One 97 Communications Ltd

NSE:PAYTM

Earnings Call Transcript 2024-Q4

[Unknown Executive]

Thank you for joining, and welcome to Paytm's earnings call to discuss financial results for the quarter ended and financial year ended 31st of March 2024. From Paytm's management, we have with us today Mr. Vijay Shekhar Sharma, Founder and CEO; Mr. Madhur Deora, President and Group CFO; Mr. Anuj Mittal, Senior Vice President, Investor Relations.

A few standard announcement before we begin. This call is for existing shareholders and potential investors and research analysts. This call is not meant for the media. If any media representative are on this call, request you to kindly drop off at this point. The information to be presented and discussed here should not be recorded, reproduced or redistributed 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 call is scheduled for 60 minutes, have a presentation by the management, followed by a Q&A.

With this, we'll start the call. I request Mr. Vijay Shekhar Sharma to kindly initiate the call. Over to you, Vijay.

[Vijay Sharma, executive]

Thank you, [indiscernible]. Hello. Good evening, everybody. Thank you so much for joining us in this quarter's earnings call. As you are aware, last 3 months have been quite a roller coaster in journey of Paytm. We learned a lot of our lessons. We learned how to become better and resilient. We also resolved ourselves to be fully compliant according to regulatory expectation and letter in the spirit. And I'm very happy to see that our results are indicating that.

Expectedly, the February and March month were very, very uncomfortably bad. At the same point of time, they were filled with lots of lessons for long-term sustainability and growth of the company. In fact, I'm very happy to tell you might have read the earnings release that sort of worse is behind us in terms of consumer and merchants and few line items of businesses that we -- first of all, we're proactively able to stop or pause or sort of reduced. We now have started to come back to those line items of businesses and started to build large revenue and profit centric company in long term. Many of our teammates in these days, have been going through the test of the time, lessons and learning of life where they have learned what we needed to do and what we have been able to do, in fact, I can say that as Paytm, I couldn't be more proud of each of our team mates commitment.

In this quarter, we have 2 months of impact of the business. Still, we have the performance of annual level, which is better than last year, and we remain committed to grow sustainability, with focus on profits, with focus on the core of the business, which is payment business and cross-selling of [indiscernible] business. Overall, it is important to note that as Paytm, we are committed to build India's financial and contribute towards in our country's financial inclusion, will remain aligned to our regulators and our government's mission to digitize and formalize formal financial economy.

With this, I give my teammate, Madhur this slide, then we will talk about a few Q&As and way forward. Thank you.

[Madhur Deora, executive]

Thank you, Vijay, and welcome, everyone, and thank you for joining our earnings call. Just to hit on a few key points and then spend enough time on Q&A. For the full year results, we achieved the first full year of EBITDA profitability since IPO at INR 559 crores. Our revenue was close to INR 10,000 crores, with growth across the 3 businesses on a year-on-year basis. Our contribution profit was INR 5,500 crores and at 56%. And like we said, EBITDA, including [ UP ] Incentive was INR 559 crores, a margin of 6%. So all of this is evidence to say that we had significant momentum all through the year, and we are outperforming the metric from the previous year and frankly, some of our internal estimates as well, obviously, as we mentioned, starting February and March, we started to see impact on our business.

Can you go to the next slide, please. For the quarter, we did see a revenue drop of to INR 2,267 crores. This was a decline on a quarter-on-quarter basis. Normally, there is some festive impact, but obviously, most of this impact, vast majority of it rather was due to the transitions that we needed to do are starting February 1. Our contribution profit was a decline, INR 1,288 crores, flattish from last year, including UPI incentive and 57% margin. Our EBITDA before we saw was INR 103 crores, as we mentioned earlier, we've got INR 288 crores of UPI incentive, which is over a 50% growth from previous year, including some U.K. incentives that we get from our new partner banks.

Can we go to the next slide? A little bit of a deep dive on our business onwards -- deep dive on our business. Our merchant business has started to grow in April and May. Our MTUs have stabilized in the month of May. Our MTU is down 24% as compared to January. April was the worst, and May has now started to stabilize at least on a daily transacting user basis. And we expect this to stay stable. Our MTU growth will come only when we get the new CPAP user onboarding commencement from NPCI.

On the devices side, we have started acquisition of new merchants that are focusing on activation of inactive merchants. As you would imagine, during February and March, we did see a reduction in our active merchant base as we were pending migration to our partner banks. Active base declined by 10 lakhs, so roughly about 10% of our overall merchants. They've become inactive. This was due to higher attrition in February and March and also because we were not doing new merchandisition which normally will offset at least a regular attrition as well as show increase in numbers. We remain very, very committed to the subscription device merchants and that business. We continue to innovate and launching our devices with improved features. A couple of them are on the cover of this presentation.

On a payments team, we have slightly better than news to report. The business has come off its worst. We did have about 12% impact or 12% of our GMV was coming from businesses which are currently discontinued or disrupted. This was into the services that we were distributing for Paytm payment banks such as wallet and Paytm payment banking, but also other places where we've taken a prudent view. Excluding that, we are down 6% compared to January, and we're about 3% to 4% higher than the March lows. So we do expect this to continue to show uptick from here on.

Can we go to the next page, please. On Payment Services, in terms of a little bit of just to calibrate everyone, the business now becomes primarily about focusing on UPI, which is 80% to 85% of our GMV card processing and EMI payments processing. So consumers are effectively in India paying merchants using these 3 instruments. And of course, as you know, we have customers on our app as well as merchants where we provide payment processing services. Our GMV was down a little bit, like we mentioned earlier, up on a year-on-year basis. Merchant subscription, this is a device space. Our net payment margin is impacted. So INR 748 crores, excluding UPI incentive became INR 565 crores and INR 853 crores, including UPI incentive.

As I mentioned earlier, the business is about UPI, debit and credit cards and EMI. I just want to remind everyone on the business model. So for bank-to-bank UPI merchant payments, we don't earn an MDR from the merchant, but we do receive subvention for the government, which is a [ 200 ], which is the UPI incentive that we talked about. There are other instruments where we earn MDR from merchants, including certain UPI new instruments that work on the UPI rails, such as UPI credit card, credit overdraft and so on. And I'm sure there'll be more innovation going forward as well as debit and credit card processing and the EMI aggregation.

So that's where we earn a higher payment processing margin. And obviously, on UPI, a bank-to-bank UPI, we are also mentioned from the government. Our outlook on payment processing margin is expected to be 5 to 6 basis points, including UPI incentive. We have elaborated on this in the earnings release. That's just the way the quarterly numbers work. We expect this to be in the 3 to 3.5 basis points range on a quarterly basis and including UPI incentive to be 5 to 6 basis points. And the last 2 years back is that UPI incentive comes towards the end of the financial year, usually in the fourth quarter.

I've already talked about merchant activation or an active base which we are focusing on reactivating and obviously adding new merchants as well. Due to this, a certain number of merchants going inactive, our subscription per device on an overall deployed basis, the 107 lakh number that we shared has gone down. We expect that to now go up. Obviously, this always remains subject to market forces and competitive dynamics. We expect net additions in terms of device merchants to come back to past trend lines by Q3. To the next page, please.

On Financial Services, as we have mentioned, starting in December, on personal loans side, vast majority of our focus has shifted to distribution that model for personal loans. This is a new opportunity that we saw where we have scaled up a business where for lenders, we do distribution only, and vendors are responsible for collections. We do not provide collection services on this. This, combined with the fact that we are extremely cautious on personal loan with collections means the vast majority of our business right now and going forward in the near future is expected to come from distribution only model for personal loans. Our take rate overall has gone up a little bit, as we had mentioned earlier, that postpaid had slightly lower take rates.

So when -- with the mix changing more and more towards personal oil and merchant home, our overall take rates have gone up a little bit given that we are going to focus on distribution only loans and at least at this point, the credit cycle be really selective on focusing on prime and super prime customers. There might be a slight compression in our take rates, and we are overall saying we should settle this at 3% to 3.5%. We are expanding our focus into insurance broking, as we have mentioned over the last couple of quarters. This is focused on being extremely product-led, so embedded insurance and DIY products.

So vast majority of our effort goes into building the best-in-class DIY products for our consumers. On equity broking to separate pieces of business, one is to have a great platform for equity trading and F&O trading, which is Paytm money. We're also expanding distribution of mutual funds, where we see strong tailwinds in terms of participation in the equity markets by retail investors. Here, our key focus is on SIPs, where we think we can expand the inclusion -- financial inclusion towards wealth management products. Can we go to the next page, please?

Just to double click on that a little bit. On the consumer loans, we are expanding on different types of distribution only loans where we earn only distribution fees and we have paused small personal loans and postpaid loans, as we had mentioned earlier, and where we were helping partners with collections to earn distribution and collection bonus. On merchant loan, our continued focus remains on merchant loans where we [indiscernible] with collections. So these are existing pay merchants of Paytm, who are receiving lots of money using Paytm every day. So that remains the core focus.

We are starting to see some opportunities and starting to do some pilots on different types of other business zones. These are, for example, larger ticket loans where we're only doing distribution. So that's another part of the business. As you can see on the right-hand side, we have given you monthly data just that you can see what the trend lines of the business have been during this period of transition in February, March and April. So in January, we had done INR 3,300 crores of total dispersals, INR 720 crores of that was postpaid. Like I mentioned, that is paused. INR 1,393 if personal loans included both models, distribution only and distribution thus collection going in February, March and April. All of these numbers are on distribution-only model. And in merchant loan, we had done about INR 1,100 crores broadly paused that in February, and now we're starting to see significant scale up in that close to back to previous levels. Maybe on the next page, please.

Marketing Services. This is a high-margin business for us, which is upsell on our payments consumer base for -- and this consists of travel, advertising and credit cards actually. Travel and advertising revenues have been impacted due to lower MTUs during this period compared to the previous period as we see stabilization and growth in our customer base, we should see this business scale up again. Next page, please.

We also wanted to share some of the financial impact. So we have broadly broken it up into 3 buckets. The big picture is that last quarter, there were obviously a bunch of moving parts, and some of them affected us earlier in the quarter and some of them affected us later in the quarter. So the full EBITDA impact -- effectively the full quarter impact will only be felt in Q1 and we do start to expect meaningful recovery from that in Q2 because we mentioned a number of things are temporary, and we can restart. So to begin with, the first is, as we had mentioned, I think it was January 31 or February 1. Then on account of embargo on the PPPL products, particularly the inability for customers to add money to wallet and PPPL bank accounts. There is an EBITDA impact to Paytm as a distributor of those services and for other services that we provided to PPPL of about INR 500 crores on an annual basis.

We have given a range of 300 to 500. We think we're going to be at the higher end of that range, unfortunately. So most of this impact will start from Q1 because the vast majority of Q4, we were offering these services, although on a slightly smaller scale, but the volumes were more or less intact. The second impact is, like we mentioned, our NGOs have gone down and our active merchants have gone down because of this in Q1, we expect incremental EBITDA impact of INR 100 crores to INR 150 crores as we get more consumers and more merchants on the platform, we should see recovery from this EBITDA impact.

We also mentioned that we have in line with certain prudent measures that we have taken and are in line with -- during this period of transition and in line with certain regulatory guidances, we have paused certain businesses in Q4, the full quarter EBITDA impact of that would be an incremental INR 75 crores to INR 100 crores according to our estimates. And again, here, we expect that to be recovery starting in Q2. So overall, we expect Q1 to be, like I said, the full water impact of this. If you add up all of these incremental impacts, then we come -- currently, we're doing about INR 118 crores of EBIT negative EBITDA before UPI incentive. And obviously, you're not expecting UPI incentive in Q1. Hence, we -- if we add up all of this impact, we expect Q1 to be INR 500 crores to INR 600 crores.

This includes investment in marketing in February and March of last quarter, we effectively bought most user group marketing. We have restarted that. So if you include that impact as well, we expect INR 500 crores to INR 600 crores. And we are confident of meaningful improvement from this number in Q2 and onwards. And the reason for that is that certain products which have been paused, they have -- some have already restarted, some we expect to restart very soon. And we are also achieving steady growth in operating metrics. We have put a bunch of commentary in the earnings release about how we're looking at cost.

There is opportunity for us to create a much leaner organization structure in line with some of the revenue and profitability impact that we have had. We're very conscious about the fact that we did to -- we look at every cost. Our largest indirect cost is, of course, people cost, and we're expecting annualized people cost savings of INR 400 crores to INR 500 crores going forward. Then we go to the next page, please.

I'll turn it back to Vijay to talk about our focus areas going forward.

[Vijay Sharma, executive]

As I said, our attention to governance compliance remains [ prying ] attention in next few quarters. So you expect us to do more independent Board members and subject matter experts on our subsidiaries and associates and on parent Board and you also expect us to drive lots of internal overhaul or reviewing the workflow processes that we are looking at. Important to note that we are committed to our payments business as core payment business driving on -- recovering on consumer and merchant base. That's an important thing. That's our core moat. We will continue to invest in sales team or marketing to drive our new market share or a customer count or both merchant and consumer side and the cross-selling wise, we are very clear. We've seen it.

It works. The cross-sell is using financial services distribution model. Obviously, we have seen how we have pivoted on our loan business from collection centric approach to distribution only while on merchant side, the distribution plus collection works out great. So we'll continue to expand on that and disbursements of insurance and equity mutual fund products. It is important to know that we are looking at our cost structures or the business line items so that we can prune our noncore assets, and we can create a leaner organization focused on profitability. Thank you.

[Unknown Executive]

Yes, we can open it up to questions.

[Operator]

The first question will take from [indiscernible]

[Unknown Analyst]

So I was asking what is the view on Marketing Services business because in the earnings release as well as your comments on the call, there is no mention on the marketing services business. And there is also a mention of pruning of noncore businesses. So I just want to understand that going forward, what is going to happen on that business? Because you have been mentioning payment as core and distribution of our cross-sell of financial products.

[Vijay Sharma, executive]

Look, the key reason that we did not mention much about was that we saw lesser consumer base, and that is why our growth or the numbers were flattish. As far as the marketing services to merchant is concerned, that remains our fortifying or sort of solidifying relationship with merchants, and that continues with a focus. We have done a good job of integrating, creating merchant opportunities where we offer advertising, the offer marketing, we offer, like, the APIs led structure where we have consumer technic booking travel, et cetera. So the intention of this messaging was that we are not losing focus and sight from our core, which is payment cross-sell financial services. Marketing Services, we more or less see as a support to the payment business is the reason that we didn't mention much, but you could see that numbers are good there or less not dropped significantly.

[Unknown Analyst]

Okay, fair. So what exactly is noncore, Vijay, when you are saying pruning of noncore businesses?

[Vijay Sharma, executive]

So internally, we were running many projects, including, let's say, cross-borders and we don't need to do that now. We were running a lot of products, which was useful for various bank partners like a software service to banks, et cetera. So we are trying to find out where are those businesses where -- if you notice our cost structure of overall engineering and technology people, et cetera, have been larger than what a pure payment company would have had. So these are those kind of line items.

[Unknown Analyst]

Okay. Got it. The second one is what -- do you have any update on the payment aggregator license that you haven't got so far? And do you see any risk that your existing customer base that you have that could also be impacted at some point in time? Can RBI say that government has not given an approval and we have reached a point where the existing customers also you will have to give up. Do you have any update on that? And also, if you could let us know if over the last 3 months, you have lost any of the big online payments customers?

[Vijay Sharma, executive]

So first of all, the RBI has a variable approval sort of that inform us in 15 days of getting feedback from government. So there is no delta of that how long it is or not and more or less. So we don't foresee that as a risk there. As of the approval, it is [indiscernible] committee meetings. I think it was due or will be due once the government gets formed. I can't say much comment about when will it be done also on. So that is why we have been waiting state. As for losing any online merchant, no, we did not lose any.

We have actually focused on deepening relationship by farming relationships. So practically speaking, I can share that our revenues from online merchants have grown on a product-to-product basis. Obviously, our revenues included other payment instruments like postpaid, et cetera, that we would use to have, which we have passed. So that part of revenue if we don't account for, then like-to-like basis, our revenues from our online merchants have increased.

[Unknown Analyst]

Okay. Fair. I just have one more. On your guidance of 3 to 3.5 basis point MPM ex of UPI incentives. Your UPI incentive roughly was 1.5 basis points in FY '24. And when you look at government allocation to UPI incentive, that number is growing at a slower pace versus the growth of overall UPI P2M GMV. So incrementally, in FY '25, when you are likely to lose market share, I'm finding it difficult to understand how you will get 2 basis points when this year, you did 1.5 so shouldn't -- I mean, unless I'm missing something, shouldn't it be more like a 4 to 5 basis point kind of a guidance for NPM.

[Madhur Deora, executive]

Yes. Sorry. So I -- just a couple of clarifications. I think the incentive scheme this year was very, very similar to the incentive scheme last year in terms of how they think about industry and nonindustry teams, groups of merchants and what the incentives were to the acquiring banks. So it was very similar. As you saw, we got a number which is slightly more than 50% more than the previous year. So that's the first point. Second is on acquiring GMV, of course, we have not seen a few months of growth, but it's more or less back to especially UPI acquiring is more of this back, in fact, probably about flat to January. So yes, we haven't had the growth that we would have otherwise had from January to April, but our acquiring numbers, including on UPI is very strong.

The third is purely look UPI was previously 70% of our GMV. And now it is going to be 80% to 85% of our GMV. So that has a little bit of a blending impact as well. And finally, while overall, our UPI incentive sharing with partners is similar to what we had with Paytm Payments Bank. There are some small nuance differences. And the final point is we -- Paytm is now a DPAC. So there's a small amount of money that the DPAC gets, which we will also get going forward.

[Vijay Sharma, executive]

I think, [ Alok ], overall, I also want to tell you that UPI is headed towards MDR, if you noticed the indication of different payment instruments that have come on UPI. For example, like rupee on UPI plus INR 2,000 payment, meaning upward of INR 2,000 payment is MDR charged to the merchant. Credit on UPI also is very clearly out there with a charging to the merchant and then prepaid on UPI is also charging towards merchant. And if you notice, regulator has brought 3 different buckets of merchants -- small merchant, midsized, much and large size merchant.

In my opinion, the -- while the government incentive are like you said, that may not be growing in the same ratio as U.K. is growing. But at the same point in time, the percentage growth of UPI in itself is not very, very large as a volume, but all other instruments, which are MDR worthy. So we don't see that there is a reason for it not to be in the 5 bps range.

[Madhur Deora, executive]

And look, of course, this is all basic that next year's UPI circular will be very similar to last year's, like last year, it was very similar to the year before. So there's a little bit of just volume. But that the UPI incentive assumption is pretty strong the same one.

[Operator]

[Operator Instructions] We take next question from Sachin Salgaonkar of Bank of America.

[Sachin Salgaonkar, analyst]

My question is on loans. I thought one of the advantages, value-add what PTM historically had was the collections given your strong data analytics. Now going ahead, this entire distribution-only loans, is this something which is temporary or we could see a change and a related question is just wanted to understand how your partners are thinking because I do understand none of your partners have left you, but most appear to be in a wait and watch more.

[Vijay Sharma, executive]

Sachin, I believe that we took a call based on the overall market macro, where the credit disbursements were clearly under stress when it came to personal loans. If you noticed, we have looked at small personal loans and the NPL is specifically is a very small personal loan out there, and our personal loan ticket size were also very small. So we have taken a call that till the time period market comes back, we will not do collection incentive less led volume in that side.

While on the merchant side, as you know, we have a very clear way to help lender collect, so we continue to do it. So as you are understanding, based on these that it is temporary until the time period market comes back, where the collection activity by our platform can get collection bonus. If we are not going to generate collection bonus, we are not going to do it. That is what our approach is. And this adds an opportunity for us to experiment and bring a few more type of credit disbursement and also hedge as they say, there is an opportunity in adversity, we looked at it as expansion of other kind of credit, and we see very good approach there. And it has given us opportunity to partner with few banks also, actually, surprisingly.

[Sachin Salgaonkar, analyst]

Okay. And your thoughts on merchants.

[Vijay Sharma, executive]

Yes. Merchant, we continue to do the collection set.

[Sachin Salgaonkar, analyst]

Got it. And Vijay, obviously, in opening remarks, you guys did mention you're piloting on other side of loans. We did see gold loans on your app. So any such categories we should think about how big is this opportunity for you guys?

[Vijay Sharma, executive]

So then we are looking at microlap as of now. And we believe that we did try gold. So we are trying to secure credit also as a part of our experiments. And because it is not material, so we have not mentioned much in the numbers yet. But at the same secured credit. It's more about monetizing the traffic. So we were wondering whether it does make sense or not sense, but at the same point in time, we are integrating for a couple of secured pipelines, especially for small merchants, micro lab makes a lot of sense.

[Sachin Salgaonkar, analyst]

Got it. And last question from me is your use of cash, clearly, you have a good amount of cash on your balance sheet basis, your guidance and where things are one gets a sense that the worst is over per se for you. So again, from that perspective, I wanted to understand, should we see a some kind of a buyback to help the stock? Or could we see further heavy investments in marketing as you focus in terms of acquiring more users and merchants?

[Vijay Sharma, executive]

Do not mind telling you that, like I told you that we will invest in customer acquisition for sure because that is the first right of our business. At the same point in time, wider use, I will ask Madhur to comment on that.

[Madhur Deora, executive]

Yes. So Sachin, we do have excess cash. There's no doubt about that. We have about INR 8,300 crores excluding P&L customer funds. While we have mentioned that next year we'll -- the next quarter will be EBITDA negative. We will get back very quickly on the path back to profitability. I think over the last quarter, the most important thing for us to do was to finish these transitions and also to onboard some of the things that we had paused temporarily. And the important thing was also for us to make sure that we take this opportunity to make sure that our investors and analysts who have been effectively waiting for a full update since the embargo on Paytm Payments Bank have that full information symmetry with us or as much information [indiscernible] as we get half. .

Now that we have done that, I do expect to go back to the Board and discuss how much excess cash we have and what is the best use of that cash even with the point that Vijay mentioned is that we do have to invest in marketing, which we have mentioned and we have to focus on getting back to profitability. But yes, in that journey, we do have significant amount of excess cash and it is logical for us than unless we're going to spend that cash. We should be just having discussions with our Board about how best to return that cash to shareholders.

[Operator]

Next question is from Vijit Jain of Citi.

[Vijit Jain, analyst]

So my first question is, so aside from the impact on your UPI market share, which we can see in the data, can you talk about overall the recovery trajectory that you're seeing across merchant categories in general in GMV terms. So online, in-app, off-line, online off app? And also on a slightly different vector, if you can talk about enterprise and SME merchant?

[Anuj Mittal, executive]

So if you -- let's just go to the slide where we had the GMV trends. So if you see -- like we mentioned, there's clearly an impact of disrupted -- there's an impact of -- sorry, I'm just going to get to that side. So clearly, there's an impact of 12% from disrupted instruments. And so that's 12%. Overall, like we said, we are down about 6% to 7% from January. Now if you further break that up into consumer -- consumers and merchants. And just to calibrate everyone, when we say consumers, we mean transactions that happen on the Paytm app which is for the most part of it, [indiscernible] as well as some of the commerce categories that are on the Paytm app.

And the merchant side is all the offline merchants where we help merchants accept payments as well as on the online merchants. So that business, as you can see from this chart, rigid has been significantly less impacted to begin with and has stabilized earlier. So even as the consumer side because of MTUs will declining, this stabilized here, and then it had gone up here. In terms of the cut -- further cut of this, against online enterprise and what we call sort of sound box merchants or QR merchants. I think EDC, which is card machines was the fastest to recover and is actually higher than January levels. And online was slightly online and semi-organized was slightly slower and semi-organized especially because we had to do the migration to partner bank.

And obviously, that's a very large base of merchants, so to be able to communicate to all of them all at the same time that there is no reason to be worried. We will be able to offer you continue to your service is more challenging. So we saw that impact to be a little bit longer, but that has started to come back very meaningfully as well. So there isn't a huge difference between the 3 merchant categories as I described them, which is organized off-line kind of semi organized and unorganized offline and the third being online. There isn't a huge difference, but there was earlier and [indiscernible] in the organized off-line market.

[Vijit Jain, analyst]

My second question is just looking at the 1Q guidance that you've provided, and thanks for providing that. So if I look at the EBITDA guidance for INR 400 crores to INR 500 crores of losses seems to suggest you will have maybe somewhere around 40% contribution margins with whatever fixed cost structure you have. So I'm just wondering if you could walk us through how you get from 40% back to 50% contribution margins, which is also your medium-term guidance. And is there -- are there specific one-offs in this 1Q guidance? Or is it all to do with the scale that you are hitting in 1Q?

[Madhur Deora, executive]

So Vijit, our indirect cost base is about INR 1,200 crores. So if you do that math in the 15% to 16%, of course, we are working with ranges here. We don't expect contribution margin to go down to 40%. I would say that excluding UPI incentive, which for simplification purposes, let's just say it's Q1, Q2 and Q3 of every year and Q4, then you get the UPI incentive and you have an annual number. Excluding UPI incentive, we might be in the high 40s to 50%. And including UPI incentive, for the full year, we will be a few points north of that. So that's sort of the general direction of the business right now.

Of course, there are a few moving parts, particularly the unpausing and the ramping up of site some high-margin businesses. So we might be off by a couple of points here and there. So that's where our broad business is landing. With respect to your -- to the second part of your question with respect -- I wouldn't say one-offs. I would say that, like we mentioned, that there are certain pieces of business which are at different levels of recovery path, right? So for example, the user side of the business, just the MDU base has stabilized, but the growth of that depends on new onboard -- new user onboarding. The merchant side of the business is slightly more under our control in the sense that we are doing enormous amount of reactivation efforts, especially through a 10 lakh odd merchants who went in active and we are adding new merchants as well.

So that recovery is a little bit sharper, and we would -- we'll start to see that even in Q1, let alone and obviously, in Q2 and Q3 as well. So I would call them sort of temporary impacts with different -- slightly different recovery path back to the original trend lines as opposed to necessarily one-off items.

[Vijit Jain, analyst]

Got it. Last question, if I can just sandwich that in. The merchant loans is obviously recovered pretty well, right? You're almost back to where you were in January on that. Now is that -- and you mentioned that as well, [indiscernible] is just now -- so suffice to say, greater confidence in continuing to ramp this as per original plans going forward from here, whereas consumer loans, obviously -- because the product has changed quite a bit, is a little bit slower growth. That's how one should look at it. And within consumer loans, if you can talk about how much of the April run rate is these very high ticket loans of the ones that you launched in December quarter?

[Madhur Deora, executive]

Yes. So on the first part of the question, on the merchant loan where we are doing collections, which is vast majority, vast fast majority of the merchant loan number that you see here, which is INR 971 crores in April. I would say, yes, there has been significant recovery, nearly back to the January numbers but we should add that we are -- any -- the reason why we make this distinction between collection and distribution only is because we do take up this task of doing the collection, we also take up some sort of sync up obligation with the lenders that our collection should be effective. .

Hence, if we are finding any concerns either as a macro or in our base on potential asset quality deterioration, we take a very, very conservative view to the extent of working with lending partners to slow down disbursals or to get much more targeted and so on. So even in the merchant-owned business, while there is this ramp-up and significant momentum and tailwinds, we are going to be very focused on signs of asset quality deterioration. So I don't want to create an expectation that we will very soon be doing numbers much the same as before or much larger than before, just because of the momentum that we are seeing over the last 2 or 3 months because that -- our most important metric is whether our lending partners are seeing any kind of asset quality deterioration on businesses where we are doing collections, right?

So I would say just a little bit of we didn't watch to give us some time to just make sure that -- and there could also potentially be some signals of, hey, there's some latent demand here because when we don't do business in February, then they might do a little bit more to do in March and April. So we are very focused on this business. It is core to us. It has performed very, very well for us in the past, but we are not going to sort of just extrapolate mindlessly. On the new type of zones where we do not collect and only get distribution fees. That's a very small part of the business in the last 3 months. They're encouraging in terms of having done a lot of the upfront work and the partner interest in scaling this up. But I think for now, you could call it a pilot. Did I miss one of the -- one of your sub questions, Vijit?

[Vijit Jain, analyst]

[indiscernible]

[Operator]

Next question is from Rahul Jain of Dolat Capital.

[Rahul Jain, analyst]

So a part of my question was answered, but just trying to attempt it in a different way. Our guidance kind of suggests that our cost on an absolute basis would be stable. Is it simply coming because of lower net payment margin? Or there is more to -- more built into that to come to that number or it's simply more conservative to begin with?

[Unknown Executive]

Rahul, I think it's a couple of things. One thing I should point out is that in Q4, our marketing spend was roughly half of what we spent per quarter. And that was still the brit because in February and March, we want to make sure that transitions are completed as opposed to really focusing on specific user campaigns, right? So we do expect in Q1, our marketing cost to be higher than Q4 because now we are seeing -- and you saw some of the adds, hopefully, at the beginning of the call. These ads that I think we have launched or about to launch for [indiscernible].

So this is really just straight from the [indiscernible] and we are going out with that. So we will spend more on market and Q4 was abnormally low. So there is that one impact, and I think we have mentioned that in the earnings release, but it will be partially offset on the indirect cost side by some of the people cost actions that we have taken in the past and the sort of expectations that we have created here of INR 400 crores to INR 500 crores of value people cost savings. So -- but that takes a little bit of time to come through fully in the financial numbers. So we will not see all of that in Q1.

[Rahul Jain, analyst]

Right, right. And a question for Vijay. While we have closed down some businesses like postpaid given the way the discomfort on possibility on converting into cash or any other factor. But do we see a possibility of recreating this product as distributor or manufacturer in a way that better aligns with the comfort zone of the norms?

[Vijay Sharma, executive]

First of all, BPL was not against norm, which means that we could potentially bring it back how it was, number one. And secondly, there is an opportunity of Tradeline on UPI, which is very adjacent to this. So yes, there are 2 opportunities.

[Rahul Jain, analyst]

So in one of your comments...

[Vijay Sharma, executive]

We posted it because small ticket loans were going through extraordinary delinquencies.

[Rahul Jain, analyst]

Right. Right. And in your comment in the press release, you mentioned that happy to share some of these products have been restarted and they are more in the process of starting soon. You're trying to indicate products even as far as like wallet or postpaid or those could be a little more in the future?

[Vijay Sharma, executive]

This is -- because most of the products are in partnership with the services organization, including postpaid, including wallet now, if you notice. So a lot depends on technology, comfort, scale, comfort, then piloting starting. So that is why I have said. And literally, everything is on the table. We need to start fast tech distribution, as you might have seen.

[Rahul Jain, analyst]

Yes. I completely understand the way a lot of things have happened, but I think importantly, like one new product launch we did on the device side. But newer product has to be the instrument to reimagine the TAM which we always was offering. And if some of these products don't exist, then the TAM has to get redefined back to the similar higher size with newer launches. So we're happy to hear more inputs on that in the time to come.

[Vijay Sharma, executive]

Absolutely, Rahul, you're correct, and you have pointed out towards a product that will be our attention and much less of our attention, it is definitely dependent on our partners, their market response, et cetera, et cetera. So we will do what our partners are interested in our technology and distribution becomes our moat.

[Operator]

Next question is from [indiscernible]

[Unknown Analyst]

So I wanted to understand your view on breakeven on that next quarter, what I understand is expected to be like about INR 500 crores, INR 600 crores loss and then improvement from there on. But if I just look at the way moving parts here, I mean the payment, net payment now it seems structurally lower? And then on the lending side also, you mentioned you're going to scale it up aggressively from the April number that you have disclosed. So maybe that's also more gradual scale-up. And then marketing and other is probably more, I guess, trend in line with [ GMV ]. So if we put all of this together, it seems there's not a lot of near-term or breakeven, but I'm wondering if you have a different view or if you see like 4 or 5 quarters you do see things coming to breakeven again. And then if we have what kind of [ pot ] do you have in mind?

[Madhur Deora, executive]

Thank you, [indiscernible]. This is Madhur. Maybe I'll take your question. So I think there are various drivers, right, for our business. So one is on the payment side itself, we are seeing, as you saw, GMV recovery. And obviously, GMV has a direct impact on margins, payment processing margin. The payment processing money that we can get like in absolute rupee and dollar terms. So that's the first one. Second is, as we mentioned, the sort of, if you will, a little spike in the inactive merchants, which we are now fixing and correcting and reactivating does result in additional subscription revenue, which is -- which effectively goes straight down to the bottom line or at least to the EBITDA line. So that is a very positive contributor going forward.

On Financial Services, I think they are a very interesting conversation for us to have with our lending partners now that the payment business has stabilized, as we have said in the presentation. I think those conversations were, quite frankly, a little bit harder in February and March than they are now -- especially now we are sort of public with all of these numbers. So I think those conversations a lot easier to have now than they were in February and March. I think it's hard to be very, very specific about which one of these line items will do better than expected and which ones may not do -- may not grow very significantly from here.

What I was going to do widget was just our basic approach to be conservative. We are not seeing issues in asset quality in merchant loans, but I also wanted to be calibrated about creating an expectation that, that would automatically translate into dramatically growing the business. But there are opportunities in lending, both in the distribution only model in personal loans as well as scaling up merchant growth with collections and without collections and the pilots that we have in secured lending.

In addition, insurance and wealth can become positive contributors going forward. These businesses are not quite of the scale of our lending business right now obviously, but there is incremental money to be made. On our [ Congress ] and cloud businesses, I do think we can do a lot more about being sharper about getting slightly greater monetization per MTU or engaged customer than we currently do. And finally, on the cost, while like I mentioned in Q1, we'll spend more on user growth than we did in Q4 because Q4 was abnormally lower. We are very focused on making sure that we are lean as an organization and that we have a lot of discipline on costs.

So across the platform, there are many, many opportunities. I think we did sit down and think about whether this is the time for us to give slightly longer-term guidance beyond Q1. And we thought that as we are having these discussions with partners as well as internal conversations about where the next INR 100 crores, INR 200 crores, INR 500 crores of bottom line is going to come from and over what time period with how its better to wait. We should give the Q1 guidance, but it is better to wait at least [indiscernible] bit longer to be a little bit more specific about when exactly we get to EBITDA breakeven.

[Unknown Analyst]

That's very helpful. And then the other question I had was on [indiscernible] or adding NBUs. So you mentioned you would be discussing with NPCI about one of the points that RBI mentioned. But then the other point was also to finish migration of all the existing users -- existing UPI users. So has that been completed? And is the discussion with NPI or [ PCIe ] only outstanding point or is something else left?

[Vijay Sharma, executive]

As a migration -- logically, the migration was of the system and technology because as of consumer, as you can guess, let's say, we have X million customers, fully a fraction of them come and not every one of them will effectively come in the lifetime to get migrated. So we can and we do the migration of these customers as and when they come on the app. So we are very actively converting them and migrating them. As of any other concerns or inputs, we are in active conversations with MPCI, and they're very supportive. And we are hopeful that they should give us this in due course. If they get fewer feedbacks, we solve them.

[Unknown Analyst]

Got it. And just one last thing. On this UPI, you mentioned a bank-to-bank [indiscernible], which does not -- does not have any monetization apart from the incentive. How much is that as a percentage of the total UPI GMV for us, roughly?

[Vijay Sharma, executive]

I think the intention is to say when you pay from a bank account, which is a primary way of making a payment on UPI, the other payment instruments like credit, credit card overdraft prepaid are very miniscule, not even 10%. I'd rather say [ that ] single percent.

[Madhur Deora, executive]

If I may just add, out of the -- out of the about annualized INR 20 lakh odd crores, we have said 80% to 85% is UPI, which is a very small percentage in nonbank-to-bank [indiscernible] was majority of that 80% to 85%.

[Operator]

We will extend the call for another 10 minutes because there are a few questions. We'll take next question from Jayant of Jefferies.

[Jayant Kharote, analyst]

First one is to Vijay, about this INR 400 crores to INR 500 crores of annualized people cost savings, how are you thinking? Can you help us understand the journey of the savings, it's almost 15% of your current employee cost base? And how would this play out between the field force versus DHO. We saw you had almost [ 55,000 ] reduction in account of sales employees. So if you could just help understand the journey of the savings, how will this play out?

[Vijay Sharma, executive]

So first and foremost, I want to tell you then that we will continue to add more sales executives. And this turn of sales executed if at all, is due to that there was uncertainty, what kind of product that we should sell when we are migrated other banks have started and so on. So instead of retaining, we let them continue to churn and not bother about them. But I want you to know that we will increase that overall number, and we are committed to grow our merchant side ecosystem by adding more sales number of people. .

As for overall cost, there is a clarity of number of products and technology and operations side. There is a tremendous amount of scope available. So we are able to add that. I mean, very simple customer care is merchant care is the systems and people and operations where, let's say, [ excess eats ] move instead of the system could get modified. So a lot of space of cutting that kind of slag.

[Jayant Kharote, analyst]

[indiscernible]

[Vijay Sharma, executive]

We will definitely increase number of people in skilled area. It will be -- I mean, given our attention and direction, our machines are chugging along well. And in terms like they're working smoothly with our partner bank, we will continue to increase the number of salespeople that we look at on that side.

[Jayant Kharote, analyst]

And the device deployment rate, do you expect to go back to -- I mean, maybe not 1.5 million, but maybe at some level of that, not what we've seen currently?

[Vijay Sharma, executive]

Well, then, I can tell that I track this deal, and I'm happy to tell you that some of our numbers are actually very, very much going towards the previous numbers soon.

[Jayant Kharote, analyst]

Great. Great. That's great to hear. Second one is for Madhur, on the margins for lending business. If you could help us understand, there was an element of collection expenses as well, right, which used to be a part, I think, of the other contribution expenses. So if you could help us understand the margins on lending products, where you do collections and where you don't do collections. How was that before and now that you're seeing more of these on collection products, how will the margins on the lending business play out?

[Madhur Deora, executive]

So Jayant, on the -- let's say, contribution margin basis or EBITDA margin basis because some of this is people cost, the margins for similar size ones are not that different, whether it is with collections or without. Obviously, with collections also means that some of the collection revenues and collection incentives are slightly back ended. So there might be a little bit of a timing issue there. But on a bottom line basis, they're not particularly different. It is possible that some of the higher-ticket loans might be to even more prime customers or if it's higher ticket, then no take rate might be slightly lower. The average take rate of distribution on the loans is slightly higher than the loans that we do with collections. So there would be those elements as well. But like-for-like, the bottom line is not very different.

[Operator]

Next question is from Saurabh Kumar of JPMorgan.

[Saurabh Kumar, analyst]

So just 2 questions. One on Slide 6. You basically said that the average before divide subscription revenue which is 90 will go down to 80 and then recover back to 100. I'm wondering what is driving that? Is just that you're expecting more fall off in Q1? So is it just the active rate is basically declining in Q1 and going to Q2? Or is there something else, some discounts that you're giving, which probably come out. So that's one. And the second is, again, on the indirect cost basis, whatever you kind of guided to? Will it be fair to say that your full year indirect cost should be in the INR 4,500 crores odd range. These are the 2 questions.

[Madhur Deora, executive]

Yes. So on the first question, it is purely kind of the full quarter impact of how we have exited Q4, Saurabh, so obviously, January was basis normal active rates or inactive rates. And in February and March, we saw this 10 lakh drop. So we have exited Q4 slightly, 10 lakh worse, if you will, than our normal active rates would suggest. In Q2, we do see -- sorry, Q1, we do see recovery in those active rates and early signs of positive, but it is because you exited weaker than for the overall quarter, there is slightly the subscription revenue. So we -- to clarify. We're not seeing deterioration in Q1, but we are seeing in Q1 the full quarter impact of the deterioration we saw in Q4...

[Saurabh Kumar, analyst]

So just a percentage active rate change is what is driving this.

[Madhur Deora, executive]

And also the fact that we could not add new merchants for a portion of all February and portion of March, and we are adding new merchants now. So those merchants obviously active and the active rates are quite high. And to your second question, I think give or take 5% sort of range, that probably sounds right. I should mention that while I think to get to that number, you have taken out INR 400 crores to INR 500 crores of savings that you mentioned, the marketing number would vary a little bit depending on what actions we are taking in Q2, Q3, Q4. But like I said, last year, we did spend about INR 100 million, INR 150 million less than what we expected to because of the February and March.

[Operator]

Next question and the last question is from Piran Engineer of CLSA.

[Piran Engineer, analyst]

Just firstly, if you can just comment on how many lending partners are active with you as on date. And in this sourcing only model, is there some sort of FLDG agreement or any sort of that sort of stuff because there's a lot of media speculation around it. So I just wanted to clarify this.

[Vijay Sharma, executive]

Yes, none of the lending partner has cumulated any agreement with us. So practically, depending on disbursement rate, has now maybe and so on. So everybody is on. As for [ FNTG ], we have not given or don't plan to -- we don't see -- we rather would go in disbursement only model like we are talking, as you can see. And as for media report, we did file the stock exchange clarification next day. So hopefully, that clarifies.

[Piran Engineer, analyst]

But Vijay, just to be fair, this INR 2,000 crores of disbursements you did in April, that has come from all 7 partners have also been contributed? Or is it some dormant some are -- because at least one partner is public about wanting to reduce the share to 0.

[Vijay Sharma, executive]

Yes. So not every partner [indiscernible]. All this percent...

[Piran Engineer, analyst]

And hence, my question, can you give us a sense of how many are active with you?

[Vijay Sharma, executive]

Again, this is more about the comfort like I told you, Piran that which state of business stability are -- that is what the [indiscernible] partner. So we already have enough and ample supply of capital, as you can guess. We are doing these numbers as you are seeing them. So we rather are trying to find out for disbursement of -- in the merchant side, as you can see, the numbers are showed up, and we are expanding on that up to a particular level. But we are more focused on the disbursement led partners, which could be many more different kind of partners than the same partners as before. So the approach here is not necessarily to go to the same partner for the same product, if you notice because we are not doing BNPL and personal loan with collections, so we may not be to necessarily see that part.

[Madhur Deora, executive]

And I'll just add one other thing, which is that while we have had the disruptions that we had in February and March and the pausing of business and unboarding of some of those already and unpausing hopefully [indiscernible]. I think you also have to keep in mind the overall context of the market, where partners who are doing lending with players like us also have different views about what their approach should be given the overall market backdrop, right? And we have always worked with our partners on the basis of you should only then to people that you're comfortable lending to because we don't give you [indiscernible] right? .

So partners will take certain views from time to time, which is why we have been talking about how many partners we have and our desire and focus to increase those number of partners because we don't control partner decisions or do we influence partner decisions nor do we try to capitalize partner decisions by giving [indiscernible]

[Piran Engineer, analyst]

Got it. Okay. That's clear. Just a couple of clarification questions, if I heard them correctly. Did you mention that the UPI incentive sharing with the new bank partners will be similar to what you had with Paytm Payments Bank?

[Madhur Deora, executive]

Our overall commercials are similar. Some of the nuances of arrangements might be different. Remember, in the case of Paytm Payments bank, Paytm Payments Bank was running UPI. It was hosted on Paytm for customers, and we were also a merchant acquirer for Paytm Payments bank, right? Our model going forward as PPAP is different, right? So the arrangements that a PPAP would enter into with a partner bank, a sponsor bank would be slightly different than the arrangements that we had in the past. So the commercial impact to us is roughly the same.

[Piran Engineer, analyst]

Okay. That clarifies. And secondly, could you just explain this thing on the previous participant's question, the subscription device rental is different for active and inactive merchants.

[Madhur Deora, executive]

No, sorry, that wasn't the clarification. So maybe if I understood the question correctly and the way I explained it, is that -- I think the question was, do you -- you have said 90 will go to 80. Does that mean that you are seeing deterioration in ARPU per customer in Q1 and the point that I was making is that we saw a deterioration in ARPU per customer in Q4, especially on account of the inactive base going up by 10 lakhs like we have described.

So we have exited March with that state of play. And while we actually expect recovery of that, not full recovery, but partial recovery of that in Q1. So we expect Q1 momentum to be upwards, whereas Q4 momentum in the last 2 months was downwards. But as you think about what your weighted average ARPU per device would be in Q1 versus Q4, that will be downwards because you exited Q4 week.

[Piran Engineer, analyst]

No, I got that, Madhur. So it basically means that an inactive merchant pays you lower rent than an active merchant, right?

[Madhur Deora, executive]

An inactive merchant actually does not pay us rent because we deduct from their settlement. Of course, we have other ways of sending a salesperson to go collect subscription fees and so on, but that is significantly harder, right? So an active the shortest sign of being able to -- the shortest way of being able to earn subscription from a merchant...

[Piran Engineer, analyst]

Is to distribute transactions.

[Madhur Deora, executive]

Because if they do 1 or 2 transactions, even 1 or 2 transactions a month, obviously much in some [indiscernible] many, many, many more than on an average. But if a merchant goes inactive for whatever reason, then it is significantly harder to collect. And obviously, then we use remote reactivation efforts and then on feed reactivation efforts, and those activation efforts take a little bit of time to kick in on the pace of 10 packs.

[Operator]

Thank you. With that, we come to an end of this call. A replay of earnings call and a transcript will be available on the company website subsequently. Thank you all for joining.

[Unknown Executive]

Thank you, everybody.