After Alibaba And SoftBank, Berkshire Hathaway Exited Paytm; What Is Wrong With 'India's Alipay'?
According to information on a local stock exchange, $Berkshire Hathaway-A(BRK.A.US)$ $Berkshire Hathaway-B(BRK.B.US)$ sold its 2.5% stake in Indian digital payments provider Paytm through a block deal on last Friday, resulting in their exit from the company. The Warren Buffett firm invested about $260 million in Paytm in 2018, acquiring a 3% stake in the financial services startup at a valuation of about $10 billion. The global firm ended up selling all stake in Paytm at a hefty loss, over $70M.
Why Capital Giants Are Exiting 'India's Alipay'
Paytm, established in 2010, is currently the biggest payment platform in India with a customer base of over 300 million registered users and more than 20 million merchants. The company has prominent investors such as Ant Group (an affiliate of $Alibaba(BABA.US)$), $SOFTBANK GROUP CORP(SFTBF.US)$, and Warren Buffet's Berkshire Hathaway.
Before the exit of Berkshire Hathaway, Chinese e-commerce giant Alibaba has sold its remaining stake in Paytm. In January 2023, Alibaba sold about 3% of Paytm for $125 million, cutting its holdings from 6.26%, based on NSE data. And SoftBank sold 4.5% stake in Paytm for $200 million in 2022.
Although the revenue structure has improved, Paytm's payment business still accounts for over 60% of revenue, which will be under threat if there are any regulatory changes. Also, its entry into the insurance sector has been rejected by regulators.
In the last decade, Paytm has achieved success mainly due to the increasing trend of digitalization in India. The company also capitalized on the Indian government's demonetization initiative in 2016 and the COVID-19 pandemic in 2020. However, Paytm has faced stiff competition from rivals such as $Alphabet-A(GOOGL.US)$'s Google Pay and PhonePe in mobile payments and $Amazon(AMZN.US)$, Flipkart, and Reliance in e-commerce, posing a challenge for their core themes.
Paytm's diversification strategies are under threat from regulators and peers. In March 2022, the Reserve Bank of India restricted Paytm Payments Bank from acquiring new users after it violated India's data storage rules. The company also explored a move into insurance but failed to make a mark in that space. It must cross these hurdles by emphasizing its key themes to strengthen its foothold in the market.
However, Paytm is confident of its new strategy and roadmap with the continuing support of other existing shareholders.
The exit price of any investor(s) in the company via capital reduction process is not reflective of the valuation of the company and neither the exit has any link to any FDI laws," A Paytm Mall spokesperson said in a statement. "One simple metric is to consider our cash balance itself is significantly higher than the quoted number in media reports , which establishes that the suggested low Fair Market Valuation is completely inaccurate," he added.
Why It Is Difficult for Paytm to Replicate the Success of Alipay
Paytm aims to transform into a super-app similar to Alipay, offering a range of mini-apps that include payments, shopping, and gaming, all accessible through a single platform. However, Paytm doesn't have a robust e-commerce platform like Alipay to support it.
That is why Paytm plans to revitalize its e-commerce business by joining the Open Network for Digital Commerce (ONDC), an open platform launched by the Indian government to reduce the dominance of Amazon and Flipkart (owned by $Walmart(WMT.US)$) and concentrate on e-commerce exports. However, Paytm must maintain the same level of quality service, delivery, and inventory as its competitors to remain competitive in the market.
Paytm Mall said that it will pivot to ONDC as its primary focus and explore opportunities in exports business in place of traditional physical goods e-commerce.
This move enables the company to create a long-term sustainable business in partnership with ONDC, which aims to democratise the purchase and sale of goods in the Indian market, driving transparency and digital independence for small businesses in the country," the company said.
Source: Bloomberg, TechCrunch, SimilarTech, Fortune, Verdict, Paytm
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