Billion Dollar Unicorns: Paytm Plans Rapid Expansion

| About: One97 Communications (ONSC)

According to a Zinnov research report, India's mobile commerce market is estimated to grow to $19 billion by the year 2019 from $2 billion in 2015. The growth is being driven by smartphone sales supported by a wave of low-cost handsets. Cisco's (NASDAQ:CSCO) reports estimate that the number of smartphone users in India will grow nearly five times to 651 million by 2019 compared with 140 million by the end of 2014. Billion Dollar Unicorn club member One97 Communications (Private:ONSC) is counting on this rapid explosion to sustain its valuation.

One97 Communications's Offerings

One97 Communications was founded in 2000 by Delhi College of Engineering graduate Vijay Shekhar Sharma. The company was initially founded to offer live astrology services for a GSM operator in Delhi in 2001. During the course of its life though, One97 Communications has pivoted its business model many times before narrowing down on its current model. After delivering astrology services, the company launched SMS-based applications, gaming applications, and subscription-based content services.

By 2010, Vijay had figured out the importance of mobile phones in the country and he launched Paytm as an online recharge portal. Paytm is an acronym for Pay through Mobile. The website initially allowed subscribers to purchase pre-paid recharge cards for their mobile phones. Inspired by the initial success, Paytm moved beyond mobile phone recharge to allowing customers to purchase recharges for their Datacards and even tickets for the Delhi Metro.

Paytm has seen strong adoption by the market. Within a year of its launch, the company was handling over 500 million subscribers on a daily basis. To leverage on its user base, Paytm also launched Marketplace for online commerce and Wallet to become India's biggest mobile payment service platform. Today, besides recharges, Paytm allows its 120 million users to make payments for their mobile phone, electricity, gas and water bills, book bus tickets and movie tickets, pay admission fees for associated schools and colleges, book amusement park tickets, and even make purchases from its online marketplace.

Paytm has big plans for the future. According to a recent investor presentation, the company wants to grow its transaction value by five times by April 2018. It is targeting a customer base of 500 million by 2020 and is working to introduce a payment bank in August this year. The company is currently completing regulatory formalities to get permission from India's central bank, the Reserve Bank of India, to operate the bank.

Unlike other banking institutions, a payment bank is geared towards small savings and checking bank holders. The banks are focused mainly on payments and remittances to migrant workforce, low-income households, small businesses, and other unorganized sector entities. Unlike other payment banks, Paytm's payment bank will be entirely mobile app driven. For people without access to a smartphone, Paytm will issue debit cards with QR codes that can be scanned for processing payments.

One97 Communications's Financials

The business has done well so far as One97 has seen rapid revenue growth in recent years. According to latest reports, for fiscal 2015, revenues for the company grew 60% over the year to INR 337 crores (~$50.4 million). But the growth has come at a big cost. During the year, One97 has invested heavily in sales and marketing efforts for the business. Losses have grown to INR 372 crores for the year (~$55.7 million) compared with profits of INR 6 crores (~$0.9 million) in the previous year.

One97 has been venture funded so far with $585 million in investments received from Alibaba's ANT Financial, Intel Capital, SAIF Partners, Sapphire Ventures, and the Silicon Valley Bank. Its latest round of funding was held in January 2015 when it raised $550 million through a private equity round. The funding is estimated to have valued One97 at $1.5 billion.

Post the investment, Alibaba along with its entities, registered a 40% stake in the company. The funding is estimated to take care of One97's financing requirements for the next five years and is being used to strengthen its technology, customer acquisition, and geographic and market expansion. For Paytm, Southeast Asian markets are the next market opportunity worth tapping.

Within India, Paytm has a significant lead when compared with competitors. Sure enough, there are sites like Freecharge that offer the ability to recharge mobile phone cards, but there isn't really a company that has been able to successfully integrate mobile commerce, mobile payment, utility payment and, now payment banking under one umbrella.