PayTM IPO DRHP - Who moved my cheese? 👇 (1/n)
One97 Communications (One97) is primarily a one-man show. The board of One97 features 8 directors, of which 6 sit in the USA. Management team in India consists of Vijay Sharma (VS) and his lawyer (Pallavi Shroff). Yep, one man with 14.6% shareholding and a lawyer. (2/n) ImageImage
Let's talk about Paytm Payments Bank Limited (PPBL), though, the engine underneath the layers of One97 and behind almost every meaningful vertical of One97. VS holds 51% of PBBL. And One97 has an option to buy this stake. (3/n) ImageImageImageImage
Prima facie this is extremely odd, why is VS holding 51% in PPBL in his personal capacity? Are investors getting only 49% of PPBL? Why does VS get to keep 51% of PPBL and then be bought out with shareholder's money in the future? How much will it cost? (4/n)
For the answer, welcome to the Foreign Direct Investment policy. The policy restricts foreign investment in the banking sector (through the automatic route) to 49%. So, India requires any payments bank to be Indian owned and controlled. But isn't One97 an Indian company? (5/n) Image
One97 is classified a foreign investor (LOL) with 6 out of 8 directors of foreign investors and/or outside India, and minimal Indian ownership. One97 needs an Indian owned and controlled entity as JV partner to hold min 26-51% in insurance and bank subsidiaries. Enter VS. (6/n) Image
So essentially, first VS sold off so much of One97 to investors that it didn't even remain an Indian company, but then the regulatory arbitrage worked out even better to put him in control of the engine of the company, PPBL. This is very neat. (7/n)
Interestingly, One97 also plans to lend 491 crore to VSS Holdings after the IPO, an entity held 100% by VS, who will then put money into Paytm Insuretech, who will then make an acquisition. One97 will get shares of VSS Holdings for this largesse. (8/n) Image
The notes to the financials state that One97 lost control of Paytm Insuretech during the course of the year , it now owns only 48.98%. So, when VSS Holding invests into Paytm Insuretech, One97 shareholders will lose ownership while VS gains ownership? (9/n) Image
One97 also has a shareholder agreement with VSS Holdings to exercise an option to purchase its shares in Paytm Insuretech. So, pay money to VSS to put into Paytm Insuretech, and then pay money to VSS to buy that stake in Paytm Insuretech? Neat again. (10/n) Image
So you could be funding One97 to buy out VS' stake in PPBL and Paytm Insuretech later. And don't forget the IPO won't make it an Indian owned and controlled entity, One97 will need VS to hold personal stakes for a few years at least. (11/n) Image
The financials are nothing much to speak about, as expected - a lot of burn to grab users and transactions. Contrary to common perception, One97 has talked about profitability, but in a pretty roundabout manner. Here's a new concept - contribution profit. (12/n) ImageImageImage
Contribution profit is essentially revenue from operations minus some major heads of expenditure, as you can see from the second image. Quite a lot of expenses are omitted, which explains the 1700 crore gap with reported earnings. (13/n) ImageImageImage
It's easy to trash a loss making operation, so let's see the silver lining too. Losses have declined substantially in the last 2 years with not much loss of revenue. Revenue has dipped from 3200 crore to 2800 crore, losses dipped from 4225 crore to 1700 crore. (14/n) Image
One97 uses a concept of 'take rate' to contextualize the Gross Merchandise Value numbers. We know GMV increased from 2.3 lakh crore (!) in 2019 to 4.03 lakh crore (!) in 2021. One97 says the take rate was 0.64%. On the FY21 base, that's ~2600 crore. (15/n) ImageImage
FY21 reported revenue = 2800 crore, quite close. One97 lost traffic due to shutdown of travel, hospitality, tourism sectors and lockdown prohibitions (offset of course by more adoption). Could one think of a 10 lakh crore GMV and 1% take rate for 10,000 crore revenue? (16/n) Image
This analysis also highlights the criticality of Paytm Payments Bank to One97. One97 has highlighted the benefits of reduced transaction charges halving as a proportion of GMV from 2019 to 2021. The other part, is reduction in marketing expenses, which may be temporary. (17/n) ImageImageImage
Anyway, there's reams to write on the financials and governance but none of it is new or interesting. The key man risk here is stupendously high and needs to be watched for. Investors are not even getting 51% of the engine - Paytm Payments Bank, which remains with VS. (18/n)
How much will One97 pay to acquire the rest of PPBL? This can work out in a few different ways. If enough foreign investors exit and their right to appoint directors is extinguished, One97 can become an Indian owned and controlled entity, and can then acquire all of PPBL. (19/n)
RBI and other regulations permitting, VS can sell stake to One97 at lowest permissible cost, and minority shareholders can benefit. Other such VS holdings in insurance can also be reversed to give One97 control. The exact cost is a huge question for anyone buying now. (20/n)
I wonder if this is a case of excessive dilution by the founders, which has come to bite hard as One97 goes deeper into regulated sectors. An IPO may now be necessary for One97 to eventually be reclassified as a domestic investor and get easier access to regulated markets. (21/n)
As always, this is educational and not intended as a recommendation to buy or otherwise. RT the top post if you liked it. (22/n)
Oh, and I almost forgot to mention, PPBL is the only profitable entity in One 97, with 17 crore PAT and almost 2000 crore sales. Only 1000 crore revenue gets consolidated with One97 due to 49% ownership. 1000 crore value left out of the pool currently. Profitable value. Image
As someone just pointed out, *none* of the revenue gets consolidated, only part of the profit. So that's 2000 crore more revenue that's outside the pool.

• • •

Missing some Tweet in this thread? You can try to force a refresh
 

Keep Current with Leading Nowhere

Leading Nowhere Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

PDF

Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @leading_nowhere

18 Jul
Want to do this kind of an analysis yourself? Lot of messages asking how to learn to do this. It's quite simple, let me show you step-by-step. (1/18)
The first step, obviously, is spotting a candidate gives insights when the data is arranged in a particular manner. In the thread, I spoke of 'cash profits', so let's take the other example I cited - Welspun India Limited (WIL). WIL also likes to talk about cash profits. (2/18)
Next step, you need to get data. You can use any popular screener website that allows you to download data in Excel format. My default is @screener_in by @ayushmitt and @faltoo. I don't get any incentives for this mention, it is just easy to use. (3/18)
Read 18 tweets
17 Jul
The bogey of maintenance capex – how the term ‘cash profit’ can be misleading for some types of companies but insightful at the same time. Read below⬇️
Some companies report ‘cash profits’ to measure financial performance. Two random examples - Time Technoplast (TTL) and Welspun India (WIL). TTL uses ‘cash profit’ in latest presentations but does not define it, whereas WIL defines it as profit before depreciation and tax. (2/22)
For TTL, I compared the 'cash profit' for FY20 from the Q4FY21 presentation, with the cash flow statement in AR FY20. The 'cash profit' for TTL seems to refer to cash from operations before working capital changes and tax. Quite hazy for the reader . (3/22)
Read 22 tweets
12 Jul
Yesterday I shared an observation on Oriental Carbon & Chemicals (OCCL), regarding their investments into VC funds and pre-IPO opportunities. A lot many wrote in with their views, so here are mine, with some international insights. (1/15)
OCCL is a very boring business - making insoluble sulphur, which is essential for vulcanizing rubber to make primarily tyres. Their latest annual report is very informative with respect to their strengths and market positioning, no need to re-invent the wheel here. (2/15)
Back when I first looked at OCCL several years ago, a colleague and I talked to some industry people to understand the indiustry structure. As anyone following OCCL will know, the market is mature and slow growing. The industry is capital intensive too. (3/15)
Read 15 tweets
27 Jun
Generally don't write about IPOs, but reading a new Red Herring Prospectus is habit. India Pesticides is an agro-chemical company with seemingly mouth-watering financial ratios. But corporate governance markers suggest extreme caution. (1/n)
What set off this inquiry was a disclosure in the RHP, indicating that the Company issued shares at Rs 33.70 to two individuals in February 2021 (4 months ago), who are related to a director. The IPO has recently closed with 23x subscription at Rs 295 per share. (2/n)
These two individuals were collectively alloted 371,380 shares for a consideration of approx Rs 1.25 crore, which would be worth close to Rs 11 crore after the IPO. That's a 775% increase in 4 months or 40,152% ROI annualized, assuming listing date as 05 July. (3/n)
Read 19 tweets
25 Jun
Whenever you consume content and need to draw conclusions from it, refer to Carl Sagan's Baloney Detection Kit. Twelve simple logical fallacies to watch. If you spot these, you are asking the right questions.

Full piece linked at the end👇 (1/13)
(1) ad hominem—Latin for “to the man,” attacking the arguer and not the argument (e.g., The Reverend Dr. Smith is a known religious fundamentalist, so her objections to evolution need not be taken seriously); (2/13)
(2) argument from authority (e.g., Nixon should be re-elected because he has a secret plan to end war in Asia—but because it was secret, there was no way for electorate to evaluate on merits; the argument amounted to trusting because he was President: a mistake); (3/13)
Read 14 tweets
24 Jun
Bizarre and brazen moves are common on the penny stock side of the stock exchanges. Vikas Proppant and Granite Ltd just released this intimation, announcing en-masse resignation of the entire management and board of the company to "bring in professional management". (1/7)
The shares of this company were heavily manipulated in the last 2 years, following the typical pattern of operators hand-in-hand with enabling management. Here's a look at the stock chart. Take a look at the volumes before the rise and the volume of trapped retailers after. (2/7)
Company has had almost no revenue in the last 3-4 years, except for a brief blip in 2019 when the stock prices also went up 6-8x in a very short span of time. In fact, it has been selling fixed assets this year. (3/7)
Read 7 tweets

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!

Follow Us on Twitter!

:(