Mobikwik IPO — All You Need to Know

Seems like the year 2021 is turning out similarly for IPOs as the year 2019 turned out for movies grossing ₹100cr+ at the Indian Box Office. They just keep rolling in.

The latest company about to go public is the digital payments startup MobiKwik (link to DRHP) whose IPO announcement followed merely days after Paytm disclosed plans to file its own prospectus for a November listing. With significant business overlap, it will be interesting to see how the two firms go about their launches and structure their offers.

Let’s look at MobiKwik today.

Meet MobiKwik

MobiKwik is a fintech startup company as per its own definition. Founded in 2009 by the husband and wife team of Bipin Singh and Upasana Taku, the company’s business can be clubbed into roughly three of its product categories — MobiKwik Wallet, ZaakPay and BNPL.

The payment wallet service was the earliest to launch. Then came Zaakpay in 2012 which was a payment gateway subsidiary developed to diversify the existing payment options for its users (enabling cards, net banking, UPI etc.).

The third and final category called BNPL or “Buy Now Pay Later” is MobiKwik’s most recent offering and forms a chunk of its current operation. It’s basically a micro-credit business where the company offers (and cross-sells) a small sachet of insurance and loans which are provided through Amex-powered credit cards.

The BNPL model is essentially a partnership between retail and payments businesses to ease purchases on websites and apps and allow payments over time. As such, it is somewhat of a formal micro-lending play but in an informal way eliminating the paperwork required for loan processes offered by traditional banks.

The practice has become increasingly common with the growing digital payments ecosystem in the country. Other well-known providers include LazyPay, Simpl, Paytm Postpaid, KrazyBee etc. Even traditional banks have stepped into the BNPL space (e.g. ICICI PayLater, HDFC Bank FlexiPay) which is estimated to capture 9% of the total e-commerce market share in India by 2024.

MobiKwik’s self-characterisation as an “internet-first company” and its practice of cross-selling its services through a robust merchant network are strategies that have contributed immensely to its growth. Its current registered user base stands at 101.37 million and the combined strength of its online, offline and biller merchant partners stands at 3.4 million. The company also claims to have a solid foothold in the BNPL market: solid enough to cement scalable expansion to smaller cities progressively.

At a macro level, India’s online transacting users have grown sharply at 15%+ CAGR from 180 million in 2018 to 250 million+ in 2021 with the future outlook also looking quite robust. With credit card penetration languishing at just 3.5%, there seems to be a meaningful growth runway. India’s BNPL market is where the steepest growth outlook can be seen. Current disbursements stand at less than $3.5bn but are expected to grow to $45bn+ by 2026.

Let’s Talk Finances

MobiKwik raised $20m in June from Abu Dhabi Investment Authority which pushed its valuation over $700m (a 47% jump in two months). The prospective IPO is expected to push its valuation further to reach $1bn.

However, the company experienced a decreased operating revenue by 19% in FY21 to ₹2.9bn ($38.9m) driven by a 29.7% downtick in GMV to ₹149.3bn ($2bn). This was after a fairly solid 14% GMV growth in the preceding year.

The lockdowns played a significant role in these setbacks as revenue from offline merchants was severely hit. The micro-credit business was also particularly hit as customers couldn’t stick to their payment obligations in lieu of pandemic-time income downsizes and unemployment. Plus, there was a decline in certain collections as agents couldn’t go out in the field owing to travel restrictions.

But even after setting aside the abnormal pandemic year, we can see a history of losses (and net cash flows in operations) taken by the company in the preceding years as well which is fairly intuitive as there were likely a result of investments laid into business expansion and user acquisition plans. Perhaps the freshly-raised capital from the market could mitigate that to a certain extent if the right scale could be achieved which could subsequently ease some margin pressure.

Needless to say, if the company is unable to generate sustainable profit and cash flow in the future, it could impact its ability to raise capital and expand business further.

Business Outlook and Concerns

The company insists that the integration of its consumer payments segment (MobiKwik Wallet) with its BNPL business provides many competitive advantages to the latter. The large existing KYC base, big data to assess creditworthiness and a large merchant network directly facilitates growth in the BNPL segment, which reportedly remains profitable in the last two fiscals.

In fact, the wallet-based BNPL models seem to have inherent advantages over other models because they can be built on the back of a large customer base and data pool.

But speaking of data, MobiKwik has run into some concerning events related to data breach in the past. On March 30th 2021, the personal data of over 10 crore MobiKwik customers was leaked for sale on the dark web, making it one of the largest data breaches in India’s history.

Events like these can offset years of business expansion and lead to user losses which quickly translate to financial and equity losses, occasionally causing even market upheavals especially for a listed company, which is where MobiKwik is soon headed.

Furthermore, the exposure to credit risk for companies like MobiKwik is significant considering its BNPL business that requires credit underwriting from partner banks and NBFCs (like Bajaj Finance, Aditya Birla, DMI Finance etc.) for which MobiKwik provides financial guarantees. MobiKwik is also not a credit-rated institution at present which impacts its ability to access capital for future growth. The RBI’s PAPG Guidelines also require payment aggregators like MobiKwik to acquire (and maintain) a net worth of ₹25cr ($3.3m) by 2023.

Even if it isn’t a high target to achieve for a company eyeing a billion-dollar valuation, it indicates adherence to statutory prudential norms which could be tricky for certain companies, especially one like MobiKwik which has been charged with violation of RBI norms and awarded penalties in the past.

The fintech industry is growing large and fast but it is still in a relatively grey area in terms of regulatory compliance. Competition is fierce and there are bigger players in the space with larger user bases and brand recognition compared to MobiKwik. However, the company is willing to bet its IPO on the rising tide of consumer internet economy in India and the possibility of that tide cascading successfully towards retail and digital businesses.

(Originally published July 15th 2021 in transfin.in)