Thank you for joining and a warm welcome to Paytm's earnings call to discuss its financial results for the quarter and half year ended September 30, 2022. From Paytm's management team, we are today joined by Mr. Vijay Shekhar Sharma, Founder and CEO, Mr. Madhur Deora, President and Group CFO, Mr. Bhavesh Gupta, CEO Lending and Head of Payments, and Mr. Anuj Mittal, Vice President, Investor Relations. Before we start, a few standard announcements. This earnings call is meant for existing shareholders of Paytm, for potential investors and research analysts to discuss the company's financial results. This call is not for media personnel. If any media representatives are attending this call, request you to kindly drop off the call at this point. The information to be presented and discussed on this call should not be recorded, reproduced, or distributed in any manner.
Some statements made on this earnings call may include forward-looking statements. Actual events may differ materially from those anticipated in such forward-looking statements. Finally, this earnings call is scheduled for 75 minutes. It will have a presentation by the management, followed by Q&A. Finally, utilize the raise hand feature of your Zoom dashboard if you seek to ask a question. We will unmute your line in the respective sequence and within the scheduled and permitted time. Please ensure your name is visible as first name, last name, followed by your company name at all times for us to identify you. The presentation or replay of this earnings call and a transcript will be made available online subsequently. With this, I would like to request Mr. Vijay Shekhar Sharma to kindly initiate this earnings call.
Thank you, and hello, everyone. Good evening, good morning. I'm very happy to welcome you all for our earnings presentation for our quarter ending September 2022. As you may have seen, we've had a good quarter as teams have performed very, very well by focusing on our commitment to target breakeven by second quarter next year before ESOP costs , as you know. I will give you a little bit of summary of the business model once again, that we acquire customers, and we had 80 million transacting customers. These customers in turn bring us merchants, and we have 30 million merchants who in turn work and give commerce services to consumers. This makes our business model core business to acquire customers on payments.
In turn, because this gives us insight, ability to distribute and a great brand name, we work with our lenders to distribute credit. As you may be aware, over the period of time in last four quarters, we have trimmed since IPO tremendous amount of businesses and focused on key business areas and pruned many business line items and made it very clean and clear that we acquire customers for payments and distribute loans from our credit partners. In fact, our payment business, which is based on our merchant side business model, where we deploy QR codes for merchants to enabling them for Soundbox or giving them for various devices and enterprise payments. We have expanded into online and omni-channel merchant, which is an approach that the market is taking shape towards.
I believe the payment will become more and more omni-channel, where online companies are going to be significantly offline and offline companies are going to be online. Case in point, Flipkart, with whom we work, has lots of online business. We also help them take offline payments because there is a lot of cash on delivery out there. This is something we pay attention to and then merchants use our platform, which we call consumer payments, to collect payments. Technically, online merchants use our app to collect payments. If you notice our payment business, which is core payment business, thanks to a model where we have added subscription and UPI, MDR, which we don't account for yet in our business model till the time government gives. Subscription and MDR revenues mostly and little bit of platform fee.
These revenues right now that you are seeing on the right side are inclusive of MDR, subscription and select customers platform fee only. The government's giving of UPI subvention revenue is going to be given only in the quarter that we get that money. These are the revenue line items that we ended up making absolutely for payment and enabling commerce and cloud service also grew very healthily, year-on-year. As you can see, this is a business that is 55% up year-on-year, INR 1,550 crores. We believe the payment stack is business stack where we help merchant take payments in different different avatars, locations, occasions, and opportunities and enabling them for commerce. This stack makes for a scalable, large growing profit and profitable business model for payment and enabling cloud commerce business.
Credit business, as you are aware, is based on the foundation that our abilities of digital lending sourcing and cross-selling partnership with our lending partners and over the period helping them collect the loans, make this business model, I call it, typically in a fund management that this is a part where we get fixed fee. This is a part we get sort of a portfolio performance or carry, if you will. You can imagine that this business model has an inherent compounding because when we disburse the loan, we get certain percentage, but our ability of collecting, our ability of effort of collections, enable us to get sort of a portfolio performance bonus on that. Important thing to note is that in last quarter, RBI came out with clarification around digital lending, sourcing and EMI servicing collection opportunity.
Paytm's business model was completely looked as clearly, following the suggested guidelines. We are very happy to tell you that we have been able to include every delta incremental, whether small or large, in the business model, and business model was very, very much aligned to how regulators sees it. We continue to believe that this loan disbursement and collection business for India will play an important role in democratizing credit. If you remember, at one point in time, RBI leveraged public sector banks, then created private sector banks, then created NBFCs, and now we believe different different buckets of credit requirements were satisfied with that. Today, the digital lending service provider, as LSP RBI calls them, which is what Paytm is here, will generate and create new opportunities for disbursing digital credit.
As you are aware, our digital disbursements are typically small ticket loans, and we internally call these two businesses as INR 2 lakh and 2 years tenure kind of loans, where average advances are INR 1 lakh plus 1 year and INR 150,000 plus 1 year. This is what the typical ticket size anyways remains in personal loans, merchant loans. Paytm Postpaid, which is where customers get an overdraft limit from lenders to spend, it is typically now averaging around 4,500. The good part, in my opinion, is that while these are incredible year-on-year growth, they are very small fraction of our customer base, which is availing all three services for us. There is an incredible amount of headroom for our disbursement opportunity quarter-on-quarter.
We continue to see post reclarification, reconfirmation from RBI that this business model and this workflow is how regulator expects. It has now opened doors for many more lenders and many more partners to continue to join us and expand this business. I would now call upon my colleague, Madhur, to expand and give you a summary of overall business and the numbers. Madhur?
Thanks, Vijay. Welcome everyone to our earnings call. I'm very proud to report that we had a very strong quarter. Our revenue growth, as you would have seen from our earnings release, was 76% year-on-year, and our EBITDA before ESOP cost improved by 61% year-on-year. Just to get into that, revenue from operations was INR 1,914 crore, so just under a billion-dollar run rate. Our contribution profit continues to improve. It's at 44% of revenue. A year ago, this number was at 24% of revenue, so significant step change over the last twelve months. Even on a quarter-on-quarter basis, we have had a slight improvement and we're currently doing INR 843 crore of contribution profit. Our EBITDA before ESOP cost is really starting to see operating leverage come through.
INR 166 crores of revenue, less than 10% of revenue as a loss. It is nearly a INR 260 crore improvement from a year ago, and over INR 100 crore improvement from last quarter. By all measures, a significant improvement in EBITDA performance, and for the last two quarters in a row. Operating highlights, Vijay already talked about value of loans disbursed, INR 7,300 crores, up nearly six times, and even on a quarter-on-quarter basis continues to grow at a very fast clip. Merchant subscription, which is our payment devices, primarily is 4.8 million devices, 3.5 million added in the last twelve months, and we'll see faster right now. This is a break up of revenue.
The basic point of this page is that we have seen platform expansion and increased monetization across businesses. There's not one or two businesses carrying the overall performance. Our payment services business is up 56% year-on-year and up nearly 10% quarter-on-quarter. Financial services obviously growing a lot faster, driven by lending. Commerce and cloud grew 55% year-on-year and 14% Q-on- Q. Some of you may have noticed that there's a small amount of other operating revenue here. This has to do with basically a fund that RBI has, which promotes acquiring side for digital payment infrastructure, and we are one of the beneficiaries of that. It is payments revenue, but our auditors ask us to put that as other operating revenue rather than as payment services revenue, so that's where it is.
Our contribution profit, like I said, a year ago was 24% of revenue. Now it's at 44% of revenue. Both in absolute terms and even as percentage terms, significant increase. The two main reasons for this, payments for us is now more profitable. You would have seen that our net payments margin has grown to INR 443 crore per quarter. Significant improvement in that, and we'll talk about that a little bit later. Clearly there is a benefit from high margin loan distribution, giving us better mix. The right-hand side, we're very proud of the fact that we continue to invest in our business in three main areas, technology, sales, and marketing.
For example, a year ago, we had INR 94 crores of investments in our sales team, or spend in our sales team every quarter. That number is now INR 172 crores. Despite increasing the investment which we believe is important for long-term scale and growth for Paytm, we are able to show operating leverage and go from 63% internet costs to 63% of revenue, down to 53% of revenue. Significant improvement due to operating leverage. All of this translates into strong EBITDA performance. EBITDA losses have gone down by INR 260 crores a quarter. Due to huge operating leverage and our EBITDA margin has improved from -39% to -9%.
So 30% margin swing in a single year due to focused execution. As you may have figured out by now, 20% of that was from contribution margin improvement and 10% of that was from reduction in indirect expenses. Just to get into the payments business a little bit. Again, payments, we as you know disclose as payment services to consumer and payment services to merchant. The growth of both these businesses was roughly the same, 55% year-on-year for consumer business. That is basically due to our growth of MTU and GMV. On the merchant side, 56% growth, which should do INR 624 crore. The reason there was subscription and MDR revenue from offline merchants. We did see a just meaningful growth in revenue from online merchants this quarter as well.
Primarily because of some early festive in e-commerce. Some of the big sales that happened in September and so on. As Vijay pointed out earlier, we don't have UPI incentive recorded this quarter. Consistent with our methodology last quarter, we only record UPI incentives when it is confirmed by MeitY. Net payment margin is up 5x year-on-year to INR 443 crore. In addition to the revenue momentum, which is the main reason for it, we continue to focus on reduction in payment processing charges. That's why we get this significant uptick. Some key operating metrics for payments. Our MTU is up 39% year-on-year so strong performance there continues.
That is driven by, you know, sort of increasing customer acquisition at relatively benign CACs, but also an improvement in customer retention. Our GMV was up 63% year-on-year. Like we mentioned in the last quarter, our primary focus in our payments business is to have profitable revenue rather than GMV as a metric. There's enough and more GMV that one can go out and get. The key thing is, can you make revenue and can you make net payment margin off of it? That's what we optimize for. As we had mentioned in the last quarter, we got rid of some business that we did not feel either generated as revenue or net payment margin or have significant upsell opportunities. Despite that, we're up 63% year-on-year.
We'll continue to trim business that we don't make net payment margin on, but we will continue to become, try to make our payments business more and more profitable. Merchant subscription, we have talked about that we are now at 3.5 million. With that, I'll hand over to Bhavesh to take us to the next few slides, please.
Yeah. Thank you, Madhur. Hi, good evening, everyone. Good morning. Our lending business continues to show good results. As you can see that we ended our revenue from financial services. The predominant part of the financial services revenue is coming from lending, while our equity broking business and insurance business are also starting to contribute. We had 4x growth from INR 89 crores last year same time. We ended at INR 349 crores. The important part here is that our entire focus continues to be on our lending business aligning to the new digital lending guidelines. We were always aligned, as Vijay said in his opening statement. We had to make some adjustments that we made to be absolutely aligned to those pieces and we are happy to inform that there was no disruption in the business.
Our business continued to perform exactly for every single day in the same manner. Our BNPL business, personal business and merchant business continues to demonstrate the strength of the opportunity that we're leveraging through the Paytm platform. Next slide, please. Yeah, coming to the numbers here. Postpaid, personal loans and merchant loans. The good information about here in this business here is that all the three businesses are now showing tremendous growth. We are seeing postpaid, which is moved up 5x. We are now disbursing, we dispersed actually INR 4,000 crore. If you look at the September run rate basis, this business obviously looking at a very healthy growth rate. It continues to demonstrate great penetration to merchants and I'm very happy to inform that we have now added 15 million merchants who accept Paytm Postpaid between offline and online.
This is arguably the largest acceptance of any credit instrument across any funding sources in the industry. We do see a very large amount of merchants, both online and offline, coming towards getting to this 15 million addition. We hope to see this number continue towards the trajectory of 20 million and beyond in the next couple of quarters. On the fact that Postpaid is just still 4% of our MTU, that's the headroom that we see. We do see new acquisition continuously happening in a manner that we were seeing, let's say, two quarters back. There is no letdown of new customers getting onboarded on Paytm Postpaid. Hence it gives us tremendous confidence that this growth of Paytm Postpaid will be as robust as we've seen in the previous quarters. Coming to personal loans.
I think personal loan has been growing very, very nicely on a small base. If I look at June 2022 and September 2022, from there also, it has almost doubled its business. There are two reasons behind this massive growth of personal loans. One, as the Paytm Postpaid business is maturing, we are finding that our lenders are getting very comfortable seeing the mature book of the Paytm Postpaid business and offering them personal loans. Almost half of our personal loans have been disbursed to customers who have a running Paytm Postpaid loan with one of our lending partners. The journey and the entire customer appreciation of the product is extremely simple, and that's giving us a good growth trajectory, and that is continuing because Paytm Postpaid is continuing.
We will continue to see PL also continue on the back of Paytm Postpaid. The remaining 50% is the customers who are directly coming and applying for PL on our platform. We also see that trend actually being a nice trend because these are consumers who are looking for a bit higher ticket size amount, and they are seeking for something which is instant. As you understand that 24 by 7, 365 days is the positioning of Paytm PL, and that is giving us a good headroom and headstart. We again don't see any issue with the TAM.
It is hardly less than 1% of our MTU as personal loans, and there is fairly decent amount of headroom ahead for us while we are now almost averaging INR 900 crores+ per month on PL, and we're clearly seeing good traction moving ahead for ourselves. Merchant loan, there was a bit of a concern two quarters back when we were in COVID, how would merchant loan grow, et cetera. I think that's behind us now. The quarter behind June saw the first, you know, first focus from our perspective, a lender's perspective in getting the risk appetite back in merchant loan, and this quarter was absolutely bang on. We saw great momentum, great acceptance from merchants in seeking merchant credit on the back of great device growth that we've seen almost 1 million.
This number is actually getting good traction, and I can very clearly see that, in coming quarters, merchant loans will continue to see great momentum on the back of our devices story. All in all, overall disbursement business and even the collection performance that we'll talk about in the further slides, has been showing great momentum, and we don't see this momentum getting slowed down. We do see calibration happening via lending partners, which is more initiated by ourselves, because we do understand that quality of portfolio for lending partners is a more important obligation than just scaling the business.
As a result of that, every month by design, we work with our partners to take out the last cohort, 5% cohort in our businesses and make sure that that cohort is not getting renewals for the next month, so that the portfolio quality is maintained the way it should be maintained. All in all, a good story for us on the lending side. This is the portfolio slide. This is purely indicative slide, as we always mention from a lending perspective for the accumulation of all lending partners. As we are the collection outsource partners for our lenders, this is an indication. There has been no change that we've seen over the last two quarters in this business.
The bounce rates, the recovery rates in bucket one, the resolution rates on gross credit losses and the expected credit loss continues to be the way the lenders are expecting. I can also confirm while the ECL numbers called out are the numbers that we've written, the actual credit loss performance is better than these numbers. We continue to maintain a conservative stand, and so do our lending partners in making sure that they are providing enough for the credit losses, looking at the macro headwinds or otherwise. Hence the risk appetite and the risk portfolio is being built on this piece.
Even on the portfolio, we're seeing very good signals, and we've not so far seen any kind of macro headwinds impact in the portfolio, and that is giving the strength to our lending partners and new lenders to come on board and expand this entire business portfolio with Paytm.
Thank you, Bhavesh. Just the last couple of slides. We want to cover commerce and cloud revenue. Our commerce business is up about 50% year-on-year. Travel merchants continue to do well. Our entertainment merchants typically have a seasonally weak quarter in Q2, both on movies and events side, so that has some impact on our quarter-on-quarter performance. Cloud business on the other hand continues to do very well, 58% improvement year-on-year to INR 252 crore. We have started to see some early signs of recovery in advertising revenue. We did mention in the last quarter that there was a meaningful amount of pullback.
Just towards the end of Q2, we started to see some recovery, but also it's too early to tell whether that will continue for the next several quarters. On the other hand, we do see growth in our credit card distribution as well as on our Paytm Cloud revenue. Those businesses do well. Finally, we just wanted to summarize and leave this with you, which is our improvement in EBITDA before ESOP costs is continuing, while continuing investments in scale and growth. What we focus on is three main levers. One is platform expansion, so that we have high monetization capacity down the road. Our monetization engine's working, which is revenue growth across all businesses. Finally, on profitability, improving our unit economics while generating operating leverage, as we continue to invest in our business.
That is giving us improvement in EBITDA before reserve costs. That's all I have, and I'll hand it back to the moderator who can help us with Q&A.
Thank you, Madhur. We will now proceed to Q&A. A reminder to utilize the raise hand feature on your Zoom dashboard if you seek to ask a question. We will unmute your line in the respective sequence. A request to everyone to please have their company name next to their names. We do have a few common names. It'll help us identify the right person. We'll just give a minute for the queue to settle in. We'll take the first question from Mr. Vijit Jain from Citi.
Hi. Thanks, Anuj. I have a couple of questions. One, you know, on the personal loan side, QoQ, has the growth come from-
Outside of the postpaid base of customers. I ask that because I recall last quarter, the share of postpaid customers was 50%, this quarter is 40%. I'm just wondering if there's a greater growth from outside that base. That's one. I'll just come back with the next question.
Sure. Thank you, Vijit, for the question. Your observation is right. Actually, it is on number of loans, because we have grown much, much larger than the previous quarter. Percentage-wise, looks that 40% has come from postpaid, but there is nothing material that's changed. One, definitely a material change which has happened, as the personal loan book has started to mature more, and I mentioned about this last quarter also. Earlier, broadly, we were doing about 10% approximately, to existing personal loan customers when they close their loan, a new loan by the lenders. That percentage has now started to inch more closer to 15%, 17%. That has been. That ticket size is a bit larger. Hence the value of loans coming from existing personal loan customers has increased.
But the postpaid number of loan penetration to overall PL has remained the same. It's more mathematical outcome, but no material change in terms of the customer adoption of the product.
Got it. Thanks, Bhavesh. My next question is in terms of, you know, overall lending partners, is that number at eight right now, same as last quarter? Could you share what percentage of loans is disbursed by the partner with the highest share among those eight?
The number is actually nine. We've got three card partners and we've got I think about five or six lending partners. We don't actually disclose the share that we do, but I can definitely mention to you that we have partners across this category who do personal loan, postpaid, and merchant credit. There is not one partner who's taking the lion's share of this business. There is material distribution based on the lenders' appetite on how much business they wanna take. Currently it is reasonably well distributed amongst the partners that we have. To your other question, we had announced publicly that we've added one more lender, which is Piramal Enterprises. Hopefully we will take them live sometime in quarter four.
We have a decent pipeline of new lending partners that intend to get onboarded, to leverage the Paytm ecosystem and the platform for credit. We obviously welcome all the new partners coming on board, and we will be adding them in due course of time.
Great. Thank you, Bhavesh. Those are my questions. I'll jump back into queue.
Thank you, Vijit. The next question we'll take from is Mr. Saurabh Kumar from JP Morgan. Sorry, your line is unmuted. Yeah.
Hi, am I audible?
Yeah, you are.
Okay. Just three questions from my side. One is, you know, the indirect cost reduction which we've had or at least, I mean, the cost control we have, how should we think about the indirect cost growth from here on? The second is, if we look at the EBITDA trend, it's very clear that, you know, you could turn positive or EBITDA neutral at least, maybe by March quarter. So will that be a fair assumption that we'll be making? Lastly, on the credit card business, could you just, you know, comment on what's the card sourcing velocity at this point of time, and how should we think about it? Thank you.
Thanks, Saurabh Kumar. Maybe I'll take the first two, and Bhavesh Gupta could take the third question. On our indirect expenses and EBITDA, maybe I'll take it together. Obviously I've given EBITDA guidance for breakeven, which is September 2023 quarter. Compared to the time when we gave that guidance, we are ahead of our plans, but we would like to maintain our September 2023 guidance for EBITDA breakeven. On indirect expenses in particular, obviously our focus is to make sure we reduce our EBITDA losses as per the guidance that we have given, but when we do see opportunities, and we do see many opportunities to invest in our business for short and medium-term growth, we do take those opportunities.
While our last quarter number was relatively flat on indirect expenses, you would have seen that on a year-on-year basis, we've actually increased our indirect expenses by 47%. So we continue to make investments in our business. We have the sort of luxury of being able to do that because our revenue and contribution margin are performing really, really well. We can achieve both objectives of reducing our EBITDA while continuing to invest in indirect expenses, where we see high ROI. Bhavesh, you wanna take the question?
Yeah, sure. Yeah. Hi, Saurabh. Saurabh, on the cards business, we are very excited in building our cards business. It's a very nascent business that we started about 18 months back. We're very privileged to have two of India's largest issuers as our partners, HDFC Bank and SBI Cards. Hence our portfolio of cards business has shown robust growth. While we've not declared actual numbers, I can only suggest to you that at this point in time, that business is operating much beyond our expectation in terms of customer adoption. Coming on the back of the fact that the customer value proposition, which is powered by our issuing partners and obviously powered by Paytm platform usage, is really giving us good customer quality which our issuers are very happy with, and we are seeing very high scale of the card business.
What we believe is that our aspiration to build at least 1 million cards a year on issuing side, maybe over the next 12-18 months, continues to remain as strong as ever, and we would be guided by that as we build this cards business. Hopefully in the future, as we feel that it is now a material side of our business, we would like to disclose more details about it.
Thank you. Just 1 million cards in 12 months is that the target, right?
No, I'm saying we continue to aspire to build.
Okay.
1 million cards origination over the next 12 to 18 months, and that's the aspiration that we would like to achieve.
Okay. Got it. Thank you.
Thanks, Saurabh. The next question we'll take from is Mr. Kunal Shah from ICICI. Kunal, you can unmute your line.
Hello? Yeah. Am I audible?
Yeah, Kunal, you're good.
Yeah. Firstly, again, to touch upon this question with respect to the postpaid. In fact, when we look at the overall correction in terms of the number of loans disbursed, in fact, normally it used to be in the run rate of say towards a million, but now this quarter it seems to be slightly on a lower side. Just want to get a sense in terms of on the postpaid, why it's just like 0.6 odd million and how should we look at it? Because it's hardly like 7%-8% kind of a sequential growth.
Yeah. Kunal, we had to make some adjustments with regards to new digital lending guidelines, which we had called out very clearly. Which meant that our lending partners and ourselves, we had to make adjustment in terms of fund flow. That clarification took time from the regulator. I think it came in about 40-50 days later on, that the entire fund flow has to be reorganized in this manner, which was the way we were doing. And hence that is a disruption that we saw in the last quarter, but it is from a new customer origination and acquisition perspective, we continue to see very robust growth. Every month we're onboarding more than 400,000 new postpaid customers, so that hasn't stopped. It was just a recalibration that we had called out in a specific call that we had done.
Yeah.
That we need to align to the fund flow, which took some time for us to align and clarification, which is now behind us.
Okay. When we look at it now, incrementally the run rate should get back towards that number. This was just a quarter's disruption and that's more or less corrected?
Very honestly, we don't track this on that basis that how much is postpaid doing in terms of number of new incremental loans. We track on basis of new customer acquisition. I can definitely confirm to you that our new customer acquisition on postpaid will be highest ever that we've seen thus far and will continue to have the same trajectory. What will that mean in terms of new customers converting their postpaid lines to actual loan is a matter of conjecture, which will happen as per the customer expectation for the next quarter. It should broadly be in the same range, but I can't comment actually will it be 2 million or 1.5 million or 2.5 million, but it will be in that range for sure.
Sure. Secondly, with respect to the direct cost on the promotional cashback and incentives. Whatever would be the incremental which is there for the quarter, maybe almost like more than 30% kind of sequential rise out there. Any color that you can share in terms of how much would be related to the payments and how much would be towards the rolling out of the financial services or maybe enrolling more of the customers for that service and how much would be towards the commerce, yeah?
Yeah. Actually the cashback is split into predominantly into two parts, which is that we do cashback on our payment services. There is some customer incentives that we also used to pass till September with, for promoting postpaid at different online merchants on behalf of lenders. That cashback increased because postpaid as a GMV was very high in the last quarter. That cashback saw a rise. What we figured out very clearly now with our partners is that that is actually a payment charge, so from next quarter onward that will start showing in our payment charges. That postpaid incentive will all move to payment charges. It is predominantly the increase that you see in the last quarter is driven by postpaid.
It's driven by postpaid, yeah.
Postpaid.
Kunal, one more thing I'd like to add here. Your question was split it in, let's say, payments, commerce and financial services. Postpaid because we are accounting for as a payment, so it'll go towards payment charge, from next quarter, so you would see payment charge line item. But the commerce part, incidentally, we internally have a key KPI that it should not be more cashback than the margin. We've talked about in our previous earnings also, where our commerce business continues to operate with profitability as a target and it has achieved profitability, complete operating, full cost loaded profitability. Like you said, we, I mean, we don't have it immediately adoptively available that this much was for payment, this much was for commerce. In payment, the cashbacks are given only as an incentive to the new customer.
If you are a first-time customer, we give you incentive to try out different services. If you are an old customer, that is reduced dramatically and that is how the cashback and marketing spends were reduced over the period.
Sure. Lastly, in terms of the commerce, now that maybe with the opening up of all the activity levels and the situation stabilizing, and now we would get a more sense in terms of how the overall positioning is, say for Paytm in the commerce. So sequentially, I think there was a dip, but otherwise how should we actually see the traction with respect to the commerce business going forward?
More or less other commerce, all commerce, we do three kind of commerce. One is led by shopkeepers commerce, deal gift vouchers that shopkeepers enable. Second is ticketing commerce, which is led by movie, train, cinema and all these commerce. The movie part has not come back by the way. We want to still tell you that movies footfalls have not happened yet. One of the important driver of the commerce movies has not happened. Third is advertising, which is definitely not just because we treat credit card as advertising, so for us it definitely has grown. Like I said, first part where we help the shopkeepers has grown and travel has grown, but not movies.
Yeah. Thanks and all the best. Yeah. Thank you.
Thank you, Kumar.
Thank you.
Thanks, Kumar. The next question will be from Manish Shukla from Axis Capital. Manish Shukla.
Yeah. Good evening. Thank you for the opportunity. Firstly, what does it take for a merchant to start accepting BNPL, because that number is growing very fast, now at 15 million merchants. What does a merchant need to do to start accepting BNPL?
Manish, the merchant has something called a Paytm for Business app. On the Paytm for Business app, the merchant can subscribe to the service. Depending upon the category of the merchant, there is a charge the merchant has to accept, and it could also be given free if you are a very, very small merchant and we would like to enable that merchant for Paytm Postpaid. The moment the merchant accepts the terms and conditions of Paytm for Business app, it is, the merchant is onboarded. If the merchant meets the risk criteria as defined by our risk team, because a credit instrument, where the merchant is allowed to go through a risk criteria. That is how the entire onboarding process works. It's completely digital, and it is obviously DIY for the merchant.
The number of devices we are at 5 million and acceptance of BNPL is at 15 million. Should we think of that 15 million as a potential universe where you can cross-sell devices?
Yeah. I think that could be one of the ways, because these are materially decent-sized merchants, then only they meet the risk filter, and also they meet the classification for them, for themselves to accept a credit instrument. Yeah. You could say that could be an opportunity, but not an exact opportunity. Yeah, that could be an opportunity for us.
Okay. Moving on to platform fees, could you tell us how does the platform fee work and what percentage of your users might be paying platform fee at the moment?
See, platform fee as a part of our overall revenue is a small number. We, for our various categories, when customer come on the Paytm app, right? For doing certain set of transactions and activities, let's say movie ticket booking or doing some recharge, et cetera, there is a small fee which is levied on a cohort of customers because we offer them various other value-added services, including and not limited to things like bill reminders, auto pay, et cetera, et cetera. Hence these customers subscribe to these services and they end up paying a platform fee. Purely from a rupee quantum of this charge, that charge is still very immaterial to the overall revenue that we make from payments.
Has there been any communication or otherwise from either the regulator or government about these platform fees being levied? Because in some sense, technically that makes UPI as not a free service, right?
No. I just want to clarify, Manish. There are two different parts. There is no platform fee that we're charging to merchants when we're giving them any kind of funding source. Some of the competitors do that in the online space. We are not charging those kind of fees, et cetera. This is the fees that a consumer is paying when they're trying to consume certain services on the Paytm platform. The regulator has very clearly called out on what services you can charge and on what services you cannot charge. The ones they have allowed us to charge, we are charging on them. It's completely compliant to the regulatory guidelines.
Okay. Thanks. The next question, in response to an earlier question, you said that starting next quarter, the accounting will move from cashback to processing charges. Is it material enough for you, for it to lead to a sequential decline in net payment margins?
Madhur, would you want to take that?
Yeah. It is a material number, but our net payment margin sort of continues to grow. It will have some impact, but we don't think it will lead to a, you know, a drop in net payment margin per se.
Okay. There is a last question, any update on your payment aggregator application with the Reserve Bank?
The payment aggregation, which is our Paytm Payments Services, license is in progress. Whatever engagement that we had to do with RBI has happened. As you can see publicly, that various other PAs have started to get the license. We do believe that we should also be getting our own license in due course of time, and fairly soon.
Okay. Sure. Those were my questions. Thank you.
Thanks.
Thanks, Manish. The next question we'll take from Rahul Bhangadia from Lucky Investment Managers .
Yeah. Thank you for taking my question, sir. Congratulations on a great set of numbers. Just one question. What should we expect the CapEx rate to be in, you know, on a run rate basis? I see H2 last year and H1 this year were reasonably higher than what we used to see before.
Yeah. Rahul, most of our CapEx is related to Soundbox and devices. As you know, we have ramped that up and we have continued to talk about there being a large opportunity there. Currently, I think we're doing somewhere between INR 120 crore and INR 150 crore a quarter of overall CapEx. As I said, vast majority of that is related to devices. You should expect that to be broadly the level over the next few quarters.
Roughly what? INR 400 crore-INR 500 crore per annum is the CapEx number we should expect?
Yeah. I said 120-150 a quarter.
Yeah, yeah. Okay.
INR 500-600 crore a year.
Yeah. The related question would be, what would be the depreciation policy here? Because now we are running a run rate of about INR 400 crores of depreciation per annum, and we are doing a CapEx of INR 500 crores or maybe INR 600 crores. What's the policy that we are looking at here?
Yeah. The philosophy that we took on depreciation is that we wanted our depreciation to be, so we want the depreciation rate to be faster than the average life of a device. For Soundbox, we depreciate it in two years. For card machine, we depreciate in three years, which we think is at least 20%-30%, if not more, less than the average life of the device. The way we price this is a payback period which is better than the depreciation period for the device. We try to be conservative on each one of these things. To answer your direct question, Soundbox is at two years and card machines is for three years.
Okay, Madhur. Thank you so much.
Thanks, Rahul.
The next question we'll take from Mr. Sameer Bhise from JM Financial.
Yeah, hi. Thanks for the opportunity. Can you talk a bit about the GMV per MTU metric? I think last couple of quarters probably we have not alluded, but how do you think about it over the medium to long term?
Just to be clear, the reason why we don't refer to that number is because effectively, you know, we have a total GMV number, which is all transactions which are processed by Paytm. In some of those cases that is being done by the MTU numbers that you see, but in some cases that is actually not being done by that MTU number. For example, if I have a card machine at a retail shop or at a petrol pump, they might be accepting credit card which does not belong to our MTU. Same thing would happen in the online world. Same thing would happen when somebody uses a third-party app to scan a Paytm QR.
There's a fair amount of GMV in our business which is unrelated to the MTU base that you see. Sort of taking the GMV divided by MTU is probably not sort of slightly apples and oranges, and as a result we sort of don't calculate that and give that number because it may be misleading to think that it is this MTU which is generating that GMV. Does that make sense, Sameer?
Yeah, probably I'll take it offline as well. Secondly, there's a news article on RBI giving some clarifications or response on the IT audit. It would be helpful if you could give us some sense on that.
We actually have in our earnings release given a statement on this, so I'll just refer you to that. In summary, the Paytm Payments Bank management has told us that they have received the IT audit report and RBI's observation on the report. As per the preliminary assessment done by them, most of the observations are around continuous strengthening of IT processes, IT outsourcing processes and operational risk management. The bank is in the process of responding to RBI and they're just obviously very, very highly focused and prioritizing the conversation with RBI to make sure that they're fully compliant and that risk bearer. That's sort of the update that we have. Obviously if we have more updates, we'll share them with the stock exchanges.
I'll just refer you to the note that we have in the earnings release, which sort of gives you the complete picture.
Sure. Those were my two questions. Thank you and all the best. Congrats on-
Take this opportunity to also mention that we had shared in March 2022 when this issue first came up, that we believe that the measures that were imposed by RBI on PPBL will not impact Paytm's business, overall business. The fact that you see the MTU performance and the revenue growth performance of Paytm since then, it sort of confirms that our initial assessment was correct and we don't see any sort of material impact on Paytm's overall business due to the course of the RBI measure on Paytm Payments Bank.
Sure. That's helpful. All the best. Thank you.
Next in queue would be Rahul Jain from Dolat Capital.
Yeah, hi. Thanks for the opportunity and congratulations on very strong execution. You know, I would just like you to help me on arriving at potential areas for us to get to be return neutral and beyond. Firstly, from a payment processing charges perspective, this is the first quarter we see very little optimization in this line item as a percentage of payment services. So can we conclude that easy optimizations or relatively easy picking in this cost item are behind us and it would be the run rate that we see right now would be optimized further on a very smaller level? That is question number one. Second, in this quarter, we saw other marketing expenses seeing a big drop.
Is that a drop already baked in from a run rate point of view or some of the savings have come in the second half of the quarter, so we would see this cost going down further in the upcoming quarter? Maybe in general, if you could share what would be the areas where we could see this savings coming in coming.
Yeah. On your first question, maybe I'll answer it at the contribution margin level, Rahul. We do continue to obviously look for small and big opportunities to improve the profitability of each of our businesses. We continue to do that, but I think it's fair to say that, you know, we sort of went from single digit contribution margin two years ago to 24% a year ago to 44% now. Clearly that sort of trajectory.
Which is what we call the step change in contribution profit. We don't expect that anywhere close to that sort of pace to continue, but we do and will continue to look for opportunities to do. Certainly, small improvements if not big improvements in each of our businesses. We do also expect to continue to benefit from some mix effect, particularly from lending business. Because lending is growing and is expected to continue to grow faster than our overall business. The lending is higher margin than our payments business, for example. We do expect some mix effect, a positive mix effect to come from that as well. On your second question on marketing.
Like we had mentioned in the last quarter, we did have a jump in marketing costs last quarter because of cricket sponsorships, because we had IPL as well as cricket matches last year, last quarter. This quarter, we did not have that. As a result, our marketing costs went down. A chunk of marketing costs, not all, but a chunk of it is sort of lumpy, right? Especially when you start getting into sponsorships and so on. We did not have that this quarter, and we expect that to be at a lower level going forward. Having said that, I will say that if there are opportunities for us to invest in user growth, whether it is through promotion, incentive or marketing, which is having good ROI, we'll continue to do that.
That will not take us away from our path to breakeven, and our path to creating a long-term, very profitable business. We'll absolutely achieve that. If there are opportunities for us to invest in efficient marketing, whether it is through cashback or through ATL or through any other mechanism, we would continue to do that and still achieve our profitability targets.
Right. Just to conclude from your thought, can we say that here on the growth would be more sales optimization or profitability will be more revenue driven rather than cost optimization driven?
I think it's fair to say that revenue growth as well as growth of high margin revenues such as lending will be sort of next big uplift to contribution profit. I will point out that we have a large payments business which is generating significant net payment margin, so even small improvements in that, when they drop to the bottom line, they can be very significant from a bottom line standpoint, right? If we are doing INR 443 crores for the quarter of net payment margin, then even a 10%-15% improvement in that can have a significant impact on the bottom line, right? Just because the number is actually now quite large. Working on continuing to improve that number is very high ROI for us.
Sure. Thank you. Those were my questions.
Thank you.
The next in queue is Mr. Piran Engineer from CLSA.
Hi. Thanks for taking my question. Congrats on the quarter. Just on your lending business, firstly on BNPL. You know, if I'm a customer who's paying some fee, and I think one third of the customers were delight customers don't pay any fee, how long does it take for me to get upgraded to a delight customer, status? Assuming that I don't default, of course.
Hi, Piran. Piran, there is no time-led formula. I think different lenders have different appetite. I could say between six to nine months of vintage of performance, continuous performance, the lenders revisit both the limit and the risk classification. There could be a set of customers who could be upgraded or downgraded. It is not that once you're a delight customer, you remain always a delight customers. There is a small portion, I would say, which is downgrade also, and you could also be upgraded. It is a continuous process, but that ratio or the share of delight to light to mini broadly remains range bound.
Yeah, but that's also probably because you are still growing and a lot of your incremental customers is, we say light and mini. I just assume as customers mature over time, maybe next two years or four years, and of course, if they are paying, you should have more delight customers than light and mini customers.
Um-
If that happens and the take rate reduce, will you pass it on to the banking partner or will we have to absorb it?
Piran, it's a matter of conjecture, which is fairly long ahead of our time at this point in time. I do believe that two things will happen, and I think I had mentioned this earlier. Number one, we don't see for at least couple of years to come, because we're just 4% of our MTU and MTU also growing, that our new customer acquisition engine is gonna slow down. I just mentioned in a previous answer that we are seeing very robust growth every month now, more than 400,000-450,000 users getting added to postpaid. We don't see that slowing down. Hence the overall share of delight, light, et cetera, will remain broadly range-bound.
The other thing that we also will see over a period of time is that the merchant looking at the impact of Paytm Postpaid to his sale, and hence the increasing the MDR will also be a revenue-getting opportunity, which will very easily offset any drop in convenience if at all it was to happen. That's the way the entire business model is gonna play out. At this point in time, the business model, actually for the next 12-18 months, I don't see any change in the business model. Albeit it may only have an increase in revenue, especially coming from MDR, because more and more merchant acceptance, especially enterprise merchants, resulting in higher MDR, so it's the trend that we already seeing.
Okay. Okay, that makes sense. On your merchant loans, you know, what would be sort of the TAM of this business? I understand it's just like, what, about 1% or 2% of the merchants have a loan right now. But practically speaking, what percentage of merchants, you know, could be onboarded on merchant loans? At just INR 1.5 lakh, right?
Sure. I think that's a very good question, Piran. The simple answer, the way we look at this piece here is, merchant loans are derivative of devices merchant because largely 80%-ish of our loans are given or taken by our devices merchant. We index our entire merchant loan business to devices merchant. Today, their number is approximately at 4.8 million, growing about 1 million a quarter. What our belief here is, once a merchant has taken a device, six months forward, their probability of getting eligible becomes very, very high. Give or take, we see about 50% of them keep getting eligible six months forward. As we continue to remain very bullish on adding more and more devices, we obviously remain very, very bullish on adding more and more merchant loans.
Having said that, at current point in time, we have approximately 1.5 million merchants who are whitelisted to be given credit and have a pre-qualified offer on the app, from various lenders, broadly amounting to about $2 billion of disbursements that we can do. The TAM of current itself is very large, and as we're adding more devices, the TAM will keep increasing.
Okay. Sorry, you said $2 billion?
About 1.5 million, 15 lakh merchants are currently pre-qualified by lenders. Approximately, as you know, that the number is about INR 1.5 lakh per merchant. That's the amount, about INR 15,000 crore-INR 20,000 crore of value.
Okay, got it. Just lastly, you know, in your earnings release, you mentioned about some seasonality in the cloud business as well. If you can just sort of clarify what that was?
We mentioned seasonality in our commerce business, and typically Q2 for entertainment is seasonally weak. In fact, we have said specifically for our entertainment business there's seasonality. Entertainment in Q2 is generally weak because of monsoons and so on. Also, this particular quarter, not a regular season situation, but this particular quarter, the content lineup was very weak. Whichever sort of relatively good content that we had in movies also just didn't work as well as it was expected to. As a result, both movies and events had a seasonally weak quarter.
No. Madhur, I get that. That was on commerce. If you refer to your write-up only, I don't know which page. There's no page number here, but I think page 12 of the PDF, you said it's a seasonally strong quarter for Paytm Cloud. Clearly it seems so because last three quarters your revenue was in the range of INR 190-220 crores and now it shot up to INR 250 crores.
Yeah. Upon that, it shouldn't have said seasonally strong. It just was a strong quarter.
Okay.
Because cards did well, advertising did a little bit better, Paytm Cloud did well. I think there we didn't mean to say it was seasonally strong. It was just a strong quarter. Actually, we have not said seasonally strong. We just said, it is driven by strong uptake in our credit card distribution. Yes, you're right. A seasonally strong quarter for Paytm Cloud. It's nothing to do with season, it just happened to be a strong quarter.
Okay. Thanks. That clarifies it. Thank you, and all the best.
Thank you.
Thanks. Next question we'll take from Anand Bhavnani from White Oak. Anand Bhavnani, would you like?
Thank you for the opportunity, and congratulations for a good ramp-up in the lending services business. If you could give us some color on other financial services that you'd want to explore as the lending business kind of continues to gain momentum and it stabilized, what other financial services are on your priority list?
Anand, we do a Paytm Money, which is a stock brokerage and mutual fund distribution, and we also have insurance distribution and brokerage business. These two are the other lenders.
On those, can you give us some color as to what you're targeting in terms of numbers and what kind of?
We call them future bets because there's a tremendous amount of technology development and brewing up that it requires. They're all materially large. As you can see the numbers yourself, it is led by credit. Most of the revenue is driven by credit and loans.
Got it. Secondly, on our expected credit loss, in case of merchants, I see the number is higher than in case of postpaid. So just wondering, I would have assumed that merchants, because they are a lot more located on a particular spot, and because they probably have a device and everything, they would probably be lesser credit risk?
Anand , when a loan is defined as a portfolio in lender side, as a part of that definition of loan portfolio, they put expected credit loss as a number. It has nothing to do with expected actual credit loss. That credit loss is called net credit loss. Meaning, this is when you start a business, you say this is my customer acquisition cost, this is my credit loss, this is my revenue. Expected credit loss is a number that lender puts in definition of their book of this kind of loss, which has actually nothing to do with whether the loan performance will be based on that or not. What you're seeking is net credit loss, which is in the presentation and otherwise, we always share as a detail in subsequent slides.
Anand Bhavnani, if I can just supplement to Vijay's please.
They are two different products. BNPL is INR 4,500-INR 5,000 short-term consumption credit for 30 days. The chance of default is far far lower for anybody defaulting for INR 5,000. Whereas a merchant loan is a 1-year, 14-month, 1.5-year product through daily installments deducted through Paytm settlements. The IRR and the income that the lender makes are very different, and what customer pays in postpaid is hardly much lesser than what they pay in merchant. From a risk-adjusted return, merchant loan, even at a 5% expected credit loss, while the actual credit loss, as Vijay said, is lower than that, but expected credit loss, the return for lender, return for Paytm is much higher versus a Paytm Postpaid.
Noted. Thank you very much. All the best.
Thank you.
Thank you, Anand. The next question will be a repeat question from Mr. Vijit Jain. Vijit, you're online. Can you unmute?
Yeah. Thanks, Anuj. I just a housekeeping question, alluding to one of the comments earlier made. When a customer scans Paytm QR code to make UPI payment from a competitor app, in this instance, in this particular transaction, there is no scope for monetization, right? Is this particular transaction included in Paytm's UPI GMV when the regulator NPCI reports it on their website?
Vijit, there are monetization definitely included. If you're looking at monetization from a device subscription perspective or from lending perspective, that monetization agnostic to which app is being opened to pay to the merchant, right?
Right. Yeah.
You could be scanning from.
Of course.
A competition app and paying to a merchant. The merchant still needs a subscription service because he needs.
Right.
Reconciliation at the shop, and obviously that GMV that merchant is actually collecting is being processed through us and that is available to us to underwrite through our lending partners to give credit.
Right.
Absolutely no problem. This GMV is called out as P2M GMV also in definition of NPCI, and hence is eligible for various kinds of incentives below INR 2,000 at different points in time.
Okay. Got it. Thanks. Thanks, Manish. That was my question.
Thank you, Vijit.
Thank you. With that, we come to an end of the Q&A session. As mentioned earlier, a recording of this call and the presentation and a transcript will be put online on the company website soon. Thank you all for joining.
Thank you. Namaskar.
Thank you, everyone.
Thank you, everyone. Good day.