention of [government] of India is to allow order of accounts to be used to link on a UPI rail. And hence, users can go out and scan QR and kind of consumer credit is a [indiscernible].

What is yet to be clear is the commercial architecture around it, what is currently known on the previous product, which is order of UPI rails, the MDR was similar to credit card. That adoption has been much lower. But I'm assuming looking at credit card on UPI, if you look at that commercial in which you have less than 2,000 [indiscernible] et cetera. If that commercial understanding was also on credit on UPI, then we could see some adoption happening in this area. And as an acquirer, we will only benefit with more funding sources getting added to the UPI [Q1 previous]. So we welcome this more.

[Sachin Salgaonkar, analyst]

And Bhavesh, do you see competition increasing in the back half?

[Bhavesh Gupta, executive]

Competition in terms of credit?

[Sachin Salgaonkar, analyst]

Yes, more banks. And now anyone could sort of give credit on UPI rates on the back of that? .

[Bhavesh Gupta, executive]

Yes. So we don't give credit on UPI because our partners at NBFCs who are yet not allowed to give credit on UPI. I'm assuming it will come over a period of time.

But I guess, I said that the, we don't see the competition is going to increase or decrease. There is room for a very, very large number of players in this space. We've been trying to achieve this objective through proprietary engagement with our partners for postpaid. If tomorrow, there is more acceptance of credit on UPI, it is only going to make the product more meaningful, even postpaid for us. So I think it will only expand the market. It's not going to bring more competition.

[Chandrasekhar Sridhar, analyst]

Thank you, Sachin. Given the current queue of questions, we're going to extend the call by 20 more minutes. I'll take as many questions as we can in that time.

[Operator]

The next question is from Mr. Saurabh Kumar from JPMorgan.

[Saurabh Kumar, analyst]

Just 2 questions. So one is just on this contribution margin. So if we exclude the UPI incentive this quarter, then your margin has not gone up quarter-on-quarter despite the mix improvement. Is that fair understanding?

[Madhur Deora, executive]

Yes, I think it's fair that contribution margin has been flattish Q-on-Q.

[Saurabh Kumar, analyst]

The second is this -- of your devices, the activation rate -- what should we assume as the activation rate?

[Bhavesh Gupta, executive]

Saurabh, yes, so given this number, Soundbox oscillates between 80% to 85%, and that's been a consistent number. That number has been reduced in spite of the scaling business.

[Saurabh Kumar, analyst]

Okay. So what I'm trying to calculate is basically the remaining 80% are giving you INR 100 rentals.

[Bhavesh Gupta, executive]

If you -- no, so there are 2 ways to look at it. When we look at rental active, that number is above 90%, closer to 90%, 92%. Because there are merchants who are happy to give you rental, but they may not be active every month on QR payments. But if you're talking activation as we track it, we don't track only rental activation, we track the [indiscernible] activation. That number is closer to 84%. [indiscernible] you should take it to 90%.

[Saurabh Kumar, analyst]

Okay. I'll take this off. Last question is basically this payment services to consumers. So this would include the 1% MDR of [BNP], right?

[Madhur Deora, executive]

No. The Paytm postpaid MDR depends on which merchant you're getting it from, right? So if you're using postpaid on the Paytm app, then it would come in Paytm payment services to consumer. If you're using it at one of our third-party online merchant partners or if you're using it at an offline shop and that shop is paying us an MDR, then that would come in payment services to merchants.

[Saurabh Kumar, analyst]

Okay. Got it. So the -- I mean, this lower growth that we see in payment...

[Vijay Sharma, executive]

Consumer side, Saurabh is when, let's say, you are making a credit card-based payment to someone, let's say, rent payment. And obviously, the receiving party wants INR 100 of INR 100, then we'll say that, okay, you pay discharge. So when consumer pays, that is [indiscernible].

[Madhur Deora, executive]

Sorry, just to clarify that any transaction that is happening on the Paytm app. So we have explained that in the pyramid in our investor presentation. So if a merchant is collecting the payment on the Paytm app, then -- and they're paying us an MDR for it. So it could be mobile top up, it could be electricity bills and a large set of payments, large sort of categories of payments, then that is payment services to consumers because the offering is the consumer app.

Whereas if we are doing the transaction at a merchant shop or a merchant app, then we consider payment services to merchant. So the MDR also works on the same basis, which is that if it's for a transaction that happened when a merchant was collecting a payment on the Paytm app and they're paying us an MDR or the consumer is paying a fee like Vijay said, then that would be in payment services to consumers.

[Vijay Sharma, executive]

Yes. And both are actually if the merchant is paying or consumer is paying. That is why if you notice in the presentation, this time we have called it payment services because if 2 consumer or 2 merchant was a little confusing. Because if, let's say, you are a merchant, and let's say you are a Airtel and you are selling top-up on Paytm consumer apps, you effectively are paying the fees, right, Airtel is paying the fees.

But on Paytm app, we used to call it consumer payment. So in the business presentation, if you notice, we called it payment services this time because we believe that the consumer or merchant split do not necessarily help understanding the nuance that we at the time of [indiscernible] had split, although the table below disclosures carry this.

[Saurabh Kumar, analyst]

Okay. So I was just trying to figure out the core growth with [XP], Soundbox and this MDR. So that number seems to be more like 20% order. Is that a fair number? I mean, and this has kind of stayed static for last 4 quarters.

[Madhur Deora, executive]

Sorry, which number are you looking at, Saurabh?

[Saurabh Kumar, analyst]

No. So I'm just trying to back calculate from your payment revenues of INR 1,400 crores basis, whatever you have said the MDRs that you get on the merchant fees. And sorry, the postpaid MDR and the Soundbox rental, then your core payment revenues have kind of remained at that INR 1,000 crores ballpark every quarter, last 4 quarters.

[Madhur Deora, executive]

I can't quite follow that math, also on the top of my head...

[Operator]

Next in queue is Nitin Aggarwal from Motilal.

[Nitin Aggarwal, analyst]

Am I audible?

[Operator]

Yes, Nitin.

[Nitin Aggarwal, analyst]

Congrats on good numbers. So first question is like on the device penetration. We have now achieved 20% penetration rate. And so what is the acceptance rate for a device when you approach a merchant? And do you have an order book for this which gives you a sense on how fast you should go on to invest here? And where this penetration can move like in few years from here? .

[Bhavesh Gupta, executive]

Nitin, the pipeline is fairly simple. We've got about 30 million, 3 crore merchants who are [indiscernible] QR merchants. And now, as you know, give or take 60 lakhs Soundbox merchants. Now the difference, as you can imagine, our potential merchants who can take Soundbox. At any given point in time, we do not see all the 3 crore merchants active, but a large majority of them are active.

We have seen that any merchant who does more than 25, 30 payments on the QR on a monthly basis finds having an IOP device like Soundbox meaningful for their business performance and [indiscernible]. So that funnel today, as we said today in this month will be about 60, 70 lakh more merchants, who are keen or would be eligible to take the product like Soundbox.

So there is no demand issue that we see in our system of the product called Sandbox. What is more important to us there is that we do find more innovation as an ask in the marketplace because there are various different kinds of merchants, merchants who want smaller Soundbox or larger Soundbox or a Soundbox which can have very, very low latency. That's the so we launched the 4G Soundbox, et cetera.and that is where our entire focus is. But purely from a funnel perspective, we have 50, 60 lakh merchants who are going to be eligible who can -- could do that many number of [internationals], which make Soundbox a correct product for them.

[Nitin Aggarwal, analyst]

Okay. And secondly, is there any seasonality in the GMV, the growth rate, if I look at sequentially this quarter looks relatively modest.

[Madhur Deora, executive]

Yes. They is seasonality, I mean, there's not a massive amount of seasonality, but there is seasonality in the business, particularly with GMV, particularly with in relation to festive season.

And so during Diwali and pre-Diwali, we do see -- pre-Dewali, we see online merchants running mostly large events and festivals -- shopping festivals. And as you get closer to Diwali, there is a sort of spike in business in the offline side of things. So there is seasonality and to -- not to further complicate the matter because Diwali also moves, that seasonality may be seen entirely in Q3 or in some years, it is seen partially in Q2 and partially quarteQ3. So that is the seasonality impact that we see in the business. There is other seasonality related to weather and so on, which is not significant.

[Nitin Aggarwal, analyst]

Okay. And lastly, for calculation of postpaid penetration, should we not take number of loans originated every quarter to quarterly average MTU because the current methodology seems to be unstating the penetration rate.

[Bhavesh Gupta, executive]

No, so Nitin, the way we see this piece is that we've got close to about 80-odd lakh users who have taken postpaid. But of the 80 lakh users, we see about 1 million users who are not eligible to take their credit line because of various delinquencies that then have [indiscernible] in the system.

So basically, we see about 45-odd lakh users who are using postpaid every month. But if you blend it out for a quarter, it would be 40 lakhs. And MTU that we are looking at is about INR 9 crores, et cetera. So that's the way we calculate it. But a macro point, rather than getting into it, is it 4.5 or let's say, 7.5. The headroom for growth is very, very large. And even if you were to do the math on a gross-to-gross basis, the headroom for growth is very large.

[Operator]

Next in queue is Rahul Jain from Dolat Capital.

[Rahul Jain, analyst]

Can you hear me?

[Madhur Deora, executive]

Yes, we can. Rahul, we have quite a few folks still in queue...

[Vijay Sharma, executive]

Actually, why don't you add to the main room so that we can just say and then this all initial part is sorted out. Because I'm sure they will not speak, but they will be allowed to speak so that they can quickly come back.

[Madhur Deora, executive]

Maybe answer 2 questions.

[Rahul Jain, analyst]

Sure, I have 2 questions. I will ask it one go or save the time. So firstly, on the postpaid, we have seen that the value of usage has increased multifold over last 4, 5 quarter. So is it simply because of higher limit that we have given to them? Or is it because of increased touch point? All we are observing incremental preference of consumers using the credit option instead of debit on their bank account. And what are the incremental innovation we could do to leverage on this trend, if it is shaping up? This is question one.

And secondly, if you could add more flavor to Bhavesh comment on the realignment of growth in the loan distribution business. It's more towards profitability, I think that is what he said? And also if from the point of view of how the immediate TAM or growth potential changes with on-boarding of new partner on the lending side. Any thoughts here would help.

[Bhavesh Gupta, executive]

Sure, Rahul. Rahul, the growth of postpaid is a function of 3 aspects. One is how many places postpaid is accepted. So if you go 1 year back, this number would have been about 30, 40 lakh merchants and today, we've got 1.9 crores merchants. So the fact that we've been consistently working with our merchant and merchants to make a [indiscernible] of postpaid of the product, both online and offline. The more acceptability of the product, the more usage of the product becomes a natural outcome of that. So that has led to the quarter.

The other piece is that as the portfolio has matured and the lenders have got comfortable with the way the portfolio performed. They have gone and upgraded the limits to people who had lower limits. And hence, the overall limit -- average limit per user has gone up by 30%, 40% resulting in the overall JV also being increased.

And number three, the piece here is that we've also seen the adoption of user, which -- who are adopting it, maybe only for 1 use case or 2 use case, now adopting for multiple use cases because the visibility of the product. And generally, now that you are sitting with almost 70, 80 lakh users, there is a network effect if I'm a user, it started to play it out. So we will continue to see this growth happen. May not be as much as we've seen last year because coming on a small base.

But yes, we don't see -- we have not taken, if I may use the word, our partners have not taken any additional risk to go ahead and give more limits, et cetera, et cetera. It's just the overall network has become far more meaningfully positive for the users. To your other question about my comment. So we've been maintaining this right from quarter 1 and quarter 2 when for the first time, interest rate cycle started to move up.

Our belief has always been that the strength of Paytm model is not just be able to give the best quality portfolio to our partners on our platform, but also be able to give them the portfolio, which is palatable to the risk appetite in a moving macro environment.

Now given the macro in the last maybe 12 months, you've seen repo move 2.5%, there is always an issue of unsecured credit in a higher interest rate scenario on a lag basis. And we are very, very mindful and continue to work with our partners at how we should look at the change in macro and calibrate growth so that we do not have any slippages in the portfolio.

In fact, we have demonstrated that we want to make our portfolio better. In that backdrop, our belief here is that we would like to be a lot more watchful in quarter 1 and quarter 2 when we would see elevated interest rates may not be more repo rate increase than you've seen thus far, but definitely elevated interest rates that how does the portfolio that we originated in the last 2 quarters performed in the quarter 1 and quarter 2 of this year.

And if we see that the performance of portfolio is at par or better than what the lenders are anticipated, we will see far higher growth in H2 versus what we intend to do in H1. So it is not that we are going to go into very low growth. But if you were growing at 25% quarter-on-quarter, we would like to calibrate to maybe 15%, 20% and make sure that the portfolio obligation is far, far more demonstrated through our distribution platform versus just a GMV disperse.

To your third question, about the TAM. I think the TAM expands marginally because the kind of partners you bring on the platform are all very, very large NBFCs. As you know, that our intention is to bring in banks and large NBFCs. Typically, these are AA and AAA NBFCs and we don't see much material difference in the risk appetite. What we definitely see here is that the intention of partner A versus partner B in expanding in certain geographies tends to be a bit higher. So we get maybe a couple of percentage point higher upside in terms of the opportunity that we were not able to leverage with existing partners. That's the only upside.

But more important to us it is, it provides us a nice runway over the next 6 to 9 months as the book matures with new partners on their comfort in going with us, which typically is the area that we can continue to focus in, in this year.

[Operator]

Next in queue is Piran Engineer from CLSA.

[Piran Engineer, analyst]

So most of my questions have been answered, but just to follow up on the Soundbox thing. So Bhavesh, you were saying that the potential size or the overall pool would be about 13 million, 14 million merchants and the sort of cutoff limit is 25 to 30 transactions per month on your QR code. Is that fair?

[Bhavesh Gupta, executive]

Yes. So not on my QR code, yes we have data. So we generally believe that if you are not a Soundbox merchant, and you are a QR merchant, typically, you will have 2 QRs. And if you're doing, let's say, 25 30 [pensions] with me, you may be doing similar or marginally lower to actually somebody else, but broadly even...

[Piran Engineer, analyst]

Fair enough. But that's like 1 transaction on a day, why will a customer need a Soundbox when he's like doing 1 transaction rate. Soundbox was to provide convenience when you've got multiple customers at your shop, everyone's paying you at the same time and that just gives you the ease of handling overall transaction. One transaction per day [Foreign Language] why will I pay?

[Bhavesh Gupta, executive]

The -- it ends up being 2 transactions in a day, but that is not the point. We have seen that doesn't mean that everybody who takes a Soundbox is taking it only on 1 transaction. We have seen that point in time becomes a pitch point to start engaging. And these merchants, when I'm talking about 50, 60 lack merchants available who do more than 25, 30 transaction a month with us, they become eligible. We are able to convert about 1 million of these merchants in a quarter, not all the 60 lack merchants in a quarter. So this is an eligibleness. And obviously, there's a funnel that the people are doing 100 transaction or 150 transactions a quarter find it meaningful.

The other piece here is, it is also very well demonstrated from [indiscernible], right? So if you look at a guy who's selling, let's say, ice creams. They also have Soundbox. It is not about a number of transactions. It is 1 in a day or 2 in a day. They do get unfortunately hit by frauds with spoof app et cetera, is in a result that we've seen. Where people are able to show the wrong messages on a static screen on a spoof app and kind of not pay them. And they have no way to understand that the money is coming to bank account or not. So by paying INR 100 of rental, they're able to protect themselves also from fraud, not just that they have a more convenient way to reconcile.

So it's a more of a market dynamic. And hence, it makes us believe that when we look at the funnel, we have a large funnel, which keeps getting converted into every month. And if I was to say for the month of April, we have seen that demonstration again happen that we were able to deploy the same number a marginally higher number than what we did in March.

[Piran Engineer, analyst]

[Foreign Language] Fair enough. And No, I understand the run rate is going from just thinking about the TAM, but that's okay. And secondly, again, just on the TAM on the lending business, now we have 80 lakh, 90 lakh GNPL guys. And -- but just in terms of, say, PL and merchant loans, in terms of number of customers, how -- what could be the TAM 50 years down the line? And also in the lending business, how often do commercial between you and the lenders get revised, be it for cost of funds going up and down or be it for ECL being better or worse than expected? Does it get revised every 3 months annually? How does that work? .

[Bhavesh Gupta, executive]

Yes. So Piran, we do -- we have a 6-month revision of commissions that we do with our partners. We've thus far, because the repo has gone up significantly, so there has been transmission of both repo and some commercial changes we do. But yes, simple answer is that we contractually review commercials every 6 month, and that is what we have seen. It can be for the better, very rarely it's for the worse. Obviously doing the repo increase.

We had to calibrate interest rate both what the lenders charge the users and obviously, the RO expectation they have. To the TAM question that you had, the PL TAM is linked to what we have seen thus far that to the BNPL growth, 60%-ish or 55% of our disbursements that our partners do is happening to existing BNPL customers. And that funnel is only becoming robust on a month-to-month basis as the book is maturing.

So if we were to be sitting on, let's say, 40 lakhs or 50 lakhs active users of BNPL in a quarter, we do find that almost 1 million or 1.5 million users of that funnel are eligible for PL. And then the 50,000, 60,000 of them keep taking PL from that funnel. So the more and more we are able to grow our Paytm postpaid business, the downstream impact is on PL, which continuously keeps growing, and that has been demonstrated. So there is less focus on straight-through PL coming into the lenders book. There is more focus on it getting upgraded to either a merchant loan or a BNPL loan or an existing personal loan in PL.

So I don't think we have at all a problem on the TAM of PL. It is extremely small as a number today, and it is linked to the [indiscernible] and that postpaid is cross sale. On the merchant loan side, the TAM is linked to the devices. We have so far, if our memory stands right, we have so far given about 600,000 -- 500,000 to 600,000 merchants over the last 2.5 years merchant credit. We have 60-odd lakh merchants for devices. And I think I've spoken about this math in the past that typically takes 6 months for a device merchant to become eligible for credit in the location that we are in.

So if you look at this number, this typically the base of merchants who can be eligible is about 40-ish lakh, 35-ish lakh of which 5 lack have already bought the credit. So remaining basis 30 lakhs, of which half of them are white listed by our partners to take credit and we are able to disburse about 70,000, 80,000 merchants, maybe more closer to 90,000 merchants every month. So again, it is linked to the devices story. More devices we're able to deploy, more merchants get eligible for credit. And that TAM is obviously very, very high for us.

[Operator]

Next in queue is it Vijit Jain from Citi.

[Vijay Sharma, executive]

We can add another question because Vijit seems to be having a problem but [indiscernible] in the room, please.

[Madhur Deora, executive]

Just come back to Vijit, later.

[Operator]

Next in queue is Himanshu from man from [indiscernible].

[Unknown Analyst]

Just most of the questions has been answered. Just 2 small quick questions. One is when you talked about this, the growth drivers of the launch of the new tech platform, what is the cost of upgradation to this? And how much you have accounted in that quarter?

Secondly, how much and how we are going to see this in the coming quarters as well or is going to spread this cost in the coming quarters as well? Second part to this question is, is it just need a clarity? Is this -- cost is part of your indirect expenses?

[Madhur Deora, executive]

Sure. So Himanshu, if I could just clarify. The cost of building the new platform more as in people cost. And that cost we're not incurring anymore. Obviously, those people are now deployed to other projects like which I mentioned.

The cost of operating the platform going forward is significantly less than the cost of our existing platform at scale. So there are 2 differences that we get, which is that over the last year, we were running effectively 2 platforms because not all of the transactions are migrated from the old platform to the new platform. So there are some efficiency improvements that we get as a result of now running on a single platform. And that impact, you will see in software cloud expenses. And like I said, the running cost of the new platform will be lower than the running cost of the previous platform.

[Unknown Analyst]

Sure, sir. And my another question is this wallet interoperability guidelines. Just trying to understand how this is going to increase the use case for the revenue on the payment size, payment business. And since you mentioned that whatever come, it is at least 2 quarters away. So if you can just give us how -- what is the scope and the opportunity here?

[Vijay Sharma, executive]

Well, what it means is that Paytm full KYC wallet customers will be able to make payment in other places and the QR provider will make payment to us. Now what is the market, if you assume that Paytm is accepted at x percentage of the market, the prorata, et cetera, potentially could be the market opportunity.

But to be honest about it, we don't put this kind of mathematics because the increased acceptance increases the customer's traction, et cetera. So we have not done this math, Himanshu. And we are 2 quarters away. So we are not doing this math or we are not looking to see. We will see as it comes.

[Operator]

Next in queue is Next in queue is Mr. Akshay Jain from JM Financial.

[Unknown Analyst]

I have a question regarding the recent news reports that RBI has cautioned the banks to go slow on the unsecured lending side. So what are your thoughts on the same? And any potential impact on Paytm? Or further, have you received any communication from RBI or your lending partners regarding this. That my only question.

[Bhavesh Gupta, executive]

We've also read the report. I'm sure that from time to time, the regulator will guide the industry, especially banks and nonbanks to be mindful of the changing macro. And that's the reason we have preempted it always that the moment the interest rate environment, inflation environmental has macro changes, there has to be far more conservatism building to our business models.

And they should be focused on portfolio versus growth. So having said that, we have not got any confirmation or any kind of guidance from our partners that they are worried about the kind of portfolio we're originating. We continue to originate the portfolio as per the risk appetite. But as I said in my previous conversation, we are mindful far more proactively of the changing macro and the overall growth of unsecured and the overall portfolio. And hence, we continue to calibrate the growth versus the portfolio mix that we would like to give our partners too. But we have no guidance from our partners. Our partners feel very comfortable with the portfolio that we direct with them.

[Operator]

Next in queue again, Mr. Vijit Jain from Citi.

[Bhavesh Gupta, executive]

Let's go to Manish, if you don't mind.

[Vijit Jain, analyst]

Hello. Can you hear me?

[Operator]

Yes, Vijit, we can now.

[Vijit Jain, analyst]

Sorry about that. Yes. My question is you've launched the RuPay card with HDFC Bank, which you announced in the presentation. Now RuPay credit cards are allowed on UPI, right? Is that the key pitch here because Master and Visa are currently not allowed on UPI. And how does this play with postpaid, which is also credit on UPI?

[Vijay Sharma, executive]

Vijit, it is not launched and neither is launched with HDFC. So it is not there, number one. Number two, our pitch is that a RuPay wants to promote and we want to promote RuPay. So it is the pitch. As far as the usage is concerned, the number of users to reach our will decide what incremental [indiscernible] on.

[Vijit Jain, analyst]

So I think I saw on the presentation itself.

[Vijay Sharma, executive]

We said it's coming soon. We have not launched.

[Madhur Deora, executive]

So Vijit, we are about to -- we'll launch soon. It is a RuPay credit card. We have not said which bank partner. And of course, RuPay credit cards will be used in every manner that a RuPay credit card can be used, including RuPay credit on UPI.

[Vijit Jain, analyst]

Got it. And my second question is just on the payment net margin expansion Q-on-Q. Now even excluding UPI incentive payments, you have about 60, 70 bps improvement. And obviously, the BNPL disbursals this quarter are also up 30% Q-o-Q. So net-net, is that one of the key drivers of that expansion there?

[Bhavesh Gupta, executive]

Well, it is one of the drivers, but other drivers also. Yes,[indiscernible] .

[Madhur Deora, executive]

Yes. So on BNPL also, we have MDR revenue. We also have costs. There is some amount of increase in subscription revenue, which I think Bhavik had asked about earlier. And there is improvement Q-on-Q on what we call payment processing margin, just result of our efficiency, both on the revenue side as well as on the cost side.

But again, Vijit, I would be slightly careful about looking at these numbers just granularly on a quarter-on-quarter basis. On a year-on-year basis, we have and long-term basis, we have already given the guidance.because a number of factors that go in quarter-on-quarter, including usage of different instruments by customers and so on.

[Vijit Jain, analyst]

The last question, Madhur. Postpaid disbursal volume per quarter is about INR 12 million, right? Any broad indication of how many P2M transactions are happening using postpaid a payment instrument?

[Bhavesh Gupta, executive]

So we actually don't track it because it's not -- it's not a metric that is very relevant. We look at use cases. But I think in the last time when we've seen this was about 6 or 7 tons actions, a typical postpaid user does in a month.

[Operator]

And now for the last question of the session, we'll take it from Mr. Manish Shukla from Axis.

[Manish Shukla, analyst]

What are the time lines for achieving free cash flow breakeven for you?

[Madhur Deora, executive]

I think Manish, if you -- we have not given a specific quarter. But we have said that we are very close to achieving cash flow profitability. And just to be clear, the way we define cash flow profitability is EBITDA, plus interest income, less CapEx. There is also in parallel improvements in working capital that we are doing.

So if you notice, over the last 1 year, due to improvements in working capital. And if you adjust for the money that we spent on buyback, we, over the last year, have actually added to our cash. If you look at the March 31, '22 number and the March 31, '23 number.

So we have also, in parallel, improved working capital. But when we are talking about free cash flow, we're saying EBITDA plus interest income, less CapEx, and we are very close to being able to do that. You only need some improvement in EBITDA going forward, not very significant improvements in EBITDA to be able to get to free cash flow breakeven.

[Manish Shukla, analyst]

So once you get there, what would be the end use of the cash on books?

[Madhur Deora, executive]

We will discuss that with our Board, and we will communicate sort of what that is. At the moment, we do feel that we have a lot more cash than we have immediate use for. One of the things that we have done in the past is discussed with our Board and return some of that in the form of buyback. So that would be one option on the table and there will be other options with respect to any investment areas that we feel very strongly about.

So we will, at the appropriate time, once we are starting to add the cash flow, discuss all of that with the Board and communicate that back to the market.

[Operator]

With that, we came to an end of the Q&A session. A reminder that a recording of this call and a transcript will be put on the company website. Thank you all for joining our results.

[Bhavesh Gupta, executive]

Thank you, everyone. .

[Madhur Deora, executive]

Thank you for very detailed questions, and we really appreciate your time and attention.

[Vijay Sharma, executive]

Yes. Thank you. Look forward.