Thank you f or joining, and welcome to P aytm's management, we have with us today Mr. Vijay Shekhar Sharma, founder and CEO, Mr. Madhur Deora, president and group CFO, Mr. Bhavesh Gupta, CEO of Lending and Head of Payments, and Mr. Anuj Mittal, Vice President, Investor Relations. A few standard announcements before we begin. This call is for existing shareholders of Paytm, potential investors and research analysts. This call is not meant for the media. If any media representatives are on this call, we request you to kindly drop off at this point. The information to be presented and discussed here should not be recorded, reproduced, or distributed in any manner. Some statements made today may be forward-looking in nature.
Actual events may differ materially from those anticipated in such forward-looking statements. Finally, this earnings call is scheduled for 60 minutes. It will have a presentation by the management followed by Q&A. For Q&A, kindly utilize the Raise Hand feature on your Zoom dashboard if you seek to ask a question. We will unmute your line and take questions in their respective sequence. Please ensure your name is visible as first name, full name, followed by your company name for us to be able to identify you. The presentation and replay of this earnings call and a transcript will be made available on our website subsequently. With this, I would like to request Mr. Vijay Shekhar Sharma to kindly initiate the call.
Thank you. Thank you, Keshav. Dear shareholders, thank you so much for joining our call. I'm very happy that we have announced our second successive and continued quarter of EBITDA profitability before ESOP. Obviously, we have said it earlier, we are aiming for Paytm to become free cash positive in near future. All this profitability and attention to revenue which drive quality revenues, which drive quality profit, has been possible because of our incredible team, business teams. I'm especially indebted to their attention and then realignment, disciplined assignment of resources that we pursued in last year, and their amazing efforts and deliveries that made us successful like this. I also want to share that, I'm very proud to see that our team have been continuously adding more leadership positions and we are continuously adding new teammates there.
All this is because we believe that India is offering an incredible opportunity as we talk about further growth when it comes towards the latest part of the presentation. Before I start this presentation, I want to draw your attention to a tweet that we have done from Paytm handle and filing that we have done to BSE about our business KPIs of April 2023. Many of you may or may not have seen it, so please see it. If you have any questions related to that, we'll be very happy to be part of the same also. With this, I welcome you to this incredible landmark quarter that we had in the last quarter of last financial FY 2023. We got UPI incentive, all of that in the last quarter, so we accounted for that.
In this presentation, we have tried making it as much possible the details with and without taking the last three quarters' numbers. All the numbers that we are reporting as expected, they are including of the fourth quarter UPI incentive. In the quarterly numbers, we've tried showing you mark to mark exactly how the quarter number would have been if the UPI incentive was not added in this quarter number. We are trying that. I'm sure you will be very careful and attentive towards the numbers that we're showing. Like I said it, we are repeating that because of the UPI incentive of whole year got achieved in last quarter, we are giving you reported number and mark to mark numbers. These numbers, Madhur and Bhavesh will specify when they talk about payment and overall.
With this, as you know that we, by a whisker, missed a rounded off number here and we did INR 7,990 crore, which is 61% year-on-year growth. We're very happy to report that we have internally kept a key target that we will continue to grow on a particular number in top line because of the opportunity in payment and credit. I want to use the word payment here because if you notice our payment business, which is INR 4,930 crore. Two years back it used to be around INR 2,000 crore. There is a tremendous amount of growth, and we continue to see thanks to the new monetization methods like subscription revenue, like Soundbox, et cetera, devices, et cetera, revenue. We have now added commercials towards enabling commerce.
We continue to see payment in line item of our revenue and merchant relationship continuously growing. We are very happy to announce that we have been able to achieve more than 2.9% 9x growth. Meaning it is nearly 3x that you would have seen in last 2 years. This, like I say again and again, it is all because the payment is maturing for the merchants. Merchants are making sure that there is a digital payment, mobile payment on their shops, which gives them opportunity to take our premium products also. It's a model like freemium model, where merchants get 0% MDR and which is reimbursed to us from government, then through UPI payments, various UPI payments. We have subscription revenues and extra charges for other payment instruments.
This is what is growing the payment business. I also want to point out that I believe that UPI has started going towards monetization or MDRs. Different payment instrument will come on UPI. Till now, UPI used to be known as bank account-led payment, and now bank account-led payment is what is free. If you saw the prepaid Wallet instrument has an interchange in MDR. Meaning, the issuer, that is us as Paytm, let's say our Paytm Wallet is being used on somebody else's QR. The merchant side QR will have to pay us. What we earn is called interchange. What they charge the merchant is called MDR. The delta between them is the revenue that the QR company keeps. Here it is that QR payments from bank account are free, which we believe will remain long-term free.
Other payment source, for example, like wallet, is getting visibly going to get benefit of universal interoperability and acceptability and will also generate some revenue for us. The core thing that I'm trying to point out is that you can see that UPI payment instruments will have different payment MDRs or charges to the merchant, or they may not have merchant charges because somebody who's offering this payment service to the merchant could absorb it. Let me not say that merchant will be charged or not. Let me say that issuers will get charged. That is the better way to look at for you guys. I'm very happy that our payment team has done great market penetration. As you guys are aware, we are a merchant side business. We always call payment when you are paying a merchant.
Yes, our P2P business numbers are not that great as a market share. We are very aware of it. At the same time, we are very proud to say when it comes to the merchant, whether consumer making payment to the merchant or merchant choosing a payment solution, Paytm is the market leader here. Due to this and one of the line item that we started growing in 2020, which was about credit, which is part of our financial services business, has done very, very good. As you can see and further details are coming in due course. I think the government of India and regulator have very much clearly focused on expanding the disbursement of credit using digital means here.
The idea here is that how can different small loan ticket size or various other loans or large ticket also be digitally enabled to be distributed. The keyword is digitally distributed. It is not just about the organization internally managing digital process, but it is about how they can be digitally enabled to distribute. Whether you see conveniences of KYC, conveniences of document and civil scores, et cetera, and the processes, Digital Lending Guideline clarity, all those things are towards that. We took a clear advantage, and we pursued more clarities. You're seeing that year-on-year this number is growing. We continue to believe this will be a key number and key performance number for us to focus on.
Third line item, which is our commerce and cloud services. It has little bit of, I mean, annually it is showing growth, but quarterly because as you understand that commerce is an activity which is festivity driven and so on. There will be quarterly different swings. At an overall level, our commerce and cloud business, which includes advertising, marketing, and because we distribute co-branded credit cards, We call it marketing. The keyword here is we don't call it credit because there is no credit relationship or disbursement relationship they have. We have purely co-branded credit card disbursement model. We account for it there. Led by credit card distribution, co-branded credit card distribution. This is continuing to grow. Commerce and disbursement of credit card will be the key drivers, and they are happening here. This year we are, as you will see that, we have last quarter numbers coming up soon to be shown to you.
You've seen it. Very, very good. I'm very happy to say that we are focused on not only the revenues, but we are also focused on EBITDA at all. Obviously, we are talking here EBITDA before ESOPs, so that there is no adjusted misunderstanding here. It is because the charges of ESOPs which we have clarified in different time and reports out there. The nice thing that I want to tell you is that in two years, when we have grown our revenues by 2.9x, our margins have also improved by 57%. We in last quarter even have shown how good this number has been. Profitable actually. We are very, very hopeful that we would continue to improve and improve on EBITDA over the period and in contribution.
I'll give it to Madhur, our CFO here, who is going to talk about quarterly, and then I'll come back on the rest of the business, and Bhavesh will talk about payments and credit. Thank you.
Thank you, Vijay. Good morning and welcome everyone. It's my pleasure to walk you through our quarterly earnings. Led by our revenue growth that Vijay briefly talked about, a 100% increase in UPI incentives on an year-on-year basis. Last year we got about INR 90 crores of UPI incentive. This year we got INR 182 crores of UPI incentive. Our performance has been extremely strong. Last quarter we delivered EBITDA before ESOP of INR 234 crores. Just to dig into that, our revenue for the quarter was INR 2,334 crores. Our revenue growth is 51% year-on-year, extremely strong revenue growth.
Out of this INR 2,334 crores, INR 133 crores pertain to UPI incentive for previous quarters that we happened to receive in the last quarter. We have tried to normalize for that. If you exclude that INR 133 crores, then our growth, the number is INR 2,200 crores, and our growth is 43%. Our contribution margin has grown dramatically. This trend continues over the various quarters that you have been tracking us. Over year, on a year-on-year basis, our margin improvement is 20%. We delivered INR 1,283 crores of contribution margin. Once again, if we take out the INR 133 crores for previous quarters, then that number is INR 1,150 or 52%. We have seen expansion in this number in this quarter again.
EBITDA before ESOP expense improved by INR 602 crores on a year-on-year basis. A year ago, we were at INR 368 crores negative EBITDA. This year, last quarter, we were at INR 234 crores positive EBITDA, and we've had a margin improvement of 34%. Once again, if you make that adjustment of INR 133 crores that I talked about, we delivered INR 101 crores of EBITDA before ESOP cost and a margin of 5%. Continued expansion in our EBITDA. As Vijay said, other than in some extraordinary circumstances, we expect to be EBITDA positive going forward and aim to start generating free cash flow very, very shortly.
Going back to the core business model of payments and loan distribution and collection, where we are seeing expansion of our platform. Our average monthly transacting users has grown 27% year-on-year, so we're doing about INR 9 crore average monthly transacting users last quarter. Our merchant subscriptions, which is primarily and including our payments devices business, has grown to INR 68 lakh merchants. So there's huge expansion of technology adoption by our merchants. Over the last few quarters, we have been relatively steadily adding about INR 10 lakh a quarter. We have mentioned that we expect that pace to continue or maybe even go up a little bit. On the back of our payments business, we leverage our ability, our brand, our distribution, our data insights and our technology, to distribute loans.
Obviously, as you know, we help our partners collect those loans as well. Last quarter, as you know, we did INR 12,500 crore of loan dispersals, and we are seeing significant year-on-year and quarter-on-quarter growth here. A little bit about our breakdown of revenues. Our payments revenue was nearly INR 1,500 crore. It grew 41% year-on-year. Once again, adjusted for the INR 133 crore that we talked about earlier, that number was 28%. Our financial services revenue grew to INR 475 crore, driven by the increase in our lending business. Our commerce and cloud business on a year-on-year basis went up 23%, and we'll talk about that some more. On payments revenue, like I mentioned, 28% year-on-year growth.
Our net payment margin has really been a continuing improvement story as we are focused on how do we monetize payments better and how do we keep our costs under control. Our like-for-like payments revenue, like I said, is 28%. Our like-for-like net payment margin, after taking out payment processing costs, is INR 554 crore last quarter. If we add back the INR 133, then you get to the reported net payment margin number. While we think the INR 554 is the relevant number, we have given you the INR 687 as well, just so that you can tie it back to our financials. This, as you know, is comprised of two main line items. One is net payment processing margin.
In December, we said that this number is in 7 to 9 basis points. We do expect that to, over time, go to 5 to 7 basis points. We're happy to report that currently we are at the high end of the original 7 to 9 basis points number that we have indicated we are at currently. We are not seeing downward pressure. In fact, we are seeing various opportunities to keep working on this and improving this. Of course, our merchants, the 68 lakh merchants pay us for the subscription revenue, which also continues to scale very quickly. I'll turn over to Bhavesh to talk about the lending business.
Yeah. Thank you, Madhur. Hi, good morning, everyone. On the lending side of the business, we continue to see decent momentum in growth, both in the consumer and merchant loan distribution in the month of, in the quarter four. Important to note here is that we're now getting more secular growth across three businesses. Merchant loan as a business seems to be performing much better on a smaller base because last year was a COVID year. If you look at quarter-on-quarter, we've said in the past that we'll continue to calibrate our growth as we see the entire scale of business become larger and better, because our entire focus is not on volume of disbursement and look at portfolio.
I'm happy to inform you here that while we grew our year-on-year business by 2.53% and quarter-to-quarter again by almost 25% to INR 12,554 crores, each of the individual line of businesses also have been growing almost in the same similar range point model, especially personal loans and merchant loan businesses, which are extremely profitable both for us and for lending partners. Paytm Postpaid as a business also is profitable, and it provides us a great funnel to upsell both personal loans, merchant loans and credit cards. I want to draw your attention on the, on the graph on the right side, the table. The, the focus that we've been demonstrating very clearly here is that we have a very large MTU base, and it, the MTU base grew by 27% year-on-year basis.
In spite of that, our focus has been to make sure that a very limited set of users and merchants are getting access to credit, meeting the appetite of our lending partners. More importantly, we set for ourselves a very strong portfolio governance model wherein while our lending partners could assume an elevated loss provisions, but in our case, we are having a more conservative view that we would not like any distribution of credit originated through Paytm platform to perform beyond our own credit expectation, which is far more conservative than lender's expectation. In that context, as you can see, that our penetration to MTU continues to be very, very low, indicating two things. A, the runway of opportunity for us is significantly larger than what we have exploited.
B, we continue to grow and be very selective on both postpaid merchant loans and personal loans on our system. The portfolio in quarter four performed better versus Q3. We have been very calibrated in making sure that the entry rates, which is basically the portfolio construct that we are focused on. Personal entry rates dropped by almost 1%. We were operating more closer to 11.5% on a blended basis. Now we are in range bound between month-on-month to 10.5%-12%. Those kind of pieces, more closer to about 11-ish. Postpaid also we are seeing entry rates drop. They're now closer again to 11-ish%.
We continue to believe that these will only become better because we further tightened our models of underwriting with our partners because we are seeing very decent growth happening. On overall basis, our expectation is that the portfolio quality will remain stable and maybe we will be in a position to have a much better portfolio quality being demonstrated in the subsequent quarters. We've already seen, especially in postpaid, that from the last quarter wherein our expected credit loss by lending partners used to oscillate between 1%-1.2%. It has dropped down to 0.75%-1%. We feel very comfortable and so does our partners, that this particular ECL for postpaid, which is almost 50% of a chunk of our loan business, will continue to perform like this or even get better.
All in all, I'm happy to inform that we continue to demonstrate good growth in terms of distribution of credit and at the same time get much better portfolio performance than expected by lending partners. As we look into the next year, our belief it is our focus will be a lot more on portfolio quality, given elevated interest rates in the market than growth, and hence be able to maintain profitability of this business much better, in spite of the fact that we will calibrate our growth as we see the overall interest rate scenario far more closely and the overall credit scenario far more closely into the next year. Back to you, Madhur.
Thanks, Bhavesh. I'll just talk about the commerce and cloud business. As you know here, we have two broad set of businesses. One is commerce, where we sell travel, movies and events tickets and deals gift vouchers to our customers. Sorry, I apologize. Last quarter, we did INR 2,185 crores of GMV in this business, which was up 22% year-on-year. This is despite the fact that as you may be aware, the entertainment side of business, especially movies, has not completely come back to pre-COVID levels, and it's still seasonal and goes sort of up and down, depending on the quality of the content. We did see a slight decline on a quarter-on-quarter basis.
This is because, like we mentioned in the last quarter results, we do events business, some of them on a sort of full stack basis, which is to say, we have very high take rate on those, but we also have very high direct costs. That business is seasonal. It usually peaks in Q3 and it comes off a little bit in Q4 and Q1 and Q2 are more subdued. We've also indicated that our take rate, which over the last two quarters has been closer to 8%, should revert back to 5%-6% as we sort of experience the seasonality. On the cloud side of business just to remind everyone, we offer advertising, marketing loyalty services to various enterprises, and we also distribute co-branded credit cards.
While our co-branded credit card businesses continue to scale very well, we have now 5.9 lakh activated credit cards with our partners as of March 2023, and this business continues to scale well, both in terms of new card issuance as well as spends. We saw an increase in that, but we did see a decrease in our marketing cloud business. Just to remind everyone, our marketing cloud business is where we provide marketing and upsell services to telecom companies and enterprises. This is a business that Paytm One97 has been in for over a decade. That business is not a very fast growth business, and it has been sort of under some amount of pressure.
I would just like to point out that this is overall now it is less than 3% of our revenue. It's not particularly material in terms of overall growth rates and so on. Finally, we are launching a co-branded RuPay credit card very soon. We wanted to take this opportunity to make everyone aware of that. With that, I would like to hand it back to Vijay to talk about the growth drivers and wrap.
Thank you. Thank you, Madhur. The RuPay credit card will be really interesting. As you guys understand, RuPay credit card will come on UPI rail also. We've been trying to work it out. I want to point out what is on the right side to you. This is a dynamic QR device that we have refreshed as a portfolio. This is a device that is integrated with you might have seen in various stores out there when you go to a large enterprise store. The billing, it is integrated with the billing force. When the merchant generates the bill, it automatically, dynamically shows the QR. Obviously being Paytm QR, it allows Postpaid, Wallet and everything else to be accepted and obviously other UPI apps can also pay.
I'm very happy to tell you that as a part of device portfolio, that is what we've done as refresh. Secondly, we've done our Soundbox, which is a very legendary device. I mean, the amount of love that we get for Soundbox from merchant consumer is incredible. We continue to enhance and invest on hardware. We want to remind you that we treat it as one of the key portfolio offering of our services. We launched 4G-enabled device. 4G-enabled device, meaning that it can run faster, better battery efficiency and so on. We now have seven days of battery backup, kind of industry leading backup.
I'm very proud to tell you the thing that Bhavesh's team did in the market is that even though there were many companies which thought that they will throw in the market free device, but because of the cost, because of servicing, because of feature, it didn't even see the day and we actually continue to grow more and more in market. Incidentally, what we are seeing is that when more players come, the product becomes more mature in the market and market understands it, and then superior products win. For us, we're seeing that there are many people who are launching Soundboxes and that is growing our opportunity in the market.
I put the word growing our opportunity because ultimately this product is an outcome of last four years of R&D and efforts and now that it is made software, hardware-wise completely by us, so it is something that people will take time to even understand. Here it is in the technology. We also launched our new technology platform. It is very important for me to tell you that this was a key milestone behind the scene. This is where the engineers were invested. I want to share that we are going to release some engineers from here, but we would assign them to other business and technology.
I remember in December when we have done an analyst call, we had suggested that we are sort of sorted out except for standard engineering increase and engineering technology. The good part is that this technology platform will take us to 10x more transaction at current scale. I mean, obviously we are handling hundreds of billion dollars of merchant payments. I'm calling it out this is a merchant payment because P2P technology owned by Paytm Bank, it is not related to us and it is P2M payment which is merchant payment platform that I'm talking about. The beauty of this is that this is 100% in-house developed technology, including risk operations and operation risk, et cetera.
That will actually take us next level because I don't think the kind of features that we have added, people are seeing them today. Obviously, artificial intelligence, AGI will play an important role here for us in this, especially for protecting frauds, et cetera. I'm very happy to announce that our fraud rates and, as they call it, fraud to sales rates are not industry leading, but startlingly incredibly better. Whether we talk government or regulators, they are very happy seeing what we've done and how we have started using artificial intelligence in our business. This is our payment update on systems much for merchants. You all are seeing that we have launched UPI Lite. If you have not, please use Paytm app. Now more banks have started coming on UPI Lite, so it is scaling.
UPI Lite enables payments of small amount without requiring a PIN and more or less. It is not offline, just in case, but it doesn't require PIN, and the balance is maintained on the device side instead of to the bank. The bank leg failures are sorted out. It is even better. We've launched it and we have already 55 lakh customers on it. We've done transactions in crores, so it is taking up very, very well. On the consumer side, we have Wallet interoperability. We've been waiting for this to come for long. What it does is that it allows us to get Paytm Wallet accepted on all UPI QR.
Although we are the largest QR or largest acquirer of merchant, but still there is a tremendous large potential merchants whom we would want our Paytm instruments or Wallet, et cetera, to go. That is what we are expecting. It is commercially live or agreement-wise live, et cetera, et cetera, but everybody has to launch, so you expect it to take at least, I would say two quarters for material important contributions to show up in our numbers, et cetera. That also brings that now the Wallet has grown, so you can understand that Wallet, UPI, everything. Now the Paytm instruments are as uniquely available and will have advantage of being merchants available across every merchants. That will allow us to invest even expanding more in merchant acquiring and consumer growth. I want to call out consumer growth investment here.
Because of the extra profits that we have started to make, while we will continue, and we said it in previous quarter and earnings also that while we continue to invest, we continue to commit to incredible market opportunity which requires us to expand and invest in consumer growth. We believe this will not be materially costing us in our profitability. In other words, our profitability and revenues continuously grows even when we will do these investments. It's an important thing. Finally, as you all are aware that our business of financial product distribution, and it is led by credit, we are signing up large NBFCs and banks, and we have a couple of them which are very, very interesting in the queue. As we are aware, it takes a lot of technology for the partner to become Paytm partner.
In fact, I want to share one extra thing here, that in last month of April, one of our lending partners went through significant IT outage. Because of that significant IT outage, they were not able to disperse loans to many of the customers whom they sort of had dispersed earlier loans. Not top-up loan or potential loans. If you see our April numbers, especially I think in the merchant case, they are seemingly flat out there. It is because there is a lot of technology stress on our partner continuously remains. We are adding more number of banks and NBFCs and in fact, some of announcements are queued up before next quarter. You will see that.
I think whether you look at payments on merchant side, whether you look at payments on consumer side, whether you look at our credit disbursement, these are the core businesses. In addition to this, like I said, we are enabling AGI and I don't wanna call it AI only, I want to call it AGI, general intelligence here. The reason that I'm calling it out is because that is a incredible technology that I believe will change how we use the server-side components. For example, like you're talking to a server which is configuring and you have a workflow and
Instead of this, you can talk to it. Give you an example here. Many of us are old internet users. Imagine internet being navigated like Yahoo directory and search on Yahoo directory versus search like Google that you can search what the destination has. That leap is what I'm talking AGI is for the business. We are committed, and we are investing, and have started investments already. You will see that there is large amount of product which are AI first or AI enabled coming from our family. The best part, like I said, is that we don't need to allot extra dollars because our platform that we got expanded here is giving us opportunity to expand on that side.
With this, I want to say thank you, and we look forward to get as many questions and understandings that you seek. Thank you for championing. I see very, very detailed narrations about our business which are getting clearer and clearer. Thank you so much for that. Look forward to the questions.
Thank you, Vijay. 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 and take questions in the respective sequence of raise hands. With that, the first question of the session will be from Ankur Rudra from J.P. Morgan. Ankur, your line is unmuted.
Hi. Thanks. Hi, thank you for taking my question. First question is on the payments business. We've seen one of your peers scaling quite rapidly in recent times with a similar product. I think you referenced that. Is there any pressure on subscription charges for the Soundbox portfolio or the net payment margins from this?
No. No. Actually, it is increasing our opportunity. It is increasing our opportunity because more number of merchants take our Soundbox then. It's the product maturity and our product pricing. Actually, I mean, the market moved to the pricing that we were giving. Ankur, let me say this, it was priced zero and it over the period became same price as our comps.
Okay. Thank you. Second question on financial services. I did notice that the effective take rates on the loans for the quarter has become a bit muted versus what we saw in the previous periods. Is this due to any change in collection incentives or changes in the take rates, from your partners?
Yeah. Ankur, let me clarify this please. You're aware that in our business model, our lenders keep some elevated provisions, right? Because they don't know at the scale at which we operate what actually will be the loss rate. We are also fine that they can keep elevated provisions. What happens over a period of time it is, as they see the product portfolio perform, especially in a product with a short-term credit like Postpaid, that the portfolio performance is much, much better than what they were keeping elevated provisions. We try to work with them to bring the provisions more closer to the actual provisions.
That is what has actually happened in Q4, that especially in a product like Postpaid, given the steady and improving quality of the loan book, we've seen the lenders are becoming more comfortable with portfolio quality, and hence they have reduced the excess provisions that they were keeping on this portfolio, thereby reducing our opportunity to bill them more and collect over a period of time. The EBITDA doesn't change. The gross revenue that we used to bill them because we were keeping higher provisions, that has gone away to in the product like Postpaid. That's the reason you're seeing a marginal drop in take rate. Our overall EBITDA has remained same or actually become better.
Okay. This is connected to the change we see on a quarterly basis on your ECL, your bounce rate, et cetera?
Yeah. Yeah. That is what I pointed out in my previous conversation, that we were having our lenders keep an ECL of, expected ECL, if I may use the word, of 1.2% in postpaid, which has dropped to 0.75%, right? Our intention is that the lenders should be far more comfortable and not be keeping a lot more elevated provisions. In postpaid, because it's a 30-day product, they have now become extremely comfortable, and hence their need to keep extra provisions to look at any kind of deviation quarter-on-quarter has reduced significantly, right? That is the reason why the entire revenue, gross revenue kind of is billed less, whereas the net rate, net revenue continues to be higher for us.
Okay, understood. Just the last question on the tech upgrade, you know, Vijay, you referenced. Is there any kind of capitalization for the tech platform upgrade that we should expect in the accounts?
There's an extremely small amount of people cost that we have capitalized. I think it's about INR 3 crore or INR 4 crore a month for the period in which for about a 12-month period in which we have done the build out of the new technology system. Yes, there is an extremely small amount of capitalization that we that our auditors had asked us to do.
This would be over a period of, I mean, roughly how long would the capitalization be?
No. It's historical, and it's for about, it was done for 12 months.
Okay.
Roughly 12 months.
Thanks.
Right. Just to be clear, the tech system that Vijay talked about, I'm assuming you're talking about the first bullet point on the growth drivers page.
Yeah. That's right.
Which is our, what we internally call the 2.0 system. That is now completed. We had done a press release on this, I think it was back in February, maybe it was early March. That entire project took about 12 months. Over that 12-month period, we did about INR 3 crores a month, and we're not doing that anymore because the project is finished.
Okay. Understood. Thank you. Investment bank.
Thank you, Ankur.
The next question is from Jigar Valia from OHM Group. Jigar, your line is unmuted.
Hi.
Are you there, ma'am?
Sorry, Jigar, we lost you for a second.
Yeah. Sure. Thanks for the opportunity. Congratulations on the great performance. A follow-up question with regards to the take rate, the net take rate. If you can help understand that now there is less need for the buffers or provisions that the lenders need to keep and accordingly, we can kind of also invoice them a little lower. We can map the gross take rate and which we can see the pattern, but if you can help understand the net take rate and it would get adjusted under which line item on the expense side, if you can help that. Thanks.
No. There is no expense side adjustment to this entire thing. What ends up happening here is that, as we've explained the business model earlier, that there is a distribution revenue which largely remains unaffected by any change of portfolio, and then there is a collections revenue. Now, if you are keeping a much higher provision for collections that the portfolio may not perform as well as we believe it will perform, we will bill over a period of time. Now, in what is happening in a product like Paytm Postpaid, because a short-term product, the portfolio performance is very well established. We bill less and hence we get less. Only on a gross-to-gross basis it will optically appear that our take rate has gone down.
If you look at the contribution profit or the EBITDA, that remains same or marginally actually better.
Okay.
Maybe I'll just add, if I understood your question correctly. What Bhavesh described as bill less is in the payment processing cost line.
In the payment processing cost line. Got it. Yeah. That was what.
For example, if this trend was to continue and we were to further make changes, then the payment processing cost would go down marginally and the revenue side of it would go down marginally.
Got it. This should lead to a contribution margin to be higher than 50%, which used to be earlier because of this accounting. Probably it should inch slightly upwards of 15 and stay there. Okay.
Yes, it does because, you make the same amount of money on a slightly lower revenue base. It should move the contribution margin upwards. There are also some sort of tax and other efficiencies that we get out of this.
Got it. On a net, on the gross take rate, should, if it is right now, say come close to 3.5% type of, calculated levels, on a blended basis, that would be a more steady state sustainable number rather than 4%+?
Yeah. Jigar, yes to that, to that question. What we've seen that this will oscillate depending upon ho which business contribution we are doing more versus less. There are quarters like in quarter four, Paytm Postpaid was marginally higher than 50% and personal merchant loan was like at 45%. If the personal loan and merchant loan contribution a bit more, the 3.5 could become 3.75. Yeah, the better way to do it is that it will oscillate between 3.5-3.75.
Perfect. That helps. Last question from my side is it-
Sorry, Bhavesh. Jigar, I apologize. Bhavesh, may I just add to that payments MDR that we get from merchants on Paytm Postpaid, that is recorded in payments revenue because all MDR regardless of which instrument, that is recorded there. While you're absolutely right in tracking this line and dividing it by the dispersal value to get to a trend line, I just did want to point out that what we report as financial services revenue is not all revenues related to all products, loan distribution products. The MDR from Postpaid does come in the payments revenue.
Understood. Thanks, Madhur, for that clarification. Just a last question from my side. Is it possible to, on a pro forma basis, give the UPI incentive for Q1, Q2, Q3? Because having just for Q4, again, it makes it non-comparable. You've tried to be as elaborate as possible, I understand, but maybe on a pro forma basis.
Jigar, maybe, with the disclosure that we have, I can help you, that we have said that out of the INR 182 crores that we got for the full year, INR 133 crores was of previous quarters, which means that INR 49 crores was for Q4. If you were to back out that INR 49 crores from our reported number, which is 101, then you get to INR 52 crores of EBITDA excluding the incentive for Q4. If you exclude even the Q4 UPI incentive from Q4, then the number that you get is INR 52 crores.
Yeah. I, yeah. Got it. Excluding the UPI, it is comparable. I cannot map the UPI incentive for Q1, Q2, Q3 separately. That's clear.
The 133, you can broadly assume that it was growing at 5%-10% quarter-on-quarter, right? The last quarter number, I don't have the exact last quarter number, but I think it was closer to INR 45 or INR 50 crores.
Understood. Helps. Thank you very much.
It's relatively evenly split, with of course some Q1 growth amongst those three quarters.
Helps nevertheless. Thank you very much. Thank you.
Next in queue is Suresh Ganapathy from Equirus. Suresh, your line is unmuted.
Yeah. Yeah. Am I audible?
Yeah.
Yeah. Okay. Just to understand this better on this take rate thing. What you are saying from an accounting standpoint is, yes, when your provisions in the Paytm Postpaid business is better than expectations or the loss rates are lower, your revenue line item shows a lower take rate, but at the same time, the payment processing cost also comes down. Net net on an overall basis, it remains more or less the same. It doesn't affect the overall EBITDA. Is that interpretation right from an accounting standpoint?
Yeah. Suresh, it would be the same, perhaps slightly better.
The profitable-
Okay.
Say more slightly better.
Okay. Just to again repeat, part of it gets adjusted in a lower downward revision in the financial services distribution line item, and part of it will get adjusted in the downward revision in the payment processing cost.
Um-
The payments cost, the payment processing charges, right? That will also come down.
I wouldn't think of it as splitting it into two parts, and maybe Bhavesh you can add.
Mm-hmm.
I wouldn't think of splitting it in two parts. What we are saying is that the cost impact is seen in the payment processing cost line item.
Yeah.
The revenue impact of nearly the same, perhaps slightly lower, is seen on the revenues, the financial services revenue side.
Okay. Okay, so the overall EBITDA doesn't change much. Okay, fine. The second question is can you let us know totally how many partners you have on the lending side, banks and NBFCs? If you can give the proportion it would be great, in value terms.
Yeah. Suresh, we have seven partners today, two banks and five NBFCs. Unfortunately, we do not have the, I would say, approval from our partners to declare individual disbursement values, et cetera, et cetera. I can give you this part, that large part of our business. Our business is fairly well spread. It's not concentrated to one or two partners. While some partners are very comfortable doing postpaid and PL, some are more comfortable in merchant loan. If they are comfortable doing our business, they will do that business materially with us and not a very small portion. Having said that, we also are now in the midst of adding more partners and we will be announcing some of the new large NBFCs and banks in due course of time starting from June.
Okay. It's not possible to share the share of the largest partner also?
No. We don't have the, what can I say, agreement with our partners to share either their portfolio in specific. Some of the time they ask, "Can you share a particular lender portfolio, et cetera, or the disbursement value?" Because some of these are listed entities, as you understand. If they were to declare individually in their announcements to investors, we'll be more than happy to share. We currently do not have the approvals from these people.
Yeah. Because the simple math says that the share of, on an average basis is 15% per partner, right? I'm pretty sure that it is not gonna be 15 uniformly across seven, so there is a possibility that a partner will be greater than 20%. If I were to simply do the math. Just wanted to understand that a bit better.
Yeah. Sure, sure, Suresh.
Yeah.
As I said that not every partner does all our businesses. Let's say partner A will do only postpaid and PL because that's generally the combination. We have partners who only do PL and they do a lot of PL. If I'm doing, let's say INR 1,400 crore, they could be doing 50% of the PL volume with us, and there could be another two partners doing 25%, 25% each. Similarly, in merchant loan, there are partners who will do 50% of merchant loan with us, and then another three partners will do 15%, 20%, 20%, et cetera. Depending upon their risk appetite and where they are strategically they want to calibrate their ROAs, et cetera, they pivot on the business. It is not kind of uniform.
What you're saying is right, but it is not very concentrated also. That's the comfort I can give you very clearly.
Important thing that I want to add to what Bhavesh is saying, Suresh, here is that our internal KPI is that as soon as we start crossing two digit of their disbursement, we start to make it that we need to add or divert transactions or requests of loan disbursement to some other people. Our continued aim is to remain single-digit distribution of their overall book.
Okay. In this two and five that you're talking about, HDFC Bank is not included, right? Because they are just a credit card partner.
No, they're included because, credit card, while we book that in our cloud revenue, it is a business which is driven with our lending partnerships. We also are currently in conversation with not just HDFC but other banks to do more credit card distribution and loan distribution. We kind of not differentiate between the four businesses when it comes down to banks.
Yeah. Bhavesh, then this is one and five and not two and five because HDFC Bank doesn't give a single rupee of that INR 5,000 crores of loans that you have disbursed this quarter, right? I mean, this month rather.
Yeah.
It's effectively six partners giving you that INR 5,000 crores that month and not seven partners because HDFC Bank doesn't have any lending relationship with you guys.
Yeah, that's fine.
I'm just trying to-
That's one way to look at it.
Yeah.
We have with each partner, including the bank, we have agreements to do multiple products. It is a sequence of events that we go with. Currently we're doing cards. Obviously in the future, not just with HDFC but with other banks also, we intend to do loan businesses with them. It's just how technologically we want to sequence the scale up with each partner.
Okay. This is clear now.
What you said is right, that if you want to.
Yeah. Yeah.
mathematical assessment, mathematically we can divide it by five or six partners that we currently have within the INR 4,400 crores of business.
Yeah. That comes out to be almost 20% per partner, right? On an average, if you have to do the simple math. That's the only concern here. Okay, no problem. It's fine. It's pretty clear. Thank you so much.
The only clarification also, Suresh, here is that as you understand it equally well, while on gross disbursement basis it may appear that we are doing, let's say, INR 1,000 crores or INR 800 crores per partner, but because 50% of this business is pretty in Postpaid and it just runs off in 30 days, from a purely AUM origination perspective, the number is 5%-6%.
Yes.
It is not a concentration at all.
Yes, that's clear. That's fine. That's clear.
Yeah.
Okay, thank you so much.
Okay, thank you.
Okay. Bye-bye. Bye-bye.
Next in queue is Bhavik Dave from Nippon. Bhavik, your line's unmuted.
Yeah. Hi, am I audible?
Yeah.
Yeah. Congratulations on a good quarter. Just two, three questions. One is on the on the operating expenses and the specifically the indirect expenses that we have. The INR 1,000 crore odd number we've, like, kept it, like, flat for like four quarters now. Just wanted to understand how should we think about it? Can this be controlled or can grow in a reasonable way versus the revenue? Just want to understand. At a percentage of revenue, it's come off from 60% - 45%. How do you think about this line item? That's question number one.
Bhavik, a couple of points on that. One is on employee costs, we do have appraisal impact in Q1 of every year.
Correct.
That's something that will be there and should be factored in.
Sure.
The second is, like Vijay mentioned, given how well our monetization engines are working, both on payments, on lending, as well as in commerce and cloud, and the way our contribution margin and EBITDA is growing, we do see opportunities to continue to invest in merchant acquiring sales team as well as on the marketing side. We're not gonna grow this, we're gonna grow this in line with revenue or not, obviously not as fast as revenue, but we're gonna grow this to support revenue and to make sure that monetization is coming out of that, as opposed to significantly ahead of that. As we grow as a platform, we will make investments in sales, marketing, and obviously technology, and plus the appraisal impact.
We're very conscious that we want to get to higher EBITDA profitability and cash flow profitability. And we believe we can do both of these things in line with each other.
Great. That's useful. Just one understanding clarification. In terms of promotion and cashback incentives, I see that number quarter-on-quarter has come off, is it like purely seasonal or is there something more to read into it? Our MTU and devices and all other things are growing, and customer acquisition is quite healthy. This promotional cashback incentive number, obviously we can't compare it with last year or two quarters back because we had that payment processing bit that was reclassified. From a quarter-on-quarter basis, it's just purely basis the seasonality, right? That's the way to think about it.
I think a little bit of seasonality in there.
Sure.
in Q3 when we have festive related sales, we do support some of our online partners and those sorts of things.
Right.
There's a little bit of seasonality in there. I think it is also fair to say that we are very sharp about the promotional cashbacks.
Sure.
as a company. We do think that unless, something dramatically changes on the monetization side, taking a number of something like 2.5-3 bits.
Right.
Is probably the right, sort of right level for our scale.
Understood. Sorry, just to dig a little deeper. The other expenses part, like that number remains reasonably elevated. What exactly would be the one or two large elements of that, the INR 190 odd crores that we have this quarter?
Yeah. I assume you're referring to other direct expenses.
Yes. Yes. Yes. Correct.
Part of it is, because of the events business like I mentioned earlier.
Okay.
That in the events business, there are certain events that we do where we have very high take rate, but we also have very high direct expenses. All those events are profitable.
Mm-hmm.
In the last quarter and this quarter, you would have seen an elevation in that.
Right.
Seasonally, if this revenue from events goes down in Q1 and Q2, then you'd also see a reduction in other direct expenses. That's one part of it. The second part of it is some of the collection costs related to the lending business also goes there.
Okay.
While we've become more efficient in collections overall, but because we have the scale-up of the, you know, amount of disperses, amount of collections that we do, some of the costs related to that also go into other direct expenses.
The event-driven revenue line items will come in the commerce bit, right?
Exactly.
We've not seen any major increase there this time around, so I was just wondering, the cost maybe is a little inflated or higher than what you would have anticipated. Sorry, one last point on this same on the expense front is the sales employee force that we have is like now normalizing in that 28,000-29,000 odd number of people. The productivity remains broadly at like 12-13 devices per month kind of number for each individual. Do you think that this number will remain in this 28,000-30,000 range or will increase materially from here? Like, are we having the right man number of people to add that 1 million odd devices every quarter?
Is that the fair way to think about it, that they are reasonably productive and this is how they, it'll go about or it can be improved from here?
I'll let Bhavesh add.
Let Bhavik step. Bhavik, I must say meticulous math. Over to Bhavik.
Yeah.
Bhavik, the productivity obviously is an area that we continue to work on, and it's-
Right.
-in our business is more of a function of technology. How much technology we can give to our front-end sales team-
Got it.
that they're trying to onboard a new merchant is faster, right?
Sure.
That's a very large area of focus that we are able to bring in. I can tell you some metrics that it used to be X number of minutes, and now it's dropped by 20% and every quarter we intend to bring it down. That's the product that we keep building on.
Right.
What we've seen it is that both our expansion in geography, the demand for a product like Soundbox in tier three and tier four is also very large.
Got it.
we will not only drive more productivity as we've been driving, but we'll also are now expanding and hence our belief is that this 1 million boxes that we were able to grow last year secularly, this number.
Yeah.
can be moved a bit more. If there is an opportunity, and we believe that there is, we'll expand our sales even further.
Perfect. Last question. Either data point on subscription revenues, what will be that number this quarter? We're using the INR 170-180 range, INR 180 quarter range. Where will we be this quarter?
It continues to grow.
Yeah.
with the number of devices deployed. It has gone up about 15%-20% quarter-on-quarter.
Great. That's very helpful. Thank you so much, Madhur. Thank you.
Thank you, Bhavik.
The next question we'll take is from Sachin Salgaonkar from Bank of America. Sachin, the line is yours.
Hi, thank you for the opportunity. I have three questions. Firstly, you know, Madhu, I would like to understand what is the kind of a steady state contribution margin and steady state adjusted EBITDA margin one could look? Clearly you guys have seen a strong improvement in contribution margin even at this this quarter. Even adjusted for the accounting change, you're seeing a bit of a margin improvement. Just wanted to understand that.
I think on contribution margin, Sachin Salgaonkar, we have come a long way from where we were even two years ago to now. The payment profitability and the mix of lending has contributed to that. We think that on contribution margin, this is probably roughly the right level with some room for improvement, with in both on payment side as well as some lending, just because of the mix effect of lending growing a bit, growing significantly faster than payments or Commerce & Cloud. We think we'll see some upward trends there, but it won't be as sharp at all as we have seen in the last year or two years.
On adjusted EBITDA, it's hard to sort of talk about a steady state, because now we have sort of reached this level where we have a certain amount of revenue, call it, call it $1 billion for last year, INR 8,000 crores for last year, and about INR 9,000 crores for the last quarter run rate. We have 50%+ contribution margin, we have a certain fixed cost base. It just comes down to operating leverage in the business, which we think is very, very significant going forward, because almost everything that we have built is technology-led. There's significant amount of efficiency that we can get out of that. It's hard.
I think that operating leverage story will continue for many years, which is also to say that adjusted EBITDA should continue to move upwards for many years as long as we assume operating leverage.
Okay. you know, Madhu, to look at it the other way, next couple of years, there's room for this margin to adjusted EBITDA margin to move to around 10% +?
I don't want to give a specific number here, but yes, there is room for adjusted EBITDA margin to keep moving up as we get more and more operating leverage. What I know is that our projections for this year assume significantly higher revenue growth than indirect expenses growth, right? When you sort of put that in the model, with even if you put steady state contribution margin, even if you don't assume any improvements in that, it translates into meaningful EBITDA expansion.
I'll take the next level, Sachin, here, that the word that I used in the beginning of the call, AGI, which is towards the artificial general intelligence, which means that a lot of work that humans do, for us from onboarding to the customer care to the fraud detection to the every decision that we make. There is a large operations team also we have. I'm gonna say not only those will get efficiently done using the AGI that we are adding in our machines, it will also make us scale to another level of solutions. Now I also see trends where other companies which have not been able to scale technology like this, they are starting to falling behind us.
In other words, we will become scalable with not linear costs and the market will grow and competition will probably reduce to fewer players. That is why Madhu is saying that there is a space for improvement.
Got it. pretty clear, Vijay. Second question, you know, when we look at your depreciation amortization, you know, clearly we've seen a sharp increase on a year-over-year basis, and one understands it's mainly on the back of Soundbox. To earlier Bhavik's question, I guess you guys gave a bit more clarity in terms of the outlook of the Soundbox. Is it fair to assume that, you know, this number will continue to increase? Or, you know, are we coming at a point where this might peak at some point, maybe this year and then it could stabilize?
We do depreciate devices for financial accounting purpose quite aggressively. So two years in the case of Soundbox and three years in the case of devices, which we also think is significantly more aggressive than the useful life that we can get out of these devices. As a result, we have seen this big increase in and depreciation with the scale at which devices have grown. We do have extremely ambitious plans to continue to expand devices in the country over the next two or three years. We think that there's clear runway to be able to do that. I think depreciation number itself, you should expect for that to sort of continue to grow.
Last year it grew 100% year on year, clearly it won't grow at that level. You should expect that CapEx translating into depreciation will be a factor in our net income.
Got it. Last question, wanted to know your thoughts on, you know, the recent comments by RBI on credit on UPI. How could we look, you know, what could be the impact of that on the overall Paytm business?
See, Sachin. It's a very welcome move, in totality. The fact that India has significant opportunity for small term credit, any disbursement which can be made more frictionless and seamless, which is what the intention of the Reserve Bank of India is to allow overdraft accounts to be used to link on a UPI rail, and hence users can go out and scan QR and kind of consume the credit, is a fantastically welcome move. What is yet to be clear is the commercial architecture around it. What is currently known on a previous product, which is overdraft on UPI rails, the MDR was similar to credit card. That adoption has been much lower.
I'm assuming looking at credit card on UPI, if you look at that commercial in which you have less than INR 2,000 is free, et cetera, if that commercial understanding was also on credit on UPI, then we could see some adoption happening in this area. As an acquirer, we will only benefit with more funding sources getting added to the UPI QR payments. We welcome this move.
Bhavesh, do you see competition increasing on the back of it?
Competition in terms of credit?
Yeah, more banks and, you know, now anyone could, sort of, you know, give credit on UPI, right? On the back of that.
Yeah. We don't give credit on UPI, because our partners are NBFCs who are yet not allowed to give credit on UPI. I'm assuming it will come over a period of time. I guess, as I said, that we don't see the competition is gonna increase or decrease. There is room for a very, very large number of players in this space. We've been trying to achieve this objective through proprietary engagement with our partners for Paytm Postpaid. If tomorrow there is more acceptance of credit on UPI, it is only going to make the product more meaningful, even Paytm Postpaid for us. I think it'll only expand the market. It's not going to bring more competition.
Got it. Thank you. All the best.
Thank you.
Thank you, Sachin. Given the current queue of questions, we're going to extend the call by 20 more minutes and take as many questions as we can in that time. The next question is from Mr. Saurabh Kumar from J.P. Morgan.
Hi. Just, two questions. one is, you know, just on this contribution margin. If we exclude the UPI incentive this quarter, then your margin has not gone up quarter-on-quarter, despite the mix improvement. Fair understanding?
Yeah, I think it's fair that co-contribution margin has been flattish Q on Q.
Okay. The second is, this of your devices, the activation rate, what should we assume as the activation rate?
Saurabh, Yeah. We've given this number. Soundbox oscillates between 80%-85%, and that's been a consistent number. That number hasn't reduced in spite of the scaling of the space.
Okay. What I'm trying to calculate is basically, the remaining 80% are giving you INR 100 rentals.
No. There are two ways to look at it. When we look at rental active, that number is above 90%, closer to 90%, 92%, because there are merchants who are happy to give you rental, but they may not be active every month on QR payments. If you're talking activation, as we track it, we don't track only rental activation. We track the transaction activation. That number is closer to 84%.
Okay. One last question.
For rental you should take it 90%.
Okay. I'll take this offline. Last question is basically this payment services to consumers, you know, so this would include the 1% MDR of BNPL, right?
No. The Paytm Postpaid MDR depends on which merchant you're getting it from, right? If you're using Postpaid on the Paytm app, then it would come in payment services to consumer. If you're using it at one of our third party online merchant partners, or if you're using it at an offline shop and that shop is paying us an MDR, then that would come in payment services to merchants.
Okay. Got it. The, I mean, this lower growth that we've seen.
Consumer side, Saurabh, is when, let's say, you are making a credit card based payment to someone, let's say rent payment. Obviously the receiving party wants INR 100 of INR 100, then we'll say that, "Okay, you pay this charge." When consumer pays, that is called payments.
No. Just to clarify, that any transaction that is happening on the Paytm app, we have explained that in the pyramid in our investor presentation.
Yeah.
This is Saurabh. If a merchant is collecting the payment on the Paytm app, and they're paying us an MDR for it, so it could be mobile top up, it could be electricity bills and large set of payments, large set of categories of payments, then that is payment services to consumers because the offering is the consumer app. Whereas if we are doing the transaction at a merchant shop or a merchant app, then we consider that payment services to merchant. The MDR also works on the same basis, which is that if it's for a transaction that happened when a merchant was collecting a payment on the Paytm app and they're paying us an MDR or the consumer is paying a fee, like Vijay said, then that would be in payment services to consumers.
Both.
Yeah. Both are actually the merchant is paying, the consumer is paying. That is why if you notice in the presentation this time we have called it payment services, because if to consumer or to merchant was a little confusing. Because if, let's say, you are a merchant, and let's say you are Airtel and you're selling top up on Paytm consumer app. You effectively are paying the fees, like Airtel is paying the fees. On Paytm app, we used to call it consumer payment. In the business presentation, if you notice, we called it payment services this time because we believe that consumer or merchant split do not necessarily help understanding the nuance that we, at the time of IPO, had split. Although the table below, disclosures carry the split.
Okay. I was just trying to figure out, you know, the core growth with XT, Soundbox and this, MDR. That number seems to be, you know, more like 20% odd. Is that a fair number? I mean, this has kind of stayed static for last four quarters.
Sorry, which number are you looking at, Saurabh?
I'm just trying to back calculate from your payment revenues of INR 1,400 crores. If this is whatever you have said, the MDRs that you get on the merchant fees and, you know, Sorry, the postpaid MDR and the Soundbox rental, then your core payment revenues have kind of remained at that INR 1,000 crores ballpark every quarter, for the last four quarters.
I can't quite follow that math off the top of my head. I'm happy to-
I think it's okay.
Yeah.
Thank you.
Thank you, Saurabh. Next in queue is Nitin Aggarwal from Motilal.
Hi, am I audible?
Yeah, Nitin.
Yeah. Hi. Congrats on good numbers. First question is, like on the device penetration, we have now achieved 20% penetration rate. What is the acceptance rate for a device when you approach a merchant? Do you have an order book for this, which gives you a sense on how fast you should go on to invest here and where this penetration can move, like in few years from here?
Nitin, the pipeline is fairly simple. We've got about 30 million, 3 crore merchants who are paper QR merchants. Now we as you know, give or take 60 lakh Soundbox merchants. The difference, as you can imagine, are potential merchants who can take Soundbox. At any given point in time, we do not see all the 3 crore merchants active, but a large majority of them are active. We have seen that any merchant who does more than 25, 30 payments on the QR on a monthly basis finds having an IoT device like Soundbox meaningful for their business performance and management.
That funnel today, as we sit today in this month, will be about 60, 70 lakh more merchants who are keen or would be eligible to take the product like Soundbox. There is no demand issue that we see in our system of the product called Soundbox. What is more important to us, that we do find more innovation as an ask in the marketplace because there are various different kinds of merchants. Merchants who want smaller Soundbox to larger Soundbox, to a Soundbox which can have very, very low latency. That's the reason we launched the 4G Soundbox, et cetera. That is where our entire focus is. Purely from a funnel perspective, we have 50, 60 lakh merchants who are currently eligible, who can.
Who do that many number of transactions which make Soundbox a correct product for them.
Okay. Secondly, is there any seasonality in the GMV? The growth rate, if I look at sequentially, this quarter looks relatively modest.
Yes. There is seasonality. I mean, there's not a massive amount of seasonality, but there is seasonality in the business, particularly when, if you're talking about GMV, particularly with, in relation to festive season. During Diwali and Pre-Diwali, we see online merchants running obviously large events and festivals, shopping festivals. As you get closer to Diwali, there is a sort of spike in business in the offline side of things. There is seasonality and not to further complicate the matter, because Diwali also moves, that seasonality may be seen entirely in Q3, or in some years it is seen partially in Q2 and partially in Q3. That is the seasonality impact that we see in the business.
There's other seasonality related to weather and so on, which is not, which is not significant.
Okay. Lastly, for calculation of postpaid penetration, should we not take number of loans originated every quarter to quarterly average MTU? The current methodology seems to be understating the penetration rate.
No. Nitin, the way we see this piece is that we've got close to about 80 odd lakh users who have taken Paytm Postpaid. Of the 80 lakh users, we see about 1 million users who are not eligible to take their credit line because of various delinquencies that they may have deposited in the system. Basically, we see about 45 odd lakh users who are using Paytm Postpaid every month. If you blend it out for a quarter, it could be 40 lakh. MTU that we are looking at is about 9 crore, et cetera. That's the way we calculate it. A macro point, rather than getting into it, is it 4.5 or let's say 7.5? The headroom for growth is very, very large, right?
Even if you were to do the math on gross-to-gross basis, the headroom for growth is very large.
Right. Okay, sure. Thanks so much and wish you all the best.
Thank you, Nitin. Okay, Nitin. Next in queue is Rahul Jain from Dolat Capital. Rahul, your lines are muted. May I request, we do have a few other folks who wanna ask questions.
Yeah.
Yes, Rahul.
Hi, can you hear me?
Yeah, we can. Rahul, given we have quite a few folks still in queue and we.
Actually, why don't you add to the main room so that we can just say and then this all initial part is sorted out because I'm sure they will not speak, but they will be allowed to speak so that they can quickly come back.
Yeah.
Maybe request you to maybe limit yourselves to two questions. Thank you.
Sure. I have two questions. I'll ask it one go or save the time. Firstly, on the postpaid, we have seen that the value of usage has increased multi-fold over last five quarter. Is it simply because of higher limit that we have given to them or is it because of increased touchpoint? Are we observing incremental preference of consumer using the credit option instead of debit on their bank account? What are the incremental innovation we could do to, you know, leverage on this trend if it is shaping up? This is question one. Secondly, if you could add more flavor to Bhavesh's comment on realignment of growth in the loan distribution business over, it's more toward profitability, I think that is what he said.
Also if, from the point of view of how the immediate TAM or growth potential changes with onboarding of new partner on the lending side, any thoughts here would help. Thank you.
Sure, Rahul. Rahul, the growth of Postpaid is a function of three aspects. One is how, in how many places Postpaid is accepted. If you go one year back, this number would have been about 30, 40 lakh merchants, and today we've got 1.9 crore merchants. The fact that we've been consistently working with our merchant and merchants to make them aware of Postpaid as a product, both online and offline, the more acceptability of the product, the more usage of the product, becomes a natural outcome of the entire thing. That has led to the growth.
The other piece here is that as the portfolio has matured and the lenders have got comfortable with the way the portfolio performed, they have gone and upgraded the limits to people who had lower limits. Hence the overall limit, average limit per user has gone up by 30%-40%, resulting in the overall GMV also being increased. Number three, the piece here is that we've also seen the adoption of users, who are adopting it maybe only for one use case or two use case, now adopting for multiple use cases because the visibility of the product. Generally, now that you are sitting with almost 70, 80 lakh users, there is a network effect, if I may use the word, which is starting to play out. We will continue to see this growth happen.
May not be as much as we've seen last year because coming on a small base. Yeah, we don't see. We've not taken, if I may use the word, our partners have not taken any additional risk to go ahead and give more limits, et cetera, et cetera. It's just the overall network will become far more meaningfully positive for the users. To your other question about my comment. We've been maintaining this right from quarter one and quarter two when the, for the first time interest rate cycle started to move up.
Our belief has always been that the strength of pay tech model is not just be able to give the best quality portfolio to our partners on our platform, but also be able to give them the portfolio which is palatable to the risk appetite in a moving macro environment. Given the macro in the last maybe 12 months you've seen repo move at 2.5%. There is always an issue of unsecured credit in a higher interest rate scenario on a lag basis. We are very mindful and continue to work with our partners at how we should look at the change in macro and calibrate growth so that we do not have any slippages in the portfolio. In fact, we have demonstrated that we want to make our portfolio better.
In that backdrop, our belief here is that we would like to be a lot more watchful in quarter one and quarter two when we would see elevated interest rates. May not be more repo rate increase than we've seen thus far, but definitely elevated interest rates. How does the portfolio that we've originated in the last two quarters perform in the quarter one and quarter two of this year? If we see that the performance of portfolio is at par or better than what the lenders had anticipated, we will see far higher growth in H2 versus what we intend to do in H1.
It is not that we are going to go into very low growth, but if you were growing at 25% quarter on quarter, we would like to calibrate to maybe 15%-20% and make sure that the portfolio obligation is far, far more demonstrated through our distribution platform versus just a GMV dispersal. To your third question about the TAM. I think the TAM expands marginally because the kind of partners we bring on the platform are all very, very large NBFCs. As you know that our intention is to bring in banks and large NBFCs, typically these are double A, triple A NBFCs, and we don't see much material difference in the risk appetite. What we definitely see here is that the intention of partner A versus partner B in expanding in certain geographies tends to be a bit higher.
We get maybe couple of percentages point higher upside in terms of the opportunity that we were not able to leverage with our existing partners. That's the only upside. More important to us it is, it provides us a nice runway over the next six to nine months as the book matures with new partners on their comfort in going with us, which typically is the area that we can continue to focus in this year.
Appreciate it. Thank you.
Thanks, Rahul.
Thanks, Rahul. Next in queue is Piran Engineer from CLSA. Piran, line's unmuted now.
Yeah. Hi, thanks. Most of my questions have been answered, but just to follow up on the Soundbox thing. Bhavesh, you were saying that the potential size or the overall pool would be about 13, 14 million merchants and the sort of cut-off limit is 25 to 30 transactions per month on your QR code. Is that fair?
Yeah. Not on my QR code. Yeah, we have data. We generally believe that if you are not a Soundbox merchant and you are a QR merchant, typically you will have two QRs. If you are doing let's say 25, 30 transactions with me, you may be doing similar or marginally lower transactions with somebody else.
Okay. Fair enough. That's like one transaction a day. Why will a customer need a Soundbox when he's, like, doing one transaction a day?
Yeah.
The entire idea of Soundbox was to provide convenience when you've got, you know, multiple customers at your shop, everyone's paying you at the same time. You know, that just gives you the ease of handling overall transaction. One transaction per day.
Piran, it ends up being two transactions in a day, but that is a, that is not a point. We have seen that doesn't mean that everybody who takes a Soundbox is taking it only on one transaction. We have seen that point in time becomes a pitch point to start engaging. These merchants, when I'm talking about INR 50 lakh-INR 60 lakh merchants available who do more than 25-30 transactions a month with us, they become eligible. We are able to convert about 1 million of these merchants in a quarter, not all the INR 60 lakh merchants in a quarter. This is an eligible list, and obviously there's a funnel that the people who are doing 100 transactions or 150 transactions a quarter find it meaningful.
The other piece it is, it is also a very well-demonstrated fraud instrument, right. If you look at a guy who's selling, let's say, ice creams, they also have a Soundbox. It is not about the number of transactions, it is one in a day or two in a day. They do get, unfortunately, hit by frauds with spoof app, etcetera, is in a research that we've seen. If people are able to show them wrong messages on a static screen, on a spoof app and kind of not pay them, and they have no way to understand that this money is coming to their bank account or not. By paying INR 100 of rental, they're able to protect themselves also from fraud, not just that they have a more convenient way to reconcile.
It's a more of a market dynamic, and hence it makes us believe that when we look at the funnel, we have a large funnel which keeps getting converted into every month. If I was to say for the month of April, we have seen that demonstration again happen, that we were able to deploy the same number or marginally higher number than what we did in March.
Okay. Fair enough. No, I understand the run rate is going strong. I'm just thinking about the TAM, but that's okay. Secondly, again, just on the TAM on, you know, on the lending business. Now, we have INR 80 lakh-90 lakh BNPL guys and j ust in terms of, say, PL and merchant loans, you know, in terms of number of customers, how, y ou know, what could be the TAM say three years down the line? Also, you know, in the lending business, how often do commercials between you and the lenders get revised, be it for cost of funds going up and down or be it for ECL being better or worse than expected? Like, does it get revised every three months, annually? How does that work?
Yeah. Piran, we have a six-month revision of commercials that we do with our partners. We've thus far, because the repo has gone up significantly, there has been transmission of both repo and some commercial changes we do. Yeah, simple answer is that we contractually review commercials every six months and that is what we have seen. It can be for the better, very rarely it's for the worse. Obviously, during the repo increase, we had to calibrate interest rate both what the lenders charge the users and obviously the ROA expectation they have. To the TAM question that you had, the PL TAM is linked to what we have seen thus far that to the BNPL growth.
60%-ish or 55% of our disbursements that our partners do is happening to existing BNPL customers. That funnel is only becoming robust on a month-to-month basis as the book is maturing. If we were to be sitting on, let's say, INR 40 lakh or INR 50 lakh active users of BNPL in a quarter, we do find that almost 1 million or 1.5 million users of that funnel are eligible for PL. Then they 50,000-60,000 of them keep taking PL from that funnel. The more and more we are able to grow our Paytm Postpaid business, the downstream impact is on PL, which continuously keeps growing, and that is being demonstrated. There is less focus on straight through PL coming into the lender's book.
There is more focus on it, getting upgraded through either a merchant loan or a BNPL loan or an existing personal loan in PL. I don't think we have at all a problem on the TAM of PL. It is extremely small as a number today, and it is linked to the entire postpaid business downstream. On the merchant loan side, the TAM is linked to the devices. We have so far, if I, if my memory stands right, we have so far given about 600,000, 500,000-600,000 merchants over the last 2.5 years merchant credit. We have 60 odd lakh merchants who have devices.
I think I've spoken about this math in the past, that typically it takes six months for a device merchant to become eligible for credit in the location that we are in. If you look at this number, Typically, the base of merchants who can be eligible is about 40-ish lakh, 35-ish lakh, of which five have already got the credit. Remaining base is 30 lakhs, of which half of them are whitelisted by our partners to take credit. We are able to disburse about 70,000-80,000 merchants, maybe more closer to 90,000 merchants every month. Again, it is linked to the devices story. More devices we are able to deploy, more merchants get eligible for credit. That TAM is obviously very, very high for us.
Okay. No, no, that explains it. Thank you, and all the best.
Thanks, Piraniran.
Thanks, Piran. Next in queue is Vijit Jain from Citi. Vijit, you can ask a question, please.
I think, Keshav, we can add another person because Vijit seems to be having the in the room please.
Let's come back to Vijit later if we need to.
Next in queue is Himanshu from [audio distortion]. Himanshu from Edelweiss [audio distortion]
Yeah. Hi, sir. Thanks for the opportunity. Just, most of the questions has been answered. Just two small quick questions. One is when you talked about this, the growth drivers of the launch of the new tech platform, what is the cost of upgradation to this and how much you have accounted in the quarter? Secondly, how much and how we are going to see this in the coming quarters as well? How it is going to spread this cost in the coming quarters as well. Second part to this question is it, just need a clarity, is this cost is part of your indirect expenses?
Sure. Manshu, if I could just clarify. The cost of building the new platform was in people cost.
Mm-hmm.
That cost, we're not incurring anymore. Obviously, those people are now deployed to other projects like which I mentioned. The cost of operating the platform going forward is significantly less than the cost of our existing platform at scale. There are two differences that we get, which is that over the last year, we were running effectively two platforms because not all of the transactions were migrated from the old platform to the new platform. There are some efficiency improvements that we get as a result of now running on a single platform. That impact you will see in software cloud expenses. Like I said, the running cost of the new platform will be lower than the running cost of the previous platform.
Sure, sir. Thanks for the clarification. My another question is this wallet interoperability guidelines. Just trying to understand how this is going to increase the use case for the revenue on the payment size, payment business. Since you mentioned that whatever come it will it is at least two quarters away. If you can just give us the how, what is the scope and the opportunity here?
Well, what it means is that Paytm full KYC wallet customers will be able to make payment to other places, and the QR provider will make payment to us. What is the market? If you assume that Paytm is accepted at X% of the market, the pro rata X potentially, et cetera, could be the market opportunity. To be honest about it, we don't put this kind of mathematics because the increased acceptance increases the customer's traction, et cetera. We have not done this math, Manshu. We are two quarters away, so we are not doing this math or we are not looking to see. We will see it as it comes.
Sure, sir. Thanks.
Thank you.
Thank you. Next in queue is Mr. Akshay Jain from JM Financial.
Hi sir, thank you for the opportunity. I have a question regarding the recent news reports that RBI has cautioned the banks to go slow on the unsecured lending side. What are your thoughts on the same and any potential impact on Paytm? Further, have you received any communication from RBI or your lending partners regarding this thing? That's my only question.
Yes, Akshay. We've also read the report. I'm sure that from time to time, the regulator will guide the industry, especially banks and non-banks, to be mindful of the changing macro. That's the reason, we have preempted it always, that the moment the interest rate environment, inflation environment or the macro changes, there has to be far more conservatism built into our business models, and we should be focused on portfolio versus growth. Having said that, we have not got any confirmation or any kind of guidance from our partners that they are worried about the kind of portfolio we are originating. We continue to originate the portfolio as per the risk appetite.
As I said in my previous conversation, we are mindful far more proactively of the changing macro and the overall growth of unsecured and the overall portfolio. Hence we continue to calibrate the growth versus the portfolio mix that we would like to give our partners too. We have no guidance from our partners. Our partners feel very comfortable with the portfolio we originate with them.
Okay. Thank you.
Thank you, Akshay.
Thank you, Akshay. Next in queue, again, Mr. Vijit Jain from Citi. Vijit, unmute please.
Let's go to Manish, if you don't mind.
Sure.
Next question.
Hello. Can you hear me?
Yeah, Vijit, we can now. Thanks.
Yeah. Sorry. Sorry about that. Yeah, my question is, you've launched the RuPay credit card with HDFC Bank, which you announced in the presentation. Now, RuPay credit cards are allowed on UPI, right? Is that the key pitch here? Because Mastercard and Visa are currently not allowed on UPI. How does this play with, you know, postpaid, which is also credit on UPI?
Vijit, it is not launched, and neither it is launched with HDFC, so it is not there, number one. Number two, our pitch is that RuPay wants to promote and we want to promote RuPay, so it is the pitch. As far as the usage is concerned, the number of users it will reach out to will decide what incremental it changes or not.
Okay, great. Sorry. I think I saw that on the presentation itself.
We didn't say it's launched. We said it's coming soon. We have not launched.
I see.
Vijit, we are about to.
my-
We'll launch soon. It is a RuPay credit card. We have not said which bank partner. Of course, RuPay credit cards will be used in every manner that a RuPay credit card can be used, including RuPay credit on UPI.
Got it. My second question is, just on the payment net margin expansion quarter-over-quarter. Now, even excluding UPI incentive payments, you have about 60-70 basis improvement.
Obviously the BNPL disbursements this quarter are also up 30% QOQ. Net-net, is that one of the key drivers of that expansion there?
Well, it is one of the drivers, but other drivers also. Yeah. Both.
In BNPL obviously we have MDR revenue. We also have costs. There is some amount of increase in subscription revenue, which I think Bhavik had asked about earlier. There is improvement Q-on-Q on what we call payment processing margin, just result of our efficiency both on the revenue side as well as on the cost side.
Got it.
Again, Vijit, I would be slightly careful about looking at these numbers this granularly on a quarter-on-quarter basis. On a year-on-year basis, and long-term basis, we have already given the guidance because there are a number of factors that go in quarter on quarter, including usage of different instruments by customers and so on.
Understood. The last question, Madhur. Paytm Postpaid disbursement volume per quarter is about 12 million, right? Any broad indication of how many P2M transactions are happening using Paytm Postpaid as payment instrument?
Bhavesh?
We actually don't track it because it's not a metric that is very relevant. We look at use cases. I think in the last time when we've seen this was about six or seven transactions that typical Paytm Postpaid user does in a month.
Okay. Got it. Thanks.
Thanks, Vijit.
Those are all questions.
Now for the last question of the session, we'll take it from Mr. Manish Shukla from Axis.
Thank you. What were the timelines for achieving free cash flow breakeven for you?
I think, Manish, if you have not given a specific quarter, we have said that we are very close to achieving cash flow profitability. Just to be clear, the way we define cash flow profitability is EBITDA plus interest income less CapEx. There is also in parallel improvements in working capital that we are doing. If you notice over the last one year, due to improvements in working capital, and if you adjust for the money that we spend on buyback, we over the last year have actually added to our cash, if you look at the March 31, 2022 number and the March 31, 2023 number. We have also in parallel improved working capital.
When we are talking about free cash flow, we're saying EBITDA plus interest income less CapEx, and we are very close to being able to do that. We only need some improvement in EBITDA going forward, not very significant improvements in EBITDA to be able to get to free cash flow breakeven.
Once you get there, what would be the end use of the cash on books?
We will discuss that with our board and we will communicate sort of what is what that is. At the moment we do feel like we have a lot more cash than we have immediate use for. One of the things that we have done in the past is discuss with our board and return some of that in the form of buyback. That would be one option on the table, and there would be other options with respect to any investment areas that we feel very strongly about. We will at the appropriate time, once we are starting to add to cash flow, discuss all of that with the board and communicate that back to this, the market.
Sure. Thank you. Those are all questions.
Thank you, Manish.
Thank you, Manish. With that, we come to an end of the Q&A session. A reminder that recording of this call and a transcript will be put on the company website. Thank you all for joining our earnings call.
Thank you, everyone. Thank you.
Thank you for very detailed questions, and we really appreciate your time and attention.
Yeah. Thank you. Look forward.