One97 communication Ltd (PAYTM) Q2 FY24 Earnings Concall Transcript

One97 communication Ltd  ( NSE: PAYTM) Q2 2024 Earnings Concall dated Oct. 21, 2023

Corporate Participants:

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Madhur Deora — President and Group Chief Financial Officer

Bhavesh Gupta — President and Chief Operating Officer

Analysts:

Sachin Salgaonkar — Bank of America — Analyst

Vijit Jain — Citi — Analyst

Suresh Ganapathy — Macquarie — Analyst

Pranav Gundlapalle — Bernstein — Analyst

Pranav Tendulkar — Rare Enterprises — Analyst

Jayant Kharote — Jefferies — Analyst

Nitin Aggarwal — Motilal Oswal — Analyst

Rahul Jain — Dolat Capital — Analyst

Manish Shukla — Axis — Analyst

Jigar Valia — OHM Group — Analyst

Rahul Bhangadia — Lucky Securities — Analyst

Pallavi Deshpande — Sameeksha Capital — Analyst

Unidentified Participant — — Analyst

Presentation:

Unidentified Speaker —

[Starts Abruptly] Thank you, again. From Paytm management, we have with us today Mr. Vijay Shekhar Sharma, Founder and CEO; Mr. Madhur Deora, President and Group CFO; Mr. Bhavesh Gupta, President and Chief Operating Officer; and Mr. Anuj Mittal, Senior 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, 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 earning call is scheduled for 60 minutes. It will have a — 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 have — if you seek to ask the question. We will unmute your line and take questions in the respective sequence and within schedule time. Please ensure your name is visible, as your first name last name, followed by your company name for us to be able to identify you. The presentation, a replay of this earning, and a transcript will be made available on the Company website subsequently.

With this, I would like to request Mr. Vijay Shekhar Sharma to kindly initiate the call.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Namaskar. Good morning, everyone. And today’s earning call, we three, me, Madhur and Bhavesh are taking together.

[Foreign Speech]

I’m very happy to see the kind of innovation we’ve done in last quarter. You must have seen the amount of attention we put to the merchant ecosystem in India and make every nook and corner of India digital-enabled and help us achieve incredible financial inclusion, that is expectation of our government regulator and everyone out there.

With focus on operational risk and compliance and innovations that are exemplary in the market, we’ve had a great momentum in last quarter. You’ve seen our results. We’ve had a festive season, unlike last quarter — last year, which was in this quarter is coming in the next quarter, so Q-o-Q, we would see those numbers looking more mappable in the next quarter. I’m very happy to see the kind of attention we’re putting on growth and kind of innovations-led growth, kind of revenue-led growth, platform scale, and I’m very happy to see that our teams have a great momentum out there.

With me today, Madhur will give you more insights and Bhavesh will talk about more businesses. And I want to hand over to Madhur for detailed conversation. We look forward to answer the questions as many more beyond 60 minutes. But as we know, we would — we are here to answer — take questions and answers any which ways, 365 days out there. Thank you so much.

Madhur Deora — President and Group Chief Financial Officer

Thank you, Vijay. Good morning, everyone. It’s my honor to present the financials for quarter ending September 2023. Our revenue growth — our revenue this quarter was INR2,500 crores, so annualizes to more than INR10,000 crores is an important milestone for the Company.

We also continue to improve our EBITDA. This quarter we did EBITDA of INR153 crores, which is about 6% of revenue. Just to remind everyone, this does not include any UPI incentive money that we would get for this quarter later in the year, and this is a significant improvement of INR319 crores year-on-year. So continued focus on profitability, as we have talked about previously.

Our revenue growth year-on-year was 32%. Like Vijay mentioned earlier, some of the festive season sales, particularly online sales this year will happen in Q3 or are happening in Q3, whereas some of this had happened in Q2 last year, purely due to the shift in timing of Diwali this year versus last year. Our contribution margin has grown by 69% year-on-year. We’re very proud of this improvement in unit economics that we keep delivering, and we are now at INR1,426 crores.

We have talked about operating leverage in the past. If you notice our indirect expenses this quarter, other than increase in sales employees has been very muted. So we have a lot of controls on all of our other indirect costs, such as people costs, marketing costs, tech and all the other things, which go into other indirect expenses. While we’ll continue to invest in marketing, sales and select other areas, we believe that this discipline is really going to pay off in terms of growth in operating leverage and growth in EBITDA over time.

Can we go to the next slide, please? This is our performance on the Payments business. Payments business, our average monthly transacting users has grown by 19% year-on-year to 9.5 crore monthly transacting users. So we’re seeing an uptick in this number compared to last quarter.

Our merchant subscription we’re very proud of has gone up 91% year-on-year. If you’d notice in the last quarter, we added more than 13 lakh merchants, which is higher than the run rate that we were enjoying previously. So we’re seeing a definite increase in adoption, the pace of adoption of our devices. I think part of this has to do with the network that we have created and the sort of just making this device standard for the merchants and also all the innovation that we are doing such as Pocket Soundbox, Card Soundbox and Music Soundbox that Vijay talked about and that you would have seen on our video.

Net payment margin is up 60% year-on-year. We continue to deliver more payments profitability. This quarter alone, we did INR700 crores of net payment margin. And this is at the high end of our guidance of 7 bps o 9 bps [Phonetic]. This is despite the fact that as I mentioned earlier, we don’t have UPI incentives in this quarter. And our subscription revenue continues to grow steadily, as the scale of the devices grow — device — the deployment grows.

Can we go to the next page, please? I’ll turn over to Bhavesh to talk about lending.

Bhavesh Gupta — President and Chief Operating Officer

Yeah, hi. Thank you, Madhur. So lending business continues to see a decent momentum. As we’ve been mentioning over the last three quarters, we have muted, in consultation with our lending partners, growth of our personal loan business because we much earlier than what generally the market had started to see maybe last quarter, we started to see a couple of quarters back that there were some early signs of the portfolio, which could not be built in a manner that we would like to build with our partners. So that — other than PL, our postpaid business and merchant loan business continues to see very, very healthy growth. And PL business, we’ve obviously slowed down ourselves.

In spite of that part, Q-on-Q, we’ve still had a decent growth and Y-on-Y, as you can see, we’ve grown to 122%. We’ve ended the quarter at INR16,211 crores. This results in an annual run rate of more than US$8 billion of run rate basis and we still have H1 ahead of us and the festive season. And we do see that in the next coming quarters, we’ll see a much better momentum of the loan business, including the personal loan business.

I’m very happy to inform, true to our focus of how we would like to build the portfolio with our partners, we continue to see a much better portfolio performance what — than the portfolio performance we saw, let’s say, last quarter, the quarter before that. The entry rates or the bounce rates, as we call them for our postpaid business have further come down and now are in the range of 9.5% to 10.75%. This is a reduction of almost 50 basis point over the last couple of quarters. Our ECL rates on this business continue to remain range bound between 0.65% and 0.85%. I do believe that the entry rates coming down. Maybe in a longer arch, we could see the ECL rates also to drop below 0.65% to 0.85% range bound.

The personal loan, while the ECLs have remained stable, because we did lot of proactive engagement and portfolio action with our partners, our entry rates, the check bounce rates have come down. Now, all — again [Technical Issues] 50 basis point from — to — 10.25% to 11.25% range. What it suggests is that again, in the long arch, if you see it couple of quarters ahead, we could see more positive development on how the ECLs will play out in the personal loan business.

The important part here is, in spite of a very, very good scale up that we’ve done on the merchant loan business on the back of much higher deepening of our devices strategy in the merchants, our merchant loan portfolio has become even better. Our ECLs here have again dropped down by about 50 basis point and now we’re operating at — in the range of 4.75% to 5.25%. So on overall basis, the loan distribution and collections business for us continues to perform in a manner of expectation that we’ve had.

And I’m also happy to inform that, like we said in the past, that we’ll continue to add new lending partners. In this quarter, we have added Tata Capital as another top-notch name, AAA NBFC, as a lending partner. Last quarter, as you know we made an announcement that we added Shriram Finance. So we have now have two more incremental partners taking the overall partners to nine [Indecipherable] portfolio.

I’ll hand it over back to Madhur to the next presentation.

Madhur Deora — President and Group Chief Financial Officer

Thank you, Bhavesh. So this is about our commerce and cloud business. On our cloud business, now this cloud business is more than majority or it is majority co-branded credit cards and advertising. As we’ve been talking about in the previous quarters that these are the two big growth areas in this business. Both those businesses continue to do well.

Our credit card number now is 8.7 lakhs activated credit cards, as of September 2023. The same number was actually 3 lakhs a year ago. So we have added roughly 6 lakhs cards in the last year, and we are seeing continued traction with our partners HDFC and SBI.

As we have mentioned before Pi cloud business had a strong quarter last year in this quarter and our telecom VAS offerings, which is the marketing cloud businesses have seen decline year-on-year, as a result of which our overall cloud revenues is only 3% year-on-year growth, but we think that this is a bit of an aberration. We think this is a bit of an aberration given the points mentioned here and from here the business should continue to grow strongly.

On the commerce side, we have seen strong growth, where our GMV was — is now INR2,900 crores roughly, which is up 39% year-on-year and our take rates have also remained in the guided range of 5% to 6%. As a result, we have got 31% year-on-year revenue to growth — to report. And in each of our businesses, travel, entertainment, and deals and gift voucher, we are seeing continued growth going forward.

Can we go to the next slide, please? And finally, our key focus areas. As we have mentioned before, and this should come as no surprise. We are extremely bullish on the mobile acceptance. We are extremely bullish on the mobile payment acceptance in the country, especially due to the new innovative products that we are offering, which I mentioned on the right, and they have a tremendous product market fit. And each of them are solving a specific problem that merchants have, either by growing TAM or growing stickiness or helping them with card acceptance.

Credit and financial services, with all the work that we have done so far, INR16,000 crores of disbursals, we still think that we are heavily, heavily under penetrated. Personal loans, as you have seen, is only about 1% of our customers. Merchant loan is about 6% of our merchants. So there’s a huge runway ahead for each of our products.

Farming of online merchants, we — our online merchants team has done a tremendous job in Paytm Payment Services to do more and more with existing merchants. So this has got to do with having more payment instruments being accepted through us, better success rates for our merchants, which is really helping us deepen our partnerships and grow our share of volumes with merchants.

And finally, going forward, you’ll probably hear us talk more about enabling commerce, given that now payments and lending business have become such contributors, we’re very bullish on each of these businesses, which is travel ticketing, entertainment, deals, gift vouchers, advertising and so on. So you’ll hear us talk more about how this third piece of the business of Paytm is shaping up.

With that, I’ll hand back to the moderator, and we will take all the questions you have.

Questions and Answers:

Unidentified Speaker —

Thank you. We will now proceed with — 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 raised hands. First question is from the line of Sachin Salgaonkar.

Sachin Salgaonkar — Bank of America — Analyst

Hi, thank you for the opportunity. I have three questions. First question, you know, both to Madhur and Bhavesh, you know, I wanted to understand, you know, on the personal loan, but, you know, I mean, you guys consciously sort of, you know, reduced the growth in terms of portfolio because you’re seeing the early signs out there. Question out there is what is now changing that, you know, you guys are getting comfortable that the growth should sort of pick up in the future?

Bhavesh Gupta — President and Chief Operating Officer

Yeah. Thank you, Sachin, for the question. You rightly said, we saw some early trends about three quarters back when I think nobody in the market was kind of suggesting that we could see some bit of stress coming in the unsecured credit. We haven’t seen any portfolio deterioration, as you can see, over the last three quarters. So we are pretty comfortable with regards to portfolio that we’ve been able to originate with our partners.

The comfort is largely coming from two levels. One part it [Phonetic] is that we now have a very, very large user base, who’s taken PL over the last two and a half years, and they have matured the portfolio in a fairly large quantity, if I may use the word. We have more than INR300 crores to INR400 crores of portfolio, which gets matured every month, which is available for further upsell through our partners. So that’s one bucket, which is growing quarter-on-quarter. And in the next two quarters, we will see the renewal opportunity available to fully mature loans will be much higher than what you’ve seen in the last two quarters.

The other part it is that we do see that overall expansion of our lending partner base also brings in more insights on how the lenders look at this business, both in terms of risk and as well as the newer geographies and pin codes that they would like to open. So you will see some level of upside. We’re not expecting personal loans to start growing the way they used to grow, let’s say, a year back, but the muted approach to PL will no more be muted, and we’ll see some growth start to happen, maybe in early double digits, but not at the level that we’ve been seeing last year.

Sachin Salgaonkar — Bank of America — Analyst

Got it. Thank you, Bhavesh. Very clear. Second question is more on the partners. You know, just wanted to double confirm that, you know, is the partnership with Shriram up and running and we should see contribution coming from that going ahead?

Madhur Deora — President and Group Chief Financial Officer

Yeah. So it’s currently what we call it internally in the pilot phase. So early November is when we will start seeing contribution full scale coming in from merchant credit business that they will start to go live with.

Sachin Salgaonkar — Bank of America — Analyst

Got it. And last call, you guys had mentioned that you were in talks with two to three new partners in around six of [Phonetic] months. We saw announcement of one. Just wanted to check, you know, are we on track in terms of announcing more partners in the next coming months?

Bhavesh Gupta — President and Chief Operating Officer

Yeah. So I just mentioned in my — in the credit part, we have just gone live with Tata Capital on a pilot basis. And again, we’ll scale up with them from next month onwards. So that’s the second partner we’ve gone live after Shriram. And in the next two quarters, we at least expect to go live with three more partners, minimum one or two being banks out of the three partners.

Sachin Salgaonkar — Bank of America — Analyst

Got it. And my last question, you know, just wanted to understand, you know, the competition outlook in the market because at one level, we are hearing new players are looking to enter into Soundbox. Google, for example, is also, you know, looking to come into merchant loans. And more so, you know, how do you guys look at something like with Jio Financial Services? Is it more as the competition on the Soundbox front, for example, or, you know, is there a room to potentially partner, as a lending partner?

Bhavesh Gupta — President and Chief Operating Officer

So I think there are multiple aspects of a question. So let me take one by one. Any new fintech, who tries to get in, be it the names that you mentioned or anybody else, in our opinion, is good for making this entire business more robust and strong, as we saw in mobile payments, maybe about seven years to eight years back. When Paytm got into the mobile payment world, we were maybe arguably the one or two players in the market. But today, it is the way to go as far as payments is concerned.

Our belief is in digital credit, what we started off three years back, more and more people endorsing it will make this product and partnership with banks as mainstream, which will help the overall economy and the financial inclusion agenda that I think all of us should be focused on in building India, as a stronger economy. So it’s a good sign, both regulatorily and otherwise. And in my opinion, that is — this is not to be seen as competition, but expansion in the market.

To the other question about some of the other players, what would they do, including Jio, I think very — very less is known in our mind currently of what these players will do or not do. Our opinion is that we are a fairly decently large sized platform, who can originate good quality credit for more and more partners. And any new partner, who has a balance sheet, who comes into the market, and they do believe that we can add value to building a good portfolio with them, we would obviously look to partner with them. But as I said, that is too early for us to comment about it. But, yes, we see the — see any new partner with a balance sheet coming in as a collaborator versus a competitor.

With regards to your third question around Google or anybody else, who’s getting into this space, as I said, that is good. Anybody who comes in just endorses the belief that what we started off as a business model is now been adopted by larger companies, and that just expands the market and makes the business a lot more what I can say robust and legit, both regulatory and otherwise. So, it’s a welcome move.

Sachin Salgaonkar — Bank of America — Analyst

Right. Thank you and all the best.

Bhavesh Gupta — President and Chief Operating Officer

Thank you.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Thank you.

Unidentified Speaker —

Thank you. Next question is from Vijit Jain of Citi.

Vijit Jain — Citi — Analyst

Yeah. Hi. Thank you. Hello, can you hear me?

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Yes. We can hear you, Vijit.

Vijit Jain — Citi — Analyst

Yeah. Hi. Sir, my question is just staying on the devices a little bit. So clearly, you’re getting more aggressive in driving device signups and related to that, you know, your merchant loans are moving in the right direction, ECLs have gone down, loan growth is picking up. So, I’m just wondering on two things. One, is the devices market much larger than you thought even a year back? And how are you thinking about the devices market now versus maybe a year back? And if you can help me with the sense of what your average device per merchant, who actually uses a device is currently?

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

So, Vijit, you must have seen the kind of innovation. We especially played out a video here today to explain how we have innovated on devices. I think our out execution on not just innovation, but distribution will play out very, very scalably in our favor. We’ve seen many players coming in the market, not able to even create a dent on the merchant’s trust and confidence on our devices. In fact, we’ve had net churn join from those [Indecipherable] and especially when they make it free, etc., that also makes it in our favor because this is not the cost that a merchant can’t pay. He wants more assured, immediate, and superior product on the table. So, it’s not a price-sensitive product. It is a value and skill-sensitive product.

And there we have an edge number of years, including the stack of hardware, software, and service, all combined looked at by one company. Mostly people go in China, stamp it, and then bring it as if they’re building soundbox or any other device in the country. We’ve not only innovated on the sound, we’ve also innovated on card, meaning we’ve not innovated on QR, but also on card, and we have furthermore devices and plans and roadmap further ahead.

So in my opinion, till the time period, we are leading from the front, we are leading in front — innovation, and we are leading in distribution. I wonder that anybody’s market. In fact, everybody else coming in the market expands the market. They are able to serve to a new nuance, very far away or a vertical — particular cohort of a customer, whom we would have not reached.

Out here, we are completely committed to dominate acquiring side business in this country. It means, we will continue to increase our manpower on distribution. We will continue to out-innovate on execution of the devices. Here, the software and hardware combination works in our favor and the monetization of what we are doing works in dramatic in our favor, like you said, credit and so on.

So once a merchant has an incredible product for payment and value-added services like credit that you suggested he’s got from our partners, it becomes a lethal, incredible combination of scale. Like I said it, I’m going to repeat it. Acquiring payments for India is what Paytm’s mission when we started was, is, and will always be, and we’ll dominate in that.

Vijit Jain — Citi — Analyst

Great. Thanks, Vijay. Vijay, my second question is, just if I look at since the RBI restrictions were imposed, right, you’ve added maybe 20 million monthly transacting users in the four quarters, five quarters since. So once this restriction lifts, are you looking at trying to, should we expect a rise in the number of e-KYC customers that you would like to then have? And is that restriction kind of impeding you from growing in the personal loan side, for example, because you can’t e-KYC any new customers in the last four quarters to five quarters?

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

One of the most important thing that you should know is, Paytm Payment Bank and Paytm, which is OCL, as we know, are two very, very different companies, not just at arm’s length, I call it farm’s length now. And the approach here is of a completely clear understanding that whatever Paytm Bank does is for its good and for their business plan. What Paytm does is what business that we are in, which is acquiring consumers for various consumer payment products and then serving the merchant and value adds. Here, we have permission. As you know, UPI is the way to acquire the customer, and we’ve been able to fundamentally do a good job of it.

In credit, when you are talking about, I also sit on a selection bias of customer, where we believe that long, old customer on our platform is better suited to get credit disbursed from our partner versus a new incremental consumer, who would have a very small sort of a footprint on our platform. And I bring it in various conversations that, imagine, we are short of some million for 100 million and for a calculation sake, I’ll take, let’s say, if we have 100 million monthly users, you’re talking about penetration percentages, which is 1% today. And I mean, in a peak movement, if we ever would have crossed 20%, 25%, 30% [Phonetic], let’s say, I mean, think about it, that what is a good tag rate of a product, 10%, 20% or whatever that you want to take it, there’s a huge upside and that puts us also us into a dramatic distribution of credits, volume size, dollar value, rupee value here.

For our credit business to grow, we actually do not need incremental consumers on our platforms. It is rather better for us to farm the current customer and penetrate on them instead of acquiring new consumers. In fact, for the current customers expected penetration, you know, what different credit franchisee in banking and in non-banking sector that you see, this is incredible good opportunity for us to enable small credit to the customer base that we have, and that is the beauty that we are chasing. In other words, I’m not only going to say that it is what does not matter, I’m actually going to say as a strategy, we may not seek large number of consumers on our platform by definition.

Bhavesh Gupta — President and Chief Operating Officer

Vijit, if I may — if I may just add to that.

Vijit Jain — Citi — Analyst

Yeah.

Bhavesh Gupta — President and Chief Operating Officer

When the RBI embargo came, we had said that this was — this, we don’t expect it to have any significant impact in the business. I think the reverse is also true, that when once the embargo is lifted, and if we’re signing up more customers for wallet or bank account and so on, which as Vijay said is sort of bank’s own strategy and roadmap and investment and so on.

We don’t expect that to have sort of any direct impact on either Paytm MTUs or Paytm lending business, because there’s no such dependence per se. So, for example, you mentioned a specific point around KYC. So bank doesn’t share KYC with lending partners. And when somebody takes a loan on Paytm app, our lending partner does the KYC for the customer in that role.

Vijit Jain — Citi — Analyst

Got it. Got it. Yeah, sure. My last question here, just on the payment gateway business, when you do business with online merchants, third — merchants outside of the Paytm app, is the — are you still gaining market share there? And as, you know, you keep adding these new Paytm instruments like postpaid, etc., is that kind of helping you in kind of getting greater market share on the payment gateway business? Is that how you look at it? Is that the proposition? And how do you see market share evolving in that segment?

Bhavesh Gupta — President and Chief Operating Officer

So, Vijit, the reality of the commerce business or the third-party business, as you call it, is that while there are lots and lots and lots of companies, who are in the online space, but the materially contributing GMV companies are maybe, let’s say, about 1,000 companies, who genuinely dominate 80% to 90% of current volumes that are there. Now, the idea here is what the companies require and what Paytm’s offer, it’s a technology play, right? And that’s the reason we’ve been more often than not over anybody else.

But we’re able to offer them the best payment gateway technology because this technology was built to handle the Paytm app traffic, you know, like add money to wallet and managing a lot of commerce activities on the Paytm app. That’s where the technology got built and this technology is now available to our merchant partners, etc., who then consume the technology.

So I’ll just give you certain examples to give you some more clarity, products like allowing the merchants to use real-time monitoring of transactions, success rates, which funding source is going through, what price is going through, giving them SDK for UPI, giving them routers, which can allow them to route multiple transactions through [Phonetic] multiple complicated gateways without taking the technology bandwidth. And the latest one that we’ve done is an affordability stack that you can aggregate any kind of EMI of debit card, credit card, UPI linked credit limit, etc., just makes the entire proposition that is very dominant.

And I’m very, very glad to inform you, year-on-year basis, the online business has grown very, very handsomely and healthy and our net payment margin online business has grown. Just letting the — letting this notion that this is a very competitive space actually get defeated, that we’re actually moving in the right direction and getting more market share. There is no data available on market share. But in our opinion, we continue to be a very formidable player in this area, and we’re getting more and more inroads into merchants, where we may have had a lesser share of the e-commerce flows.

Vijit Jain — Citi — Analyst

Great. Thank you, Bhavesh. Those were my questions. Thank you.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Thank you, Vijit.

Unidentified Speaker —

Thank you. Next question is from Punit Bahlani from Macquarie.

Suresh Ganapathy — Macquarie — Analyst

Yeah. Hi, this is Suresh Ganapathy here. So just quickly a couple of questions. One is on ESOP cost. I’m looking at it, the number actually, you know, Madhur is higher. I mean, what I mean is that for the first two quarters, you have reported 7.6 billion [Phonetic]. And if I look at the full year, last year number was 14.5 billion [Phonetic]. So this number was supposed to go down in FY24. But if I look at FY — the first two quarters looks like it will land up ending FY24 at a number higher than FY23. What is happening here? Can you give us some clarity on that?

Madhur Deora — President and Group Chief Financial Officer

So — yeah. So we had actually said that starting August ’24, this number starts to go down. If you look at our December presentation that we had done in person, which we had then posted on the website, in the annexure, there is a slide on a static basis how does the ESOP cost evolve. But then we had also added commentary that this is subject to change, basis lapses of ESOPs, which we don’t control, because that is usually linked to employees leaving, and new ESOP grants that we do usually at the time of appraisals on new joiners.

So the actual numbers we had called out would be slightly different than that. Most likely slightly higher than that, but that was supposed to be a directional number. For the year, we expect ESOP costs to be similar than to last year. And then there’s a directional schedule, which for now you can use the December presentation from last year. And next quarter, we are going to share an updated ESOP schedule based on all the ESOPs granted until now.

Suresh Ganapathy — Macquarie — Analyst

Okay. Fine. And the — you know, on this personal loans, I know there’s a lot of debate. I just wanted to know how we should think about growth here because you know, this is the lowest Q-o-Q growth, both in value as well as volume perspective. Now the base is also getting tougher and bigger, right? I mean, you had — you have reported for the first half closer to 130%, 140% Y-o-Y growth in this business in value terms. With each passing quarter or year, this number will trend down, right, even if you add more partners? How we should look at the growth because on one hand, you’re talking about the fact that the penetration levels in MTU is very low, right, 1% or whatever in Soundbox merchant loans.

Bhavesh Gupta — President and Chief Operating Officer

Correct.

Suresh Ganapathy — Macquarie — Analyst

So are you confident about — not asking for a specific number, but doubling for the foreseeable future?

Bhavesh Gupta — President and Chief Operating Officer

Yeah. I think, Suresh, this is a great question. The answer will be broken in two parts. And I don’t want to give direction for the — for a number, as you rightly said. Personal loans for the future, let’s say, at least for the next couple of quarters, will remain muted. So if you were seeing, let’s say, 100% growth, 150% growth in the previous years, we will not see that kind of growth. My sense is anything about 30% to 40% year-on-year growth, even on our base, is a decent growth that we can expect in personal loans.

Merchant loans will be growing much higher because we do see that as we are penetrating a lot more on Soundbox in the market, the eligible base of merchants, who have a Soundbox and has the GMV, which is meeting the risk criteria of our lending partners, that base continuously keeps growing on a lag of six months. So we are more bullish that we will see merchant loan growth in excess of 50% to 60%. So if I give a stable case situation, I think anything between 40% to 50% on a blended credit basis, over the next two years to three years, should be a growth that we should start seeing from here on — on the base that we sit on today.

Suresh Ganapathy — Macquarie — Analyst

Sir, just one last point, stressing on this, Bhavesh, because when you say your ECL losses are, of course, as I can see for the last four quarters and personal loans have remained stagnant.

Bhavesh Gupta — President and Chief Operating Officer

Yeah.

Suresh Ganapathy — Macquarie — Analyst

What makes you take this decision? I mean, are you looking at your customer profile and seeing over-leveraging kicking in, or you are worried about the bureau data not giving you good feelers? You know, because somewhere down the line, you have to experience to take this call, right?

Bhavesh Gupta — President and Chief Operating Officer

Yeah. [Foreign Speech]. So I think, Suresh the — we took this call, as I said, three quarters back in our commentary. If you go back into archives, you will see the three quarters back when nobody in the market was talking about this, we saw three data trends. Very clearly people, who were taking personal loans for the first time, we were seeing they getting into early delinquency much faster in the system, which at least in my experience of managing this business for many cycles is always an early sign.

The second thing we started to see was that early tenure, three month and six month tenure credit was seeing much higher leverage. So these people, we could see much higher entry rates and much lesser collection efficiency than what we were seeing earlier. So we first removed that bucket completely that we will not do anything, which is six months and below. We’ll only do 9 months to 30 month credit — kind of credit. That’s the reason, why our number of loans also went down. That was the second trend we saw.

And the third trend that we started to see was that in certain aspects of the segment, which was coming in, metro people, who had multiple credit cards, we could see again, the leverage becoming much higher, and they were taking more credit on EMI, etc., on themselves, and this was very visible in our exercise that we were doing with lending partners.

So a cumulation of this, we could see that this may become a bit of an issue, especially with repo being high, you know, the overall environment of macro being what it is, it is better to be conservative. And that’s the reason we cut down much earlier and hence we are seeing a stable portfolio with a lesser growth versus maybe we could have continued to grow and we’re going to see maybe 0.5% to 1% higher ECL, which we were not wanting to. So that was a good call in the hindsight. And we’ll continue to maintain such calls in the future for the rest of the portfolio.

Suresh Ganapathy — Macquarie — Analyst

Thanks. Thanks, Bhavesh, for your insights.

Bhavesh Gupta — President and Chief Operating Officer

Thank you, Suresh.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Thank you.

Unidentified Speaker —

Thank you. Next question is from Pranav Gundlapalle [Phonetic] of Bernstein.

Pranav Gundlapalle — Bernstein — Analyst

Hey, thanks. Thanks for the presentation. Just couple of questions. One on the postpaid product, particularly. Would be helpful to understand what’s the number of merchants that currently accept postpaid and what percentage of that would actually be paying an MDR for that, right? So that’s the first question.

Bhavesh Gupta — President and Chief Operating Officer

Yeah. So, Pranav, I think we report this number annually. Out of the 41 million merchants that we carry on and offline, almost more than 20 million people, merchants have signed up to accept postpaid. Not all of them, obviously, pay MDR. That number of merchants. who are paying MDR is closer — is less than about 1 million merchants, who are paying MDR.

But what’s important it is that we, as a part of the approach, do not necessarily even mandate in offline world — in online, every merchant pays MDR. But in offline world, we do not mandate MDR charging up till postpaid, as a percentage of what they do in a month on Paytm acceptance, crossing at least a double-digit number.

So if you’re operating and let’s say you’re doing a GMV of INR10,000 and the total postpaid GMV is, let’s say, INR1,000 or maybe INR800, most likely you will not be even charged as an offer in the system. Only when we believe we’re able to add material value in bringing in customers for off [Phonetic] with a credit product like postpaid loan into your shop, and we believe the merchant will appreciate value, we start to have a cascade of MDR being charged starting from 50 basis point going up to 1.25%.

Pranav Gundlapalle — Bernstein — Analyst

Understood. Very clear. The second question was on your employee base. I think you mentioned — I mean, you do disclose the number of sales employees that you have. If, you know, at some stage in distant future, you do start seeing a plateauing of the devices numbers, what percentage of the current employee base would you require to service that base of installed devices? In other words, of the 35,000 people, what would be the rough distribution between sales and servicing?

Bhavesh Gupta — President and Chief Operating Officer

I think it’s a good question. We have not disclosed the number, but I can give you at a range bound number because this number is something that we track very closely. Close to about 15% to 20% of our sales force currently is involved dedicatedly in what we call servicing, but servicing is not just going and servicing that device. So it’s also to do with merchandising, branding, managing what is called on the shop queries, and then obviously managing device servicing, etc.

I think the other question that you asked initially, if we see plateauing, fortunately, we do not see plateauing for the next three years in this business and there are multiple pieces that Vijay also earlier mentioned about it. Innovation that we’ve been able to make in products is just expanding the market. So as an example, if you look at Pocket Soundbox, now Pocket Soundbox is a completely new area of merchant onboarding.

Now we’ve seen this product now available in — at railway stations, at bus stations, people, who are kind of vending out in buses or railway station love to have a Pocket Soundbox. We are seeing auto rickshaw drivers, taxi drivers, you know, doorstep delivery guys managing Pocket Soundbox. Now, this market did not exist in the physical Soundbox or the product that we had earlier.

So I think we remain very confident that at least for the foreseeable future, minimum of two years to three years, incremental device deployment, and hence the consumption of the salesforce that we have today and expansion of it will both continue hand in hand, whereas the service infrastructure will also keep increasing. But at any given point in time, it will remain to about 20%, 25% of total people that we have on the ground.

Pranav Gundlapalle — Bernstein — Analyst

Understood. Very clear. Last question, if I may. I mean, maybe related to the first one. You know, there’s this whole talk about credit line on UPI and how that could take off. One of the questions there is how willing would merchants be to pay an MDR on these kinds of products. Would it be fair to say, even for a credit line on UPI, the penetration of merchants or the ratio of merchants, who would pay an MDR would be similar to what you’re seeing on postpaid, maybe out of million [Phonetic], out of 20 million to 30 million [Phonetic]?

Bhavesh Gupta — President and Chief Operating Officer

I think the answer has to be against split. We cannot or should not broad base this answer. So when you talk about credit on UPI, A, let me first articulate. It’s a fantastic opportunity for India to see bank account, credit lines getting acquiring side opportunity of disbursement, which has never happened. It is much, much, much larger as an opportunity versus credit card.

For, let’s say, almost 40 years in this country, only credit payment product available was a credit card before Paytm got in the Paytm Postpaid, which is mobile credit. So this is a fantastic innovation, and one we applaud NPCI and RBI to have been able to create this product for the Indian consumers. And I think it will revolutionize the way the entire credit disbursement business happens through mobile phones.

Now, having said that, there is a decently large set of business, where consumption of such credit will happen in the online space and enterprise space. So the way to see this piece here is not everybody carries a debit card in their pocket and not everybody has a credit card, right? But you definitely have a phone. So if you’re walking into an offline store or online store, you will be able to access UPI credit line or credit line in a bank account through UPI without any friction of a plastic in your hand. So it just opens up a very, very large opportunity in the market and that is an MDR ping opportunity.

Now, when you come down to a pure play, semi-organized or small businesses, yeah, it could take some time. Will they pay MDR or not pay MDR? And it will take some time for them to start to appreciate of what level of incremental consumers the merchant is seeing this product is bringing to the shop and then MDR will follow. So there will be a bit of a learning curve. I don’t want to say, will the merchants, who pay MDR currently on credit cards or on postpaid or any other product, will this be a similar number?

My sense is on a longer arch, you take a three year to four year view, you will have a very, very large number of people, who will appreciate accepting a product like a UPI credit line at their shops if they were to bring in incremental customers or if they were to bring in higher average sales price because of affordability through [Phonetic] credit coming to their shops. If they see value, they will pay MDR.

Pranav Gundlapalle — Bernstein — Analyst

Understood. Thanks a lot. It’s very helpful.

Unidentified Speaker —

Thank you, Pranav. A request to all the participants to restrict their questions to two per participant. If time permit, we’ll allow more question. Next question is from Pranav Tendulkar from Rare Enterprises.

Pranav Tendulkar — Rare Enterprises — Analyst

Hello. Can you hear me?

Unidentified Speaker —

Yes. Pranav, you are audible.

Pranav Tendulkar — Rare Enterprises — Analyst

Hi, thanks a lot. Thanks a lot. So I just had to ask two questions. One is that in the strategic presentation that you did in December 2022, you already had focused also on the business of brokerage. So any development there that is — you know, you can share?

And also, second is that I always feel that Paytm has — main reason for why people like use Paytm is like there is no friction, and that’s why I always feel that there is a huge opportunity, where there is a non-discretionary product like say ETF or any non-discretionary product, where people are just, you know, worried about the friction in the payment, there is a huge opportunity that Paytm can capture as compared to say other distributors etc. So any thought in that line.

And just third question that if Paytm UPI cards, like UPI credit cards work then, will it result in our payment amount going up and also MDR going up? That’s it. Thanks a lot.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

[Indecipherable] Madhur.

Madhur Deora — President and Group Chief Financial Officer

Thank you. Definitely you just pointed out, correct, two opportunities in wealth business. If — we definitely are putting our energy and resources on those directions, and we do believe that there is an opportunity to serve simple wealth product to larger audience and that is the direction that we continue to work. And like I’ve said, this is one of our future long-term bets. So we are there.

And you said it correctly, when credit cards, RuPay credit cards comes on QR code UPIs, the GMV or credit cards grows, and the single thing that is important to be noted here is that merchant has to accept that I will take MDR bearing instrument on UPI, which is why you would see at many places this is not enabled versus enabled and so on. So it will generate large GMV of credit card, potential revenue on UPI. Thank you.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Thank you.

Pranav Tendulkar — Rare Enterprises — Analyst

Right. Anything on UPI remittances that we are doing? That’s it. Thanks a lot.

Bhavesh Gupta — President and Chief Operating Officer

That’s in pilot stage. It’s — I think it will take some time for cross border on UPI to scale up. But we remain very bullish on that opportunity of innovation that NPCI has been promoting and we are very positive participants in the ecosystem to promote such products.

Pranav Tendulkar — Rare Enterprises — Analyst

Thanks. Thanks a lot.

Unidentified Speaker —

Thank you. Next question is from Jayant Kharote of Jefferies.

Jayant Kharote — Jefferies — Analyst

Thank you for the opportunity and congrats on a great set of numbers. First question would be on the PL thing. So if the smaller tenure PLs are sort of moving out, how has that affected the mix between say BNPL, new to PL, and repeat PL customers in this quarter versus last quarter? And how should we think about it going ahead? That’s first. And I’ll do a follow up after [Phonetic].

Bhavesh Gupta — President and Chief Operating Officer

Yeah. Thank you, Jayant. So it’s not impacted materially, it’s just that fact that if, let’s say, we were distributing 100 loans of personal loan, the mix generally was that about 40% of them were getting upgraded, who had an earlier postpaid loan line available to our partners. Another about 25% to, let’s say, 30% were existing personal loans, who had paid off their personal loan and they were eligible for next loan and the remaining were people, who were coming and taking first time personal loan through the Paytm app.

The only difference here is that the renewal base is increased and the postpaid upsell base is decreased by 5%. So that’s how the counterbalance has happened, and it is decreased because we took a proactive call with our lending partners three quarters back that we don’t want to distribute credit up to six month tenure because we found some early trends, which are not very comforting to us and our partners and hence that’s the slowdown that we did in that business. But in the future, if we do find that it gets to stability stage, we will re-look at that thing, but no other material change.

Jayant Kharote — Jefferies — Analyst

Great. The follow-up is actually the same thing, which you sort of answered in a way. But then if the BNPL to PL customer migration, let’s say, on one month 6,000 ticket size customer moving to a three month or six month product and, you know, calibrating the ticket size upward with different products, if that is sort of getting impacted because of the credit behavior of certain course [Phonetic], how does this play into a new product line up, right? We would have some products lined up in the next, say, 6 months to 12 months or 1 years to 2 years and then how does this play into that because then you are having the large white space between your entry level product and then what starts after, say, 1 lakh [Phonetic] onwards.

Bhavesh Gupta — President and Chief Operating Officer

I think in the credit business, Jayant, as you will also appreciate, we have to calibrate how we look at growth versus how we look at portfolio and the macro. We are very conscious of that. We are currently indexed on ensuring that we build great portfolio with calibrated growth especially on the unsecured PL business, as we mentioned, and we are indexed on growing a merchant credit, BNPL, etc., etc., much, much, much more aggressively. So from an overall mixed perspective, it may change a bit more towards merchant credit versus personal loans, but from profitability and everything else, there is no material change.

And I don’t think there is any strategic new development of new lending line, which gets impacted because of this because any new strategic business line that we intend to open, while we have not currently decided, which is the line that we want to open is contingent on how the overall portfolio plays out, right?

So if portfolio and the macro is not playing out and is not conducive, then obviously we calibrate appropriately, but at this point in time, we are not seeing anything. This is a very small part of the business of PL, couple of hundred crores that we have pruned down and still the growth has been decent and will continue to remain decent in the future.

Jayant Kharote — Jefferies — Analyst

Thank you, and congrats once again for the great set of numbers.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Thank you.

Bhavesh Gupta — President and Chief Operating Officer

Thank you.

Unidentified Speaker —

Thank you. Next question is from Nitin Aggarwal of Motilal Oswal.

Nitin Aggarwal — Motilal Oswal — Analyst

Hi. Congrats on a good quarter and thanks for the opportunity. So, a few questions, like one is on the net payment margin. We have seen an increase this quarter, which like it has been suggested is due to the rise in the mix of non-UPI instruments. So, how sustainable is this? And can we see therefore higher net payment margin on the steady state versus the guidance that we have?

Bhavesh Gupta — President and Chief Operating Officer

Yeah. I think this — you may not see higher. The reason for that here is that the adoption of UPI both at the online and offline merchant as a share to total GMV, we have seen the growth in penetration in that area and that obviously is not net payment margin bearing in our system. The work that we have been doing over the last 12 months, especially on credit card side, driving affordability, enabling brand EMIs on online and offline, that has resulted in the net payment margin going up for us.

That is a bit of a seasonal business, as you can imagine because the business last year was very negligible and last quarter has become arguably very, very large compared to what is the option in the market. We could see one odd quarter further wherein you could see some tailwind in net payment margin, but it will — it still remain range bound between 7 basis points to 9 basis points.

Madhur Deora — President and Group Chief Financial Officer

Right. And just to add, Nitin. So we are not changing the long term what we have said five years to seven years. But I think it is fair to say that when we gave that a year — roughly a year ago, we had not expected a lot of these tailwinds that we have seen as well as the discipline execution from the team, especially on non-UPI instruments. So, we are certainly ahead of where we thought we would be a year out.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

I will take an opportunity to do some more thing. So, what I am seeing is that when we meet regulators, NCCI [Phonetic], government, different sort of people, so there is a continuous chatter around MDR on UPI. So, different cohorts could be opened, like we have RuPay card and plus INR2,000 there is an MDR. Prepaid, there will be an MDR. So, there is these nuances, where there is an attempt of driving transaction-based, MDR-based payments on UPI.

While we are not factoring in the five bps to six bps guidance, I do believe that there is this attention that our team has been able to bring on credit-bearing products and international card, prepaid, etc. And obviously the festivities and the next quarter even more festivities, I can tell you this, that, that means that EMI obviously is a phenomenon in this country in these days. These days meaning, these quarters of the year. And so, we are talking about that I — that’s why we are conservative, and we are saying five bps, six bps, but there are like these positive green shoots out there in longer term, I’m talking arc of two years, three years, where this could grow further ahead.

Nitin Aggarwal — Motilal Oswal — Analyst

Right. Thanks. And the other question is on the fee per device. While we have like been selling devices at a very aggressive rate now, but at the same time, the mix is going to change and you’re talking about the Pocket Soundbox also. So, how do you see the blended, therefore, fee per device trending over the next one years, two years because that’s going to be very sizable number to the overall P&L? Any competitive intensity that can drive down the fee or how do you see this all [Phonetic]?

Bhavesh Gupta — President and Chief Operating Officer

So, currently competition, let’s say, intensity is not driving the pricing of the product. The pricing of product is driven by what kind of product we intend to sell in the market, you’re right. Pocket Soundbox brings in lesser fee, Card Soundbox brings in larger fee, and our Music Soundbox again gets in larger fee. But on a blended basis, we remain range bound between INR95 to INR105. That’s the range that we’re operating even now. And I don’t see that range change materially unless until some disruption in the market happens. When that happens, we will respond to that at that point in time. But at this point in time, we remain very confident of maintaining INR100 on an average on a device basis for a hopes — for a longer future.

Madhur Deora — President and Group Chief Financial Officer

And then, I may just add that the way we think about this is sort of payback periods versus life of device and so on, and this area is very dynamic because of all the innovation that we have done. So, as a shorthand, I think we’ll continue to use the framework that we had discussed last December, which is what Bhavesh referred to. Over the long period, I think maybe there’s some tweaks to the framework that will be required to sort of better understand or model the unit economics of various types of soundboxes.

Nitin Aggarwal — Motilal Oswal — Analyst

Right. Thanks. And lastly like is on the take rate in the financial business. While we have indicated that we’re expecting them to increase, any color you can provide in terms of where do we really see that moving in the next one years, two years? And how are the partners taking it up too, because in general, there has been like some bit of caution on the unsecured loans. So how comfortable they are with you like [Indecipherable].

Bhavesh Gupta — President and Chief Operating Officer

Yeah. So, I think one good thing that we can say for Paytm and obviously the partner we work with, that both of us are joined on a common objective and that common objective is not to build a large business. The common objective is to build a great portfolio, which can result in making a business larger and longer arch of a credit business because then — you can always build a good, large business in a short term, but it may blow up in the future. So from that perspective, our lending partners continue to remain very committed to the business that we build with them. And we will continue to add top-notch AAA NBFCs and very, very, you know, early in next quarter, we should be able to announce a couple of banks also.

So I think the take rate story we had mentioned, this is linked to what a market can offer and the repo rates that they are in the market. So we believe that a stable case financial services take rate is in the vicinity of 3.50% to 3.65%. So you will see some upside on take rates over the next couple of quarters. And if we see, and as and when we see the repo comes down, is there any opportunity for us to recalibrate or renegotiate with our partners and the consumers that may give us some further upside. But I think the best way to model would be about 3.5% to 3.65%.

Nitin Aggarwal — Motilal Oswal — Analyst

Right. Okay. Thanks. Thanks so much.

Bhavesh Gupta — President and Chief Operating Officer

Thank you.

Unidentified Speaker —

Thank you, Nitin. We will extend this call by another 15 minutes to accommodate more questions. We have Rahul Jain from Dolat Capital. Rahul, you may please go ahead with your question.

Rahul Jain — Dolat Capital — Analyst

Yeah. Hi. Thanks for the opportunity. Just two questions. Firstly, we added this 0.5 million devices each in August and September month, possibly boosted by a manpower addition and also from the introduction of new innovative devices. So do we now plan to accelerate our pace of device addition from one month quarterly run rate to a higher run rate now?

Bhavesh Gupta — President and Chief Operating Officer

Yeah. Hi, Rahul. So we added new people because we could see massive demand on the back of new devices and generally the product acceptance that the market is seeing for our business. I think it will not be a very, very large growth from where we’ve been able to demonstrate because it takes some time for the sales force to get matured to be able to add value. So our sense is looking at about 1.5 million a quarter kind of a stable rate case could be something that we aspire for over the next 12 months to 18 months as far as Soundbox and Card machines are concerned.

Rahul Jain — Dolat Capital — Analyst

Sorry, you said 1.5 million quarterly is what you would expect?

Bhavesh Gupta — President and Chief Operating Officer

Yeah. Yeah.

Rahul Jain — Dolat Capital — Analyst

Okay. Thanks. Secondly, in the Paytm Money business, we saw significant improvement in profitability in FY23. So do we see this level sustaining and what we are doing to grow this business?

Madhur Deora — President and Group Chief Financial Officer

Yeah. So Paytm Money has been growing very steadily. Rahul, so our business model, as you know, is we get customers for payments and then we upsell them to other products, lending being the largest, other financial services such as Paytm Money. So the — what the outcome of that is we see steady growth in these businesses. So Paytm Money has about 7 lakh annual active customers, which is the data, which the stock exchanges share. And that has been — and you know, a lot of them are equity broking customers, F&Os and so on. It’s a fantastic business, very high margin. And if you can run it at very low cost of customer acquisition, then it’s a very good business. So we see huge opportunity in Paytm Money to continue to grow trading and investing in the country. And, yes, it is financially becoming much sounder than it was two years or three years ago.

Bhavesh Gupta — President and Chief Operating Officer

And Rahul, I also want to add to what Madhur has already said, that it is a great value added and extra product from our side. In longer arc of time, let’s say a couple of years forward, we look at it as a customer retaining product. We prefer customers creating more portfolios, picking up SIPs on our platform versus purely a trading revenue line item, which is exactly the product that we built and focused on.

In other words, idea here is that this is not a revenue monetization line item for us. It will continue to bring healthy revenue. Then we’ll continue to — it will continue to invest in technology and product. We believe a large number of customer on our platform, who have a portfolio of one of their product on our platform is what the true north this business should go towards.

Rahul Jain — Dolat Capital — Analyst

Sure. That’s helpful. One bookkeeping, sorry, if I can chip in, which is, if you could explain, which JV helped us in increased profit in the quarter and what kind of customers saw this write-off in the quarter?

Madhur Deora — President and Group Chief Financial Officer

Sorry. So both Paytm Payments Bank, as well as — Paytm Payments Bank is not JV, it’s associate obviously. So the line that I think you’re referring to is JV and associates. So Paytm Payment Bank had good profitability last quarter. And our gaming JV, which is First Games, which we own 55% off, that also had improved profitability last quarter. So both of those businesses did well. With respect to the customer, it is related to an airline customer, which suspended operations last quarter.

Rahul Jain — Dolat Capital — Analyst

Understood. Thanks a lot.

Unidentified Speaker —

Thank you, Rahul. Next question is from Manish Shukla of Axis.

Manish Shukla — Axis — Analyst

Yeah. Good afternoon and thank you for the opportunity. Bhavesh, if you look at the Y-o-Y growth trends for volume and ticket size, and here I’m referring to postpaid NPL, ticket sizes have been going up despite the increase in volume. Now, one obvious explanation is repeat customers getting higher lines, but do you see lenders willing to give higher lines to even first-time borrowers on postpaid NPL today versus six months or a year back?

Bhavesh Gupta — President and Chief Operating Officer

Yeah. I think it’s a good observation. The — we’ve now disbursed about 11 billion credit customers in the last three years with various partners. And we continue to add about 400,000 to 500,000 new customers. who are taking credit of any kind through the Paytm platform with different partners of ours every month. So the renewal rates and existing customer taking new loan rates are only becoming healthier and as they become healthier, there is a much better comfort with lenders to give them a higher credit line.

We haven’t seen a reduction or increase in people, who come to apply for the first time a postpaid or a personal loan or a merchant loan from a lending partner. So that number line has remained kind of stable. That’s not kind of dropped or increased, if that was your question. Renewal lines have obviously increased.

Manish Shukla — Axis — Analyst

And for last couple of quarters for postpaid ticket size contributed more to growth than volume this quarter. That is the case with PL.

Bhavesh Gupta — President and Chief Operating Officer

Yes.

Manish Shukla — Axis — Analyst

Incrementally, this quarter — going forward, should we expect that for at least these two product lines, ticket sizes will be a bigger contributor growth than volume?

Bhavesh Gupta — President and Chief Operating Officer

May not be true for postpaid, but could be true for PL.

Manish Shukla — Axis — Analyst

Okay. Understood. Thank you. Those are my questions.

Bhavesh Gupta — President and Chief Operating Officer

Thank you.

Unidentified Speaker —

Thank you. Next question is from Jigar Valia of OHM Group.

Jigar Valia — OHM Group — Analyst

Yeah. Hi, congrats and thanks for the opportunity. My question pertains to the employee cost ex-ESOP. The sequential increase, should we look at it more like a sequential increase or still it is like once a year addition and then it should kind of sustain or should we look at sequential increase to continue?

Madhur Deora — President and Group Chief Financial Officer

Yeah. So, Jigar, that’s a good question. So we have historically sort of broken that up into sales employees and non-sales employees. And over the last five quarters or six quarters, actually both of those costs were increasing because on the sales side, we’re obviously making investments to increase our device space and so on. And on the non-sales side, we were adding in financial services in particular in technology and so on. So going forward, you should expect, and obviously there’s an appraisal impact in the first quarter of the year for annual appraisals, which we have been talking about for the last three quarters, four quarters.

So on the sales side, you should expect this to continue to grow in line with the device net adds that Bhavesh mentioned, because we are seeing huge market opportunity at least for the next two years or three years. I think Pranav from Bernstein had also asked some long-term questions around that. So there, in the near term, you should expect for us to continue to invest.

On the non-tech — sorry, on the non-sales employee side, I think we expect the growth to be very subdued going forward if at all, because there’s a huge amount of opportunity. We have done a huge amount of investment, and we see a lot of opportunity, including because of AI that Vijay mentioned earlier, which should show improvements, not just in tech, but even non-tech because AI can help us improve a lot of our internal processes as well.

Jigar Valia — OHM Group — Analyst

Got it. Can you give some perspective about the subscription charges for the upgrade devices? I mean, you mentioned about up to — going up to INR500. So these would all be for Soundboxes, right?

Madhur Deora — President and Group Chief Financial Officer

Just to be — sorry to interrupt. But just to be clear, the INR500 is for the upper end Android device. So this is what we had said last December as well, when we are trying to clarify our business model in simple terms. So the INR500 is a very small percentage of devices. This is for the high end Android card machine, which you can check it out on our website and so on. So that’s not a Soundbox. That is a Android-based card machine, but it’s a small percentage. Vast majority of the soundboxes are in the roughly INR100 range, net of [Indecipherable].

Jigar Valia — OHM Group — Analyst

Okay. Got it. Last question is, if you can give some perspective about the nature of business with the various lending partners. I mean, if you can help us understand differentiate, like now Shriram Cap versus Tata Cap in terms of the profile of customers they’re targeting and maybe slight differentiation, of course. The attraction is good, as you have guided in terms of adding the lending partners, so congrats on that. Yeah.

Bhavesh Gupta — President and Chief Operating Officer

Yeah. Thank you, Jigar. I think the different partners bring in — join the Paytm opportunity of working together on loan distribution with different objectives. Shriram, as I said, has started with merchant credit, Tata Capital has started with personal loans, and they will — they over a longer arch of 12 months to 18 months migrate to other products in the system. Purely, if a [Phonetic] question is more from a risk perspective, I think that’s not very different. It could be very, very range bound, let’s say, between partner A to partner B.

And the material reason for that here is that from a Paytm perspective itself, as we maintained in the past that we ourselves are very, very conservative and strict as to which kind of users or merchants can get access to credit. That filter remains common irrespective of new partner or old partner. And once the merchant or user passes that filter, then the filter of the lender comes into play, where they’re looking at underwriting, etc., etc.

So I think there is no risk arbitration, if I may use the word, that we look at in a business model. Only arbitration that we look in a business model is which partner is able to service the need of the user or the merchant better, both in terms of pricing, loan amount and geography penetration, but not on the risk side.

Jigar Valia — OHM Group — Analyst

Thank you. Thank you.

Unidentified Speaker —

Thank you. Next question is from Rahul Bhangadia of Lucky Securities. Rahul, you may please go ahead.

Rahul Bhangadia — Lucky Securities — Analyst

Thank you for taking my question and congratulations on a great set of numbers. Just if you could — there’s a material uptick in the capex number for the first half. If you could just give us a sense of what all has gone into that?

Madhur Deora — President and Group Chief Financial Officer

Yeah. Vast majority of the capex is devices. And if you’re comparing first half to first half of last year…

Rahul Bhangadia — Lucky Securities — Analyst

Yeah.

Madhur Deora — President and Group Chief Financial Officer

…the deployed devices has also gone up very meaningfully. We do think that there are opportunities in the long — in the near term, given our scale to reduce some of these costs through — because obviously technology gets cheaper over time. And we are working with vendor partners to reduce the cost of devices. But the increase in capex is almost entirely driven by the number of devices that we’re deploying.

Rahul Bhangadia — Lucky Securities — Analyst

Would INR1,200 [Phonetic] per box be — still be the benchmark here?

Madhur Deora — President and Group Chief Financial Officer

No, it is lower. So I think of the Soundbox portfolio that we have, INR1,200 [Phonetic] would be the roughly the cost of some of the higher end devices. Whereas for other devices, it would be higher end Soundbox devices, I should just be clear. Whereas for the other Soundbox devices, it would be lower, and it has been trending down.

Rahul Bhangadia — Lucky Securities — Analyst

Okay. Okay. So the question actually came from, let’s say, roughly about 24 lakh, 2.5 million [Phonetic] roughly is the boxes that you put up in the first half and the capex has been about INR480 crores. So that’s the slight kind of disconnect there.

Madhur Deora — President and Group Chief Financial Officer

Yeah. No, but there is a small percentage in terms of volume of devices, but which does skew the blend upwards because of the card machines, right? So the card machines, while they’re a small percentage, cost about INR5,000 to INR7,000. So that’d be significantly more. And only about 80% of this, about 80% to 85% of the capex is devices. The rest of it is things like laptops and servers and so on.

Rahul Bhangadia — Lucky Securities — Analyst

Okay. Should we expect this run rate to continue INR480 crores — maybe INR500 crore first half, INR1,000 crore per annum kind of.

Madhur Deora — President and Group Chief Financial Officer

No. In the absolute terms, there are no aberrations in that number. So you should expect that to continue. But like I said, we should be able to do more devices for the same amount of capex going forward.

Rahul Bhangadia — Lucky Securities — Analyst

Yeah. That’s fine. So roughly that’s the number. Okay. Thank you.

Unidentified Speaker —

Thank you. Next question is from Pallavi Deshpande of Sameeksha Capital. Pallavi, you may please go ahead.

Pallavi Deshpande — Sameeksha Capital — Analyst

Thank you. Just wanted to understand on the ONDC platform, what do we charge the sellers? There were reports of, you know, high charging.

Second would be, you know, do you see government coming in to limit what you can charge these? And finally, what is the opportunity size that we are seeing here?

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Thank you. Thank you for asking the question, Pallavi, ma’am. The biggest thing that I want to share here about ONDC is the first thing that ONDC is done in partnership with our sister concern, Paytm E-Commerce Private Limited, where they hit the ONDC chain and hooked to the network, and we as OCL get advantage of dispersing on our platform.

Second thing is the charging is in that sense created in a way that we are all doing invitation charging there. There is no regulation by the way. There is no intent of ONDC to even intend that this amount will be kept. It is the classic nature of network concept here that the many number of players will be there, who can serve same merchant. So they will try to bring more value add per percentage point they charge.

We don’t have a very — I mean, there is an invitation pricing is a very much intended statement that we don’t have a very fixed percentage to all merchant. We have different, different cohort and category etc., of merchant to do it. Our focus will be just like we have learned in MDR model that instead of doing MDR you could do subscription kind model. We are tilted towards that when we look at it long term.

Pallavi Deshpande — Sameeksha Capital — Analyst

Right, sir. And sir what would be like in terms of GMV, what can it add you know for one year ahead? I know it’s early days, but what can it add to your GMV guidance, which you have?

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Ma’am I don’t have a one year guidance. I don’t have an exactly that but I have a long arc guidance. In the duopoly markets of commerce, there is an obligation of a third player, which would come with the power of ONDC of the size of the duopoly of the one of the player in the market. One time it will be the combined category of all ONDC consumer players and over the period, big players will come. And I see it happening that way.

Pallavi Deshpande — Sameeksha Capital — Analyst

Lastly would be back to the loan business, if we would be looking at here, you know, going into the smaller towns, away from the metros, expanding our geographic footprint.

Bhavesh Gupta — President and Chief Operating Officer

Sameeksha, hi, this is — we already are in smaller towns in the sense we currently service more than 250 towns for personal loans and merchant credit and more than that for Paytm postpaid. So, yeah, so there is no smaller town restriction if I may use the word and it’s a function of opportunity, demand, and as well as the partners’ risk appetite and collection capability in those towns. So as and when we believe all the three matches happen, we keep adding more towns. So this year we would be adding another 50 to 60 towns in consultation with our partners across these businesses.

Pallavi Deshpande — Sameeksha Capital — Analyst

And the 500 locations you have, that’s for the Payment business, right, right now?

Bhavesh Gupta — President and Chief Operating Officer

That’s for the Payments business. Yeah. We don’t do — we don’t offer credit in all the 500 locations. We offer credit, you can think about taking about 250 of them.

Pallavi Deshpande — Sameeksha Capital — Analyst

And what’s the growth in the 500 number we look at for this year?

Bhavesh Gupta — President and Chief Operating Officer

This year we would not be growing 500, but next year — every year we typically add between 50 to 100 towns. It’s a function of lot of data that we ingest, smart phone penetration, connectivity, what kind of merchants or kind of moving in those markets etc. So whatever the data suggests to us we have a long list of towns that we want to enter. And some of the satellite towns start becoming main towns, where we will have our permanent employees kind of serving those towns etc., etc. So, yeah — so but you can take about 50 to 100 towns we’ll keep adding every year.

Pallavi Deshpande — Sameeksha Capital — Analyst

Right, sir. And just back to that ONDC, what is the…

Madhur Deora — President and Group Chief Financial Officer

Sorry, ma’am, I think we — I apologize, too. I don’t mean to interrupt. Maybe we can connect offline because we have run out of time and there’s one more person in the queue.

Pallavi Deshpande — Sameeksha Capital — Analyst

Sure.

Madhur Deora — President and Group Chief Financial Officer

So, maybe if you can write to ir@paytm.com, then we can take all the other questions.

Pallavi Deshpande — Sameeksha Capital — Analyst

Right.

Madhur Deora — President and Group Chief Financial Officer

Thank you, ma’am.

Pallavi Deshpande — Sameeksha Capital — Analyst

Thank you.

Unidentified Speaker —

Thank you. Next question is from Deepak Mendiratta [Phonetic] of HSBC. Deepak, you may please go ahead.

Unidentified Participant — — Analyst

Hi, thanks for the opportunity. I just have a couple of questions, one on the cash and other on the lending margins. So, I mean, if I see the cash balance on the earning release and financial results, I mean, can you correlate or provide more clarity on the disclosure of cash balance on both of the reports, as they seem to be different? And secondly, could you provide a directional thing? I mean, I know we have had a discussion on the margins, but if you could provide a directional on the lending margin, do we see a little bit on the upside movement or a downside movement going forward, at least for the three [Indecipherable].

Madhur Deora — President and Group Chief Financial Officer

So Deepak, I think on the second question, I think Bhavesh already answered that in relation to someone — someone’s question earlier. So maybe I’ll just refer to that and obviously there’ll be a transcript of the call, just in the interest of time.

On the first question, we have shared the cash balances in our earnings release is about INR8,750 crores. It’s a growth of about — a little over INR300 crores quarter-on-quarter. And there’s also commentary on where that is from. Obviously, there’s EBITDA, there’s interest income, and we continue to make improvements in trade working capital, as well as settlement working capital with our merchants. So those have been the drivers.

Of course, there’s been capex as well, both in this quarter and last quarter. So that’s the main use of funds, if you will. So I’ll refer to that. I think if you had some specific observation between two numbers matching or not matching, then you could perhaps share that with us on email and we’d be happy to connect with you offline.

Unidentified Participant — — Analyst

Sure. I’ll reach out. Thank you.

Madhur Deora — President and Group Chief Financial Officer

Thank you, Deepak.

Unidentified Speaker —

Thank you. With that, we come to an end of this call. A replay of this earnings call and a transcript will be made available on the Company website subsequently. If you have more questions, please reach out to us on ir@paytm.com. I repeat, ir@paytm.com. Thank you all for joining.

Bhavesh Gupta — President and Chief Operating Officer

And everybody, thank you and happy Diwali from all of our side.

Vijay Shekhar Sharma — Managing Director and Chief Executive Officer

Thank you. Happy Diwali.

Bhavesh Gupta — President and Chief Operating Officer

Happy Diwali.

Madhur Deora — President and Group Chief Financial Officer

Thank you, guys.