Sometimes we feel like we're Superman. You know how he would never kill the bad guy but hand him over to the cops… So here we are today, bringing Mobikwik to your feet. We'll present our case and then we'll leave it on to you to make the final call – invest/enjoy listing gains/don’t touch at all.
Thanks to Zomato, now India knows how a tech IPO goes like – big traction - clingy red bottom line and a world of expectations from the listing. So, it comes as no surprise that Mobikwik is also a loss-making tech company, looking to have for itself, dare we say, an IPO as successful as that of Zomato. But here’s the catch – unlike the food delivery behemoth, Mobikwik hails from the Fintech sector, which is HIGHLY regulated:
For mobile wallets, digital payments, and payment gateways – there’s RBI
For WealthTech offerings like investment in Mutual Funds and Gold – there’s SEBI
And for InsureTech offerings like distribution of insurance products – there’s IRDAI
Here’s an example of how vulnerable that makes a Fintech's growth strategy, business plan and revenue model: Effective from January 2020, the Government of India released the zero-MDR (Merchant Discount Rate) Policy, which mandated big players to scrap their charges for any UPI, RuPay or Aadhaar-Pay B2C transactions. Result? No Fintech company will be able to build any revenue model on UPI, which clocks over 2.5 BILLION transactions every month.
High Risk = High Gains?
So, this means that in this IPO, the risk is even higher. And as your finance professor would tell you, high risk should be taken only if there is high growth and possibilities of higher returns. Right? Well, let's consider that thought and take a peek into its growth story:
Mobikwik was launched in 2009 as a payment wallet (something that it’s still proud of – “one of the largest mobile wallets companies” – mentioned in its DRHP). Growth was tremendous for payment wallets until UPI was launched in 2016.
The advent of UPI (which grew from 2 Million to 2 Billion transactions per month within 4 years) soon rendered payment wallets redundant, and even though Paytm somehow managed to be in the UPI race, Mobikwik seemingly resisted change with changing times.
In 2018 the company forayed into Lending partnering with Bajaj Finance, looking at it as it’s “path to profitability”. However, after seeing huge NPA in instant loans and due to operational gaps with Bajaj Finance, soon the partnership fell through.
In 2019, the company started it’s Buy Now Pay Later Service (BNPL) which was showing good growth. In fact, in FY19-20, the company's topline magnified by 140% and they even achieved positive unit economics for the first time with contribution margin as high as 19%.
But then 2020 happened. The Pandemic took the company by a storm, spoiling Mobikwik's numbers across the board! What’s concerning though is that during the same period, its biggest peer, Paytm grew stronger and healthier. Here’s a snapshot of their comparison:
Another stark difference between Mobikwik and its peers is that it never forayed into other service offerings which could have catalyzed its payments business. For example, both Paytm and PhonePe have adopted a super-app structure – offering services from games to e-commerce, hence increasing the use-case of their app. Users don’t just sign up to make payments, they also get attracted by other services which are all provided through the same app. This helps Paytm and PhonePe to cross sell various products to their users, like insurance, investments, business payments, etc. More users also garner more confidence from merchants, which ultimately lead to more revenue. Result?
PhonePe was launched in 2015, 5 years after Mobikwik and yet posting tremendous growth over the years, it is now 7x of Mobikwik in terms of valuation.
Paytm was launched in the same year as Mobikwik (2009) and yet today Paytm is 9x of Mobikwik in terms of revenue.
Okay one could say that Mobikwik is more focused, keeping its offerings limited to financial and payments services. Let's consider that for once and take a closer look into each of its segments:
Segment Analysis
Consumer Payments | 72.6% of overall revenue:
This is the biggest segment for the Company and also the most competitive one. Customer userbase coupled with Merchant partners is the double-edged sword in this segment, and both Paytm and PhonePe are wayyy ahead in this race. Moreover, Mobikwik's GMV (Gross Merchandise Value - the gross value of the payments made through its portal) suffered a huge blow in FY20-21 due to the Pandemic and only recovered in Q1'21. Looking forward - to be able to grow this segment Mobikwik must be able to remain consistent in garnering new consumers and merchants. While Paytm and PhonePe have the additional advantage of providing many more services than just Payments, Mobikwik only brings BNPL as something new on the table. Reaching out to new merchants in Tier II & Tier III (which Mobikwik targets to capture) is also tough because most of these merchants are first time users of tech products and take some time to adapt to their offerings.
Buy Now Pay Later (BNPL) | 20.7% of overall revenue
This product has created a fortune for Fintech Startups across the world, led by Swedish startup Klarna valued at a whopping $46 Billion. BNPL essentially means users can make purchases and pay later using Mobikwik’s ZIP or ZIP EMI products (that's what they call it). The Company boasts of having 79% repeat customers for its Mobikwik ZIP product which provides 15-day interest free credit. That’s right! We said interest free. So other than the one-time ₹100 charged from a user, this product does not yield ANY income. These products are a perfect fit with the Company’s vision to bring credit facilities to the under-banked and the un-banked. However, the question is whether this product will prove to be sustainable in a country like India. This concern is also evident from the fact that the Company’s financial guarantee expense increased from 67% to 98% of its BNPL revenue in 2020, when the country was reeling with the effects of the Pandemic. Nonetheless, largely motivated by the traction and operating profit generated in FY19-20 and overlooking the effects of the Pandemic, the Company has an extremely optimistic outlook for this segment.
Payment Gateway | 6.7% of overall revenue
Mobikwik runs this segment through its 100% subsidiary ZaakPay, launched in 2012. Payment Gateways earn their revenue from Merchants who receive payment from their customers through the gateway. In 9 years, the company has been able to garner just 4,551 merchants, which is lagging far behind industry leaders – BillDesk, PayU, Razorpay and Paytm.
WealthTech
Mobikwik acquired ClearFunds in 2018, a WealthTech management platform, so as to be able to cross-sell investment products like Mutual Funds and Gold to its users. Paytm forayed into this segment in the same year, but later also forayed into the much hotter Stock Broking biz. in 2020. Result? Paytm has outgrown Mobikwik’s WealthTech business as well, having Assets under Management that is 13 times more than Mobikwik's. Moreover, the standalone statement of ClearFunds reveals that the company has made ZERO revenue in the past 2 years.
Deep Pockets = Steep Growth
One would say that probably Paytm and PhonePe have spent large amounts of money on marketing and promotion to outsize Mobikwik. Yes, it’s true. But what’s the harm if they’re getting the larger chunk of the market and the investors are also willing to take the risk? Over the years, Paytm (backed by Softbank and China’s Ant Financials) and PhonePe (backed by Walmart) have poured in and burnt Billions of dollars to garner the user and merchant base that it enjoys today. Mobikwik on the other hand, even though backed by deep pockets like Sequoia Capital, American Express and Bajaj Finance hasn’t been privileged enough to be trusted with bigger pay cheques it seems. Here’s a history of Paytm and Mobikwik’s total funding raised so far:
The Big Question
So Mobikwik is not the industry leader (probably somewhere at the bottom), it took a serious blow from the pandemic (which is not yet over) and it is still nowhere close to making profits. Amidst all the No..Nay..and Nada, it still expects to successfully list itself in the Indian bourses, that too with a unicorn tag…which brings us to the big question:
Why Now???
Here are some things that probably makes sense:
IPOs have been selling like hot cake in India. 2 tech companies – Nazara and Zomato, have successfully raised IPO money this year, and are still in the green, despite making losses. So why not list when the markets are in favor?
Fintech startups are raising unprecedented funds this year, comprising 20% of Q1’21 Global Startup Funding. Yet, The Morning Context writes, it's because Mobikwik is unable to raise further funds from the private markets and VCs, that it has come to knock the doors of retail investors. Not surprising anymore.
so Should you LET THIS IPO PASS?
There are actually 3 things that might make this IPO worthy of some consideration:
The Human Capital – There’s nothing more assuring than two resilient and determined co-founders heading the company that you’re about to invest in. Founders Bipin Preet Singh and Upasana Taku have seen it all – from failures and roadblocks to course changes, and yet they’ve innovated and adapted in every step of the way, giving their everything to keep the engine running. The duo took the business to its peak in FY19-20, but unfortunately suffered a blow from the Pandemic last year. Nonetheless, they continue to believe in Mobikwik’s growth trajectory, and who knows, they might as well find their niche in the BNPL segment and build something as big as Klarna from Sweden.
The clingy red bottom line that isn’t that bad after all – Yes, we say that the Startup that is able to burn more cash is able to garner much more attention from the consumers and merchants alike. But all that attention comes at a heavy cost. In the past 3 years, Paytm spent huge amounts of money towards customer incentives and marketing and promotion, whereas Mobikwik kept them low. Result? a bottom line that looks much saner (see below). This indicates that Mobikwik’s management has been making constant efforts to keep costs low and create as much value as possible for its shareholders. They’re headed in the right direction, and probably the IPO money might just push them enough to see the light at the end of the tunnel.
Realistic Pricing – The word on the Dalal Street is that Mobikwik is eyeing a valuation of $1 Billion for its IPO, which gives it an EV/R multiple (Enterprise Valuation to Revenue) of around 26x. This is at par with the 26x EV/R multiple of Wise, a payments app that is listed in the UK. However, it is slightly higher than the EV/R of Ant Financials (the profitable Chinese Fintech behemoth that declared its IPO last year) and Robinhood (the American Zero Brokerage Fintech firm that declared its IPO in July’21) both of which stood at 17x. Nonetheless, Mobikwik’s valuation is still much more practical and less risky as compared to that of Paytm, which is far too ambitious to be eyeing an EV/R multiple upward of 67x.
So that's all Your Honour. We leave the rest on you. Superman out.
This article is a part of the July'21 edition of our Startup Newsletter. Here's the complete publication:
All figures of Mobikwik and its group companies is taken from its Draft Red Herring Prospectus.
The material herein is provided for informational purposes only. The information should not be viewed as professional, legal or other advice. Professional advice should be sought prior to actions on any of the information contained herein.