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Thank you for joining, and welcome to Paytm's earnings call for the quarter ended December 31, 2022. From Paytm's management, we are joined by Mr. Vijay Shekhar Sharma, Founder and CEO; Mr. Madhur Deora, President and Group CFO; Mr. Bhavesh Gupta, Head of Payments and CEO Lending; and Mr. Anuj Mittal, Vice President, Investor Relations. A few standard announcements before we begin. This call is meant for our existing shareholders of Paytm, for potential investors and research analysts to discuss the financial results of the company. This call is not for media personnel. If any media representatives are attending this call, request you to kindly drop off the call at this point. The information to be presented and discussed here should not be recorded, reproduced or distributed in any manner.
Statements made on this earnings call may include forward-looking statements, actual events may differ materially from those anticipated in such forward-looking statements. Finally, this earnings call is scheduled to 75 minutes. It will have a presentation by the management followed by Q&A. [Operator Instructions]
The presentation or replay of this earnings call and a transcript will be made available on the company website. With this, I would like to request Mr. Vijay Shekhar Sharma to kindly initiate the call.
Thank you. Thank you so much, everyone. Thank you so much for us for joining. I hope you're keeping healthy and hearty. It's an incredible quarter for us. We finally achieved one of the important milestone. I used to call it my own salary by my own efforts. I mean, this happened last when we started Paytm and that is the time when we were generating free cash flow and we use that money to start the new business of Paytm. And probably 8, 9 years later, we have come back again to that business milestone that we have started the focus on monetization in the last couple of years, and that has allowed us continuous investment in growth while improving profitability. This quarter was a key benchmark for us to generate the profit. And I'm very happy to say that you saw the team has done incredible, incredible work in growing payments business or credit business, which is the focus area that we've done.
I personally looked at along with my teammates and leaders that are in this call, the attention and the investment or dollar allocation, as we call it, to the key areas and pruned many, many, many line items over the period in the last 2 years. The best part I can tell you is that I believe that this trend of generating sustained profit will continue. Our profitability is expected to grow even further. We expect to grow to become a free cash flow generating machine. I don't call it free cash flow generating company, I wish to call it free cash flow generating machine. So let's see what comes up forward. And the best part is that our focus on merchant payments instead of focusing on consumer-led UPI payment has created a scalable UPI revenue model in subscription.
I feel highly positive and inspired by adaptation of our device business, especially Soundbox, which has led to significant scaling in UPI acquiring and various subscription-led revenues that you've seen our month-on-month numbers show up. In fact, if you noticed that our payment revenues are also one of those line items where we sort of do the processing. We kept cleaning up different, different type of merchants; different, different type of line items. And I'm we happy to tell you that we have completed our cleanup in last quarter, and we are focusing on only quality revenues that are profitable and have growth, which is something very predictable and recognizable.
So we probably would have parsed literally in hundreds various different kind of merchants if they were not profitable or if they were not useful for us or generating some kind of pain in the system. Our lending model of focusing on low and grow, if you noticed, we started with small ticket size, has now demonstrated that it is a large scalable opportunity, especially because our portfolio qualities are demonstrated over multiple payment cycles and our lenders and partners' conviction and our alignment and specific focus to the regulatory landscape and guideline gives me confidence that we are addressing a pretty large profit pool in our credit disbursement business.
I understand that it is a business which is in infancy. So percentage of growths are very, very higher, but absolute value are also, you can see, are very, very clearly growing nicely. So Bhavesh will talk about them in due course. Lending upsell, which is now in my opinion is scalable opportunity, and it does not have any regulatory arbitrate. And I'm especially calling out this line because many credit business in the country in fintechs have been built around some or other regulatory arbitrage.
While what we have built is a mature business where the partner has a comfort of credit quality, regulatory has comfort of the guideline, and we have grown organically not requiring a push of any kind of product on the market.
In fact, our belief is that increase in digital payment ecosystem in the country, we do see that there will be market risk or different, different kind of frauds that will come in the system. But I'm very confident with the quality of what Paytm is doing, the right operational risk and regulatory compliance will be a USP of our company and the attention that we are driving on the risk and fraud in the market will become a continued benchmark in the country.
If you notice, we've grown our average monthly connecting users, 32% year-on-year and subscription devices or subscription led revenue. Important thing what I wanted, again, to remind you is that our focus is various official line items to the merchants. So that is why not only devices, we have started 2 line item -- a few more subscription line items in the business. That is why we are converting this line item from subscription paying merchant instead of just a device subscription, if you notice. It is definitely key led by that.
And as you have seen, we crossed incredible milestone of 10 million quarterly merchant disbursement -- loan disbursement in the quarter and a little less than INR 10,000 crores of disbursement. Very happy to see these things driven by technology insights and the brand that we've created over the period. I invite Madhur to share the rest of the business presentation, and Bhavesh to talk about it. We look to take lots of questions from you. Thank you.
Thank you, Vijay. It's my pleasure to welcome you on our earnings call. So this is our revenue progression. As we mentioned, we have grown 42% year-on-year. As Vijay pointed out -- or sorry, as we pointed out in the earnings release, this quarter, we did not record any UPI incentive. This is because the UPI incentive circulars came in January. Last year, they had come in December. So while our payments revenue grew 21% on a reported basis, on a like-for-like basis, including UPI incentive, this number would have been 34%. And I'll talk a little bit more about that later on in the presentation.
There were a couple of small impacts on our payments revenue, which we have called out in the earnings release. One is that since the value was earlier this year, some of the e-commerce sales happened in Q2 rather than Q3, so there was some impact on that. And like Vijay mentioned, we finished all the work that we want to do on focusing on profitable GMV. So there's a little bit of impact from that as well.
Our financial services revenue grew 257% along with growth in disbursement and now is standing at INR 446 crores of revenue. Vast majority of this is from our loan distribution and collection business. And our financial services revenue now accounts for 22% of our revenue, up from 9% a year ago. So this has clearly been a key contributor to our growth in scale.
Our commerce and cloud business grew 24% year-on-year to INR 420 crores. This quarter, the key drivers were credit card and commerce. One thing we did call out is that we had high volume in our events business, which also increased our take rate, and we'll talk a little bit more about that later on. So overall, 42% growth, just over INR 2,000 crores of revenue. And we do want to call out like we did last quarter as well as in our December meeting that we do receive some incentives from the PIDF and NABARD, which we account as other operating revenue, but it really relates to payments.
Go to the next slide, please. This is on progression on contribution margin and EBITDA. Our contribution margin a year ago used to be 31%, and we have improved that to 51%. So there's been a 20-point increase or a huge jump in our contribution margin on our unit economics. And our indirect expenses as a percentage of revenue has gone from 58% to 49%. As you would have noticed in the last 3 quarters, this number has been flat at about INR 1,000 crores a quarter. And on a year-on-year basis, this has only been up 20%. As a result, as a percent of revenue, this has declined quite meaningfully. And this is -- the combination of these 2 has allowed us to become EBITDA-break even or EBITDA profitable.
A year ago, we were negative 27% of revenue. Now we are positive 2% of revenue. I should call out that this is sustainable, and this has been done without sort of cutting down on investments that we believe will generate value for us. So this is sustainable going forward. We did achieve operating EBITDA profitability 3 quarters ahead of the guidance which had given us this letter in April of 2022. So we're quite proud of the discipline that we have built into the business. And this is driven by strong revenue growth across businesses, disciplined cost management and our strong business model, which has a ton of operating leverage.
Move to the next slide, please. Just double-clicking on the payments business. Our payments revenue on a headline basis, like I mentioned earlier, was 21% year-on-year, just expanding on the UPI incentive. Including UPI incentive, this number would have been 34% year-on-year. The way this works is that last year, we received first 3 quarters of UPI incentive in Q3, which is a December quarter, and that number was INR 68 crores.
Our estimate is that for the same 3 quarters this year, our U.K. incentive would be INR 130 crores. So just to be clear, this number is only for the first 3 quarters of this year, whatever we get for the fourth quarter will be above -- over and above this. So if we just include this INR 130 crores to compare on a like-for-like basis, this INR 992 crores last year included UPI incentive for the first 3 quarters and then we are including management estimate of this -- for the first 3 quarters of this year to our reported number, then we get to about 34% revenue growth in payments.
So payments continues to grow revenues quite meaningfully. Like I said, 34% year-on-year, despite the fact that we have mentioned earlier that we have cleaned up revenue, which was not very profitable for us. Despite doing that, we have been able to grow 34% year-on-year. And just to be clear, we have not recorded any UPI incentive this quarter because the final circulars from AG came in January.
Go to the next slide, please. We talked in the December meeting about our payment business and how we track that. So our payment business generated INR 459 crores of net payment margin. Net payment margin, just to be clear, is our payments revenue minus our payment processing costs. And that has 2 main components. One is payment processing margins. So all the money that we make on processing payments, and the second component is the revenue that we make from subscriptions.
On payment processing margin, we have given the guidance that we're currently at 7 to 9 basis points of GMV. So we continue to be right within that range in the December quarter. This number is including the pro forma impact of UPI incentive for one quarter and despite inclusion of interchange costs which I'll talk about in a second. And we had given the guidance and we said with that, which is that since UPI is growing faster than other instruments and UP is slightly lower margin, we expect long-term payment processing margin to stabilize at 5 to 7 basis points.
Coming to subscription for a second. Subscription, we made a little over INR 100 per month per device. The number of devices has gone to 5.8 million devises now, up 3.8 million. So roughly [Technical Difficulty]. Massive growth in this business and a massive opportunity ahead for us, and it gives us many, many benefits in terms of merchant monetization, merchant stickiness and merchant upsell. And like we mentioned in December, I briefly mentioned earlier, we also get some incentives from partner banks, RBI and NABARD.
Some of them can be lumpy in nature because from a quarter-on-quarter basis, but it's a steady revenue that we get every year. On the right-hand side, we have just given a little bit of clarity on net payment action. So on a like-for-like basis, this number went from INR 443 crores last quarter to INR 537 crores last quarter this quarter. One of the things that we have done is for our Paytm postpaid product, we now incur an interchange cost. Previously, we used to incur a promotion incentive which used to be in our cash back.
So you'll notice that our cash back has gone down dramatically and we have a lot of disclosure on this in our earnings release. But at a high level, our cash back has gone down quite dramatically from about INR 190 crores to about INR 90 crores, whereas we have taken INR 78 crores of interchange costs related to Paytm postpaid in our net payment margin. So while on a like-for-like basis, our net margin would have gone up much more. We are reporting INR 459 crores of net payment margin this quarter. And this is the basis on which we will report going forward, including the interchange cost for postpaid. And including the interchange cost of postpaid, like we said, we would be at within the 7 to 9 basis points currently. I will turn it over to Bhavesh to talk to us about that.
Yes. Thank you, Madhur. Good evening, everyone. So lending, again, had a wonderful quarter. This is on the back of all the 3 businesses now coming to some level of maturity. Post-paid as a business, you see that now 2 big things have happened. One piece is that Paytm postpaid continues to be the largest funding source or a lending product which is accepted at 17 million merchants, 1.7 crore merchants in the country. We're seeing a very good adoption by merchants who want Paytm post-paid to be available on their shops, either on a UDC device, payment gateway or a QR code.
We continue to see a very healthy growth. Obviously, Y-on-Y, this number of 3-digit 300% plus but Q-on-Q basis also, we are clearly seeing this business grow very comfortably at about 25%, 30% which is a shade over the guidance that we have been provided in the last quarter that we feel very comfortable growing our lending business quarter-on-quarter between 20% to 25%. But now we're seeing that growth actually higher than that number at about 30%. Our personal loans, Y-on-Y is looking much sharper because we started this business shade before December '21 quarter. So this number obviously look closer to 500% in terms of personal loan. But 2 interesting things have started to happen PL. The customers who are taking PL from us, 40% of the disbursement happened to existing postpaid customers. This is giving much better portfolio quality comfort to our lending partners, and also is giving a good experience to our consumers who would largely with couple of clicks are able to consume this product very conveniently through the Paytm app.
We also starting to see almost 15%, 20% of the customers who had taken PL over the 12 to 18 months and now finished their loans coming back to take on the loan. And hence, that portfolio is also becoming very material and the quality of that portfolio is better. New-to-PL portfolio continues to be operating between 30% to 40% of the disbursement amount in the quarter, which is a very healthy mix which will make the PL business, not only scale very, very well for us, but also will make sure that our profitability for us and credit quality and profitability for the new partners continues to be better than the plan.
Merchant loan is something that we will be excited now. Obviously, last year, through the year, it was impacted by COVID. And we saw maybe about 2 quarters back that once COVID was completely out of the market, merchants were coming back to the normalcy and accepting more payments and hence merchant lending. We're now seeing the acceleration amongst the 3 businesses is highest in the merchandising product. And we continue to believe that merchandising product back on the devices growth, will continue to scale much healthier, and we do see as an opportunity that as our devices penetration keeps increasing, our loan penetration to devices merchants will also keep increasing.
It is hardly about 5%, and our total devices in the market have now crossed 5 billion. So we do feel very positive that all the 3 businesses, be it post-paid, personal loans, merchant loans should continue to demonstrate very healthy quality of business and profitable products for both lending partners and ourselves in due course of the next many quarters to come.
Can we go to the next slide. If you see on the left-hand side, there is the financial services revenue, which now is contributing 42% of the overall revenue for Paytm. This has really grown very, very incrementally over the last year. And this is largely impacted by the performance that we've seen in lending business, which is contributing disproportionate portion of this INR 446 crores of lending revenues.
The interesting part here is that we continue to see that the number of new borrowers who are coming in quarter-on-quarter is a very comfortable 0.5 million-ish number every month. We are not aggressively chasing this number as a metric while the overall top of the funnel, as you can understand, we're sitting with 80 million-plus multi-transacting users and of the 80 million multi-transacting users, like to date in the last 2 years, only 8 million unique borrowers have access credit through retail platform through our various lending partners.
So just 10% of our entire multi-transacting users thus far have taken any form of credit through then Paytm platform. And another 0.5 million every month are taking incremental credit as the new customers in the Paytm platform.
This just gives us a very good segue because we've spoken in the past that a very large portion of our MTU, close to 40%, 45% of our MTU is whitelisted on various loan products with our partners. And hence, we feel very confident that while we continue to grow new business to new consumers as a fact that almost 40%, 45% of our existing loan business is coming from existing customers or merchant business.
The cumulative effect will continue to give us a 20%, 30% growth rate quarter-on-quarter for [Technical Difficulty] future. In terms of our portfolio, I think the portfolio is holding up very, very nicely. We continue to see that for all the metrics that we have demonstrated over the last 3 or 4 quarters, there has been 0 any kind of deviation in [Technical Difficulty] portfolio deterioration of any [Technical Difficulty]. In fact, the portfolio is performing better than the expected broad credit losses that our partners have presumed. These numbers for the 2 businesses are lower between 50 basis points to 75 basis points between postpaid to personal.
And I do believe that going into the next year, with higher interest rates also in mind, we do not see any kind of lead indicators to suggest this portfolio quality is going to be of any different number than [Technical Difficulty]. The last point on the [indiscernible] side, important to understand is that our focus on continuously looking at the regulatory landscape and working with our partners to make sure that, Paytm is always upholding every regulatory processes that have been laid down, both in terms of the directions coming in from the Government of India or any other regulator. And [Technical Difficulty] lenders is making our business more solid than ever before, and we're committed to make sure that we keep building the business on the 4 legs of risk compliance, operational efficiency and profitability and continue to scale this business in the manner that we've seen thus far. [Technical Difficulty] Madhur, back to you.
Thanks, Bhavesh. So this is about the commerce and cloud segment, which is at INR 420 crores of revenues this quarter. The main drivers of this were our credit cards and commerce business, which saw quite a decent jump. On the co-branded credit cards like we've discussed before, which is a part of our commerce and cloud business, that continues to scale particularly well. We have started to give additional disclosure on our credit card business.
As of December 2022, we now have 4.5 lakh activated cards, and we activated 1.5 lakh credit to this quarter. Overall for this cloud segment, our revenue grew by 15% to INR 235 crores. On a Q-on-Q basis, there is some impact because our PAI cloud business had a particularly strong quarter last quarter. So there was a little bit of impact from that. But on a year-on-year basis, this business is performing fine. On enabling commerce, our GMV was INR 2,300 crores.
Our revenue was INR 185 crores resulting in the take rate of 8%. We did have high volume in our events business, and we have clarified in the earnings release and we are happy to take in Q&A. There are certain events in which we provide full stack services. So we have high take rates but also higher direct costs. On a steady-state basis, our take rate should be roughly 6%. But in Q3 and Q4, we do see a little bit of a jump in the events business, including the full stack events.
Move to the next slide, please. And finally, we just wanted to call out a number of growth drivers in our business. One is that obviously, as all of you experience every day, while India digital payments has grown quite a lot, it is still in very early days. Growth in UPI, cards, EMI-led payments, all of this is yet to reach the masses. So we think that just from a user standpoint than the usage standpoint, there's massive growth.
We are going to be launching UPI Lite soon, which allows instant multiple small-value UPI payments, which we think will lead to increase in adoption of digital payments. We will possibly launching credit card on UPI, which enables users to link their RuPay and other credit cards to UPI. On the merchant side, which is like Vijay pointed out, really where a lot of revenue can be made. We think there's a potential of 10 crore merchants and more than [ 50 crore ] payment customers in the near term. So really a very large opportunity to go after.
We are on the lending side working on integrating with large [indiscernible] and banks to leverage the potential of small digital credit on the Paytm platform just in the way we have been able to scale it to INR 10,000 crores a quarter. We think that there is a long way to go. We have put a bunch of disclosures in our earnings release about how we are working with RBI regarding both Paytm Payments Bank and on Paytm Payments Services Limited. And one of the things that we're quite proud of is that we have been able to do all of this and increase our focus on building scale, but with a huge amount of focus on operational risk and compliance.
We think that as we go forward, like Vijay mentioned earlier, this is going to be quite important and quite a differentiator, both in terms of customer experience and in terms of what regulators expect from us. And I think that's all we had. I'll hand it back to the moderator, and we can do Q&A.
[Operator Instructions] With that, I'll move to the question-answer session, which will be from Mr. Manish Adukia from Goldman Sachs.
Firstly, congratulations on reaching the milestone of operational profitability in the quarter. My first question actually relates to that. On the shareholder letter, you mentioned that the next milestone you're looking for is free cash flow profitability. Now with the UPI reinvestment coming through in the next quarter and your continued traction in the lending business, is it safe to say that you should get to positive free cash flow starting the March quarter itself. And related to that, where do we see margins go from here? I mean, are double-digit EBITDA margins possible by end of fiscal '24? That's my first question. I'll wait for the second question.
Thank you, Manish. And I just wanted to tell you that the Q4 UPI incentive will be one-off and we will explicitly call it out it as a one-off. So leaving that apart, we will not be free cash flow generative. I mean understand what I am trying to tell you here is that one-off number because it is coming in Q4 -- remember the number INR 130 crores that we are quoting is for 3 quarters, fourth quarter numbers will be topped up on top of it. But still that fourth quarter color whenever it comes, we will call it extraordinary onetime line item. And because I'm calling it onetime line item, so I' not calling it to free cash flow generative.
While technically, with adding that, yes, it could be free cash flow generator for that quarter. But again next quarter because it won't be there, so then we don't know what to say. We would rather like to say free cash flow generative in the quarter when we are consistently sure of this. For example, like EBITDA profitability that we have done operating, we will continue to increase the EBITDA profitability. Could it go 2 digits in what time line? I don't know. But yes, it could go 2 digits for sure. And like I said, this is as the same EBITDA growth that we are seeking from here.
We agree with that Manish, and I think for us, it's important that the timing of UPI payments will vary depending on when government releases the circular. So the way we see it is bit of a normalized number. So while it is correct that the expected chunky number to hit our reported numbers to Q4, we would not consider that as sort of normalized. And as a result, if that results in free cash flow breakeven, we would not consider that as normalized free cash flow breakeven or a milestone in that journey. And on the second part of your question, I don't want to give specific quarters or specific guidance, but we did want to call out that nearly everything that we're doing is very sustainable.
We are -- we have, as you know, been investing in growth alongside moving to profitability. So we don't see a challenge with some of these trends continuing where we can continue to improve our revenue and our contribution profit dollars while improving -- and having that result in increased profitability.
My second question is on regulation and thank you again for providing the detailed update in the press release. Would you be able to give us any sense on time lines. I mean, the Paytm Bank is now obviously lasted longer than your initial expectations. You had some back and forth of the RBI there based on the press release. Can you give us a sense of how long it might take, like a quarter, a couple of quarters longer? Any color would be helpful.
RBI decision is RBI decision, we don't have a control over them. Based on what we've been interacting, the day is not very far.
Right. And can I ask a follow-up? I mean have you had to make any kind of meaningful operational changes [indiscernible] this bank could have any kind of business impact?
That's a very good question. Answer is no. RBI actually called out that we went through all kind of different, different technology system or, let's say, commercial systems, et cetera, et cetera. But in the end, there was no incremental dramatic change that we had to do or anything that has an impact on [indiscernible]
The next question will be from Mr. Sachin Salgaonkar from Bank of America.
Congrats for a great set of numbers. I have 3 questions. First question is, when we look at payment services to consumers, it is down on a Q-o-Q basis. I do understand your comments, but I just wanted to understand that going ahead, how should we look at -- will there be incremental growth? Or we do see a bit of softness in the near term?
We see growth. We were moving the bad blood.
Okay. Great. Second question is, Vijay, on the comment what you made about the cleanup with merchants. So what kind of an impact -- and there was obviously a statement at the end by Madhur saying that the opportunity is huge, even in terms of 10 million merchants. So is it possible to help us with [Technical Difficulty] what kind of merchants are you seeing and what kind of focus of merchants is what you guys are having going ahead?
So Sachin, in the market, there was a budget where the, let's say, the rates that were provided were special case in rates, for example, like you go to issue a brand and then stabilize the commercial base on that. But over the period, those rates were changed, but customer rates cannot change. [Technical Difficulty]. So we were extremely critical of accounts that were not profit generating for us. We were clear in the market that none of our [indiscernible] can even afford to take these kind of costs. So we were clear about it that take it or leave it, and we left many of those merchants. So it was led by clean-up of quality revenue that contributes towards bottom line and growth.
Sachin, if I may add, just a filter that we use is that the merchant should be profitable, with the only exception where we see immediate upsell opportunities, right? So for example, a paper QR merchant historically was not profitable. Now, UPI, they are profitable as well, actually. But we also see upsell opportunities there, which is devices and merchant lending and so on, right?
But for example, certain online merchants, you will not see, for example, lending upside. So those businesses need to be profitable for us because we build technology, we help them with routing, we help them aggregate different types of payment instruments, we should be able to make margin on it. And that discipline has percolated to every steel business team. And as a result, we have been able to -- we've been able to improve our net payment margin.
There has been a marginal impact on revenue. But on a year-on-year basis, we're still growing very significantly. So I think we quite like the trade-off where our revenue is up 34% like-for-like and under payment margin is up 120% like-for-like. I think that brings a lot of [indiscernible] into business. That's the right building a business.
And last question, obviously, is on the back of the adjusted EBITDA breakeven. And clearly, obviously, you guys are seeing sustainability of this. On the back of it, I guess the bar goes higher, right? So should we see some kind of an incremental new guidance coming from you guys in terms of either a net income or a reported EBITDA breakeven or to that matter, even when could we see free cash flow breakeven. I'm asking free cash flow because I presume there's a bit of a device CapEx, which is going to increase going ahead. So any thoughts, any comments would be helpful?
Sachin, we're not giving any incremental guideline on free cash flow, but we are definitely making sure that we have sustained and growing profitability. I also want to remind you that we would have lots of investments coming up in growth and market opportunity. You've seen that we've never ever compromised. Important thing is disciplined growth and profitability, disciplined contribution in growth and marketing. So it's an important thing. We are saying that our profitability will continue to grow and consistently along with the investment if you are looking at it. As far as the time line for free cash flow generation is concerned, we are not setting it up. And we believe that the company requirement for CapEx is not very, very large. It is very much generatable within the current operating business that we have like we have discussed in the December month.
Next question will be from Mr. Saurabh Kumar of JPMorgan.
Congratulations on this breakeven. I just have 2 questions. First is on the cash flow again. So could you reconcile this INR 9,200 crores cash balance to INR 9,000 crores in December. How much was the CapEx and how much went into buyback? And so I just want -- where this INR 200 crores go?
Yes. So we have -- in the last quarter, we had just under INR 200 crores of CapEx. We do earn interest income as well. So we do earn about INR 100 crores of interest income every quarter. We have actually given disclosure on how much buyback we had done until December, that number was INR 68 crores. I should add at this point that as of Friday, we had completed INR 796 crores of buyback in total, which was about [Technical Difficulty] of the maximum buyback [Technical Difficulty]. So a vast majority of that would have come in Q4.
Okay. Okay. I understand, sir. So INR 200 crores of CapEx and INR 100 crores of -- okay, I understand. The second is essentially on the loan syndication. Have you still seen the incentive income yet [Technical Difficulty] or that will happen later?
So we don't do syndications Saurabh as you know. We do distribution. So we do distribution. So, yes we do see a decent amount of collections revenue, which come in, but as we have explained last time also, that the collection revenue comes for a book that will be originated, let's say, one year back, right. With the personal loans, average tenures are [indiscernible] between 14, 15 months. So the incentive is coming for the business that we generated 14, 15 months back. Now 14, 15 months back, obviously this business was 1/3 or 1/4 depending on the business you look at of the size. So the correction incentives in terms of rupee value in today's terms looks small.
But yes, in percentage term of that year book, the number is fairly material. Yes, we are getting very healthy collection incentive. But rupee value, the number is small compared to the last year business.
And would you be able to quantify that, like percentage of how much...
We have said in this presentation also, collection incentive is ranging between 0.5% to 1.5% depending upon the business that you're looking at. Obviously, [Technical Difficulty].
Okay. And just this last question is on the sustainability of this indirect costs. So you've not grown indirect for 3 quarters now. And your marketing expense to revenue has kind of fallen to 6%. So how should we think about this indirect cost going ahead? Any color you can provide would be great.
As we've said before, I think we have -- prior to 2 quarters ago, we had done a significant ramp-up of indirect expenses in 3 main areas. One was technology, the second is sales and the third is marketing. So we have done that even as we were increasing contribution margin and revenues. You're right to notice that over the last 3 quarters, we have kept indirect expenses flat in absolute terms and in percentage terms, it has gone down by 9 points. I think given how well our monetization engines are working, if there are areas where -- whether it's on sales employees or on marketing, where we would make -- where we could make slightly incremental expenses, we would do that. So it's not like we are internally managing this number to, hey, we have to tap it to INR 1,000 crores or something -- of anything of that sort.
So where we do see an investment opportunities, we do that. You would have seen that within this INR 1,000 crores number, people cost has gone up largely driven by sales employees and in some cases technology folks. So we do make those choices. So as monetization is kicking in, we might increase this number over the next few quarters, but not at the expense of increasing profitability and free cash flow. And frankly, given how well monetization is working, we don't have to make those sort of tough choices if you will.
We do also -- I should also add that like all companies in April of every year, we also haven appraisals. So that also has an impact on employee expenses, but that's one [indiscernible].
Okay. And just one follow-up. So of the employee, INR 300 crores is the discretionary that cost of building the platform -- growth cost. The remaining INR 700 crores is basically just the maintenance cost of this whole business side. That's the way one should think about it?
No, no. We've given making cost and disbursement cost. Field sales executives are one cost. Second cost is people who make it. So the appraisal happens of the people who make it.
The next in queue would be Rahul Jain from Dolat Capital.
I just have a couple of questions. Firstly, if I look at our [indiscernible] cash tax, even on an adjusted basis on the INR 78 crores that you mentioned, it's kind of now INR 30 crores to INR 40 crores on a Q-o-Q basis, and it's not significantly higher either on a Y-o-Y basis. But we've been adding our number of NPUs quite well even on a Q-o-Q and Y-o-Y basis. So I understand a very large component that could have come from lending and devices use cases, but where we are and how we are adding more and more NPUs with cutting down on both [indiscernible].
Rahul, these NPU additions, as you very well have seen are not driven by cash tax. Instead, they are driven by good marketing that is led by referral marketing and great product initiatives where customers who have downloaded the app, we are converting them into better way than previous in first transaction. So we internally have a first transaction hawk-eye view of the customer and then retention technology. So it is production technology driven by referral as a product initiative, not by the marketing initiative. That said, like I've always said it, we will not tie away from investing in consumer growth at a time when we see that we have outlay of profit opportunities coming up. So right now, it is productive.
Right. So does that mean our annual transacting user is still a very high number from where this retention and optimization is being done and if you could share that?
Rahul, you are very, very interested. I want to tell you that we have looked at UPI because this was a war of UPI effectively between different companies. Somebody chose consumer P2P, somebody chose P2M, the merchant payment -- he chose merchant business. So if you notice how merchant business revenues in the industry of payments is particularly higher than every other peer, all because we put attention there. In fact, our acquiring side market share recently said, it is not yet declared. Once they start declaring, you will see how well we are capitalized there over other UPI players also -- standalone UPI players or other payment aggregators. So idea is that we have deliberately built it led by product and technology and consumer side and acquiring side is what our revenue and business opportunity is. So we'll do it consumer side also.
Rahul, just to clarify, we have not slashed cash back or anything of that sort. Our contribution margin continues to improve. So we do have room if we wanted to increase cash back. But this just hasn't been at the, like Vijay said, this is product led. Our learning is that customers long-term stay with the product are -- the product is improving, they just stay with you. So we're roughly think about 3 basis points, so just under 3 basis points of GMV as cash pack. A chunk of that is referral, which is maybe targeted towards new users. And the rest of it is just related to just transactions and users too where we have recently good take rates and we might be getting a little bit of that back to users. So that's how we manage our business, but we have not sort of slashed cash back or anything of that sort.
All right. Just one more if I can. Basically, we've been highlighting this new net payment margin and we have even a bank. While we see the way we have progressed, we have improved on this metric very, very significantly. And the kind of net margin that we are making right now, probably we might not have made in the historical basis any time in the past. So what makes you think that this could get optimized to this level and rather go down eventually just because of the mix? Because I think the number of use cases and the kind of the value our GMV individual transaction can bring, it has such a wide variety of possibilities, and it will never be possible for anybody to capture this number precisely. So why we want to share this number and think this can pull out?
I think when you adjust for UPI mix, which we have clarified and you mentioned in your question the mix effect. We think that this is a reasonably good indication of -- how much money are we able to make on each transaction, right? And you're right that certain times actually may make us lower money that could depend on the type of merchant, type of customer, it could depend on the type of instrument. So this gives us a reasonably good sense of -- if a customer comes on our app versus if you're on the merchant app or on the merchant shop, and what is the value that we are adding for the technology that we bring or for the consumer access that we bring to our merchants or the convenience that we bring to the consumers.
So we think there's a reasonable proxy for that. And while UPI mix, and we had mentioned that UPI we expect to be 3 or 4 basis points, so that increasing would bring this down number slightly. We think this is a recently put number to focus on. And I think a part of the reason to bring that out was to clarify that payment actually does make money on an aggregate basis on GMV. Because I think there was some misunderstanding at least among some folks that "oh payments, everything has to be at CEO" and we just wanted to clarify that, that is not the case, and that is certainly not the trend that we see.
And in fact, over the last few quarters, we have seen this number go up rather than down, right? And we see continued momentum in this number.
The next question we'll take from Mr. Sameer Bhise from JM Financial.
Congrats on the good numbers. So on the gross margin thing, do we expect that this is the new normal?
Sorry, on which number?
On the gross profit margin?
I'm sorry. What are you referring to exactly as gross profit margin? Are you referring to net payment margin, Sameer.
So basically, the contribution profit which is currently tracking 50% plus.
Yes. So there's no one-offs in this number. So -- and we are ahead of our internal plans and the plans that we have sort of shared -- on the basis of which we have shared breakeven guidance. But there are no one-offs in this number. So we should assume that we'll be at roughly these levels of potential upside from growth of [indiscernible], faster than payments and those sorts of things. But there are no one-offs in this number. So yes, this is a rebase margin number going forward. And I should add that from quarter-on-quarter, we should -- we may have fluctuations. But on the long-term basis, we see this as steady or growing.
Yes. And secondly, on the number of employees. I believe the material increase has come from addition of sales force on the employee cost side. We probably are at -- I mean, how much more to go in terms of on-ground sales force additions?
Bhavesh, you want to take that. So Sameer, the opportunity is fairly decently large for us as in the beginning of conversation said that we added about 3 quarters back a lot of people. Today, when you see the opportunity in the future, we do believe that we will add, not as much as the order 3 quarters back, but we'll keep adding a few more. But bottom is the exact number, we haven't done the planning. But yes, there is going to be addition, but it's not going to be a materially large addition. It's an issue which should be positive in terms of getting us more devices for incremental sales force than what you've in the past.
Yes, because we are already probably tracking roughly 30,000 kind of sales -- I mean, on ground sales team, which is why -- which is sizable. So.
Yes. So it's not actually that large a number. But yes, it's closer to that number. But the important part here is that when we look at the opportunity, as Vijay mentioned, of 10 crore merchant as an opportunity and we are sitting with 3 crore merchants today. We have a very, very long way to go. We are currently placing about 400 to 450 cities and towns. And I believe that over the next 3 years, we would like ourselves to be in maybe 1,000 towns. So this penetration will be a bit more people led. But yes, we'll calibrate it as we see the growth, but it will not be on the back of doing loss-making growth, but it will be on the back of making profitable growth.
And Sameer, if I could just add one thing is that the work that these sales employees do has a very good payback period, especially when they're going and putting some boxes and devices and so on. So the unit economics of that works really well. So it's just a question of do you do upfront investment like we have done or do you sort of staggered over time, right? But we have such high conviction that we have done the upfront investment and goes a little bit back to the question that Sachin was also asking, is that we have sort of gone from 2 million devices to 5.8 million devices. For that sort of growth, you do end up front ending investments a little bit. And that's what we have done.
Yes. And the payment services to merchant fees is clocking like 9% Y-o-Y. I'm sure with the kind of devices that you added in the last 9 to 12 months, this number starts ratcheting up. But how does we see this?
Yes. So I think, Sameer, Vijay tried to answer that question earlier in that part that two things have happened. One piece is that last year, we were locking in certain GMV and hence certain gross revenues of merchants, which are either not profitable or we were not very comfortable purely from a risk perspective. So we've done a lot of cleanup over the last 2 quarters. I think the cleanup started in 1Q and then we moved in quarter 2. And then we did some residual impact in quarter 3.
So there is some impact this time around as well?
Yes. But future, going forward, I think when you get into the next year, we do see that the cleanup that we had to do, we have done. And we will have some more impact coming back from those merchants who on commercial business had been left off. Because we do know our product is arguably the best in the country. So it will come back to us. And more importantly is that our acquisition machinery, as you actually pointed out, is going to continue to churn a lot more GMV than we have been in the past. So you will see growth coming into this factor, and this will be more profitable growth than we've seen in the past.
And just to add to that, there's 2 other factors when you're looking at the Y-on-Y comparison. So let me apologize if I wasn't clear earlier. One is, obviously, UPI incentive. So in December quarter last year, we had UPI incentive and this December quarter in the number that you are referring 2.9% Y-on-Y...
Yes, it doesn't include.
So that's one difference. Second is because Diwali was a bit later last year [Technical Difficulty] online merchants had sales in October and early November, whereas this time, most of our merchants had their big sales in September and a few smaller sales in October. So that sort of some of that revenue was moved to Q2 this year versus being in Q3 last year.
The next in queue would be Gaurav Kochar from Mirae Asset.
Many congratulations to the team on achieving the operating profitability ahead of guidance.
Question, sir, firstly, on the lending side. So why you've disclosed the penetration level in merchant loans as a percentage of device merchants. A similar like-for-like on the consumer side, if you can call out what is the total, let's say, user base of BNPL product, which is your postpaid. So any -- I mean, if you can give the number of users who have subscribed to postpaid.
And maybe PL as a percentage of that. PL disbursed in the last 12 months as a percentage of that. How would that number be? And like you mentioned, repeat rate of 45% in case of merchant loans, given that this product is also more than 12 months old now, what is the repeat rate in case of PL.
And going in terms of this sort of penetration, PL as a percentage of your BNPL customer base, where do you see it tracking. That would be first on the lending side. I have another question, maybe I'll ask it later.
Sure, Gaurav. So Gaurav, the way we have said 8.1 million users have gone ahead and taken any form of credit. Out of 8.1 million, broadly I would say, closer to 7 million are people who've taken BNPL credit. And that number, we do see adding about 400,000 new users every month, right? So that is there. And hence, the percentage of MPU, still there is -- this is about less than 10%.
And in terms of lenders whitelist, which is close to about 40 million, there's a very, very long ago. So there is obviously no holding us back in growing this business at 400,000 to 500,000 new users on BNPL every single month. In terms of the personal loans, in terms of penetration, that number will be -- I don't have an exact number, but I give you raise on. That number is fairly small against the 7 million users who have BNPL. The number of users who have been preapproved for a personal loan, while lenders will be close to about 2 million, of which I think about 300,000 or 400,000 users have taken. And every month, we see about 30,000, 40,000 users take PL from the BNPL pool. So again, that opportunity continues to be very, very large.
[Technical Difficulty]
The third piece of [Technical Difficulty] in terms of PL to existing PL. I did mention earlier in the conversation that is closer to about 15% to 20% today. And as the book continues to keep maturing, this ratio will stabilize at about 40%, 45% of existing PL for customers taking another PL over the next 12 to 18 months. I don't think that the BNPL customers taking PL, that ratio is 40% of PL coming from existing BNPL customers. This ratio is going to change.
So the stable use case will be about 40% of PL coming from BNPL, another maybe 40% coming from existing PL and the remaining coming from new to PL for the first time. So there is a very decent runway ahead of us for many, many years to continue to penetrate into the current MTU. And obviously, our MRU is also going fairly at a good click.
Great. Sure. So just to clarify, the first form of credit that we give to the user is a postpaid or you directly give [Technical Difficulty]?
So it depends upon the lenders' risk appetite. There are different funnels. The user can offer BNPL or personal loan or credit card or merchant loan, the different whitelist. But there is an upsell opportunity from BNPL to a PL. It's not to say that you can't take directly a PL. Obviously, the risk policy of vendors are more tougher if you are coming absolutely new to personal loan, whereas the risk policy for somebody who is upgrading from BNPL after repaying 6 months is a bit more lenient because they have seen the risk play out for that user for the last 6 months.
Got it. Sure. Second question is on the credit card side. We've added about 1.5 lakh cards in this quarter. Just wanted to understand, was this a festive quarter and hence, the run rate is high? Or you believe incrementally, we can add 50,000 cards every month or 1.5 lakh for the quarter kind of run rate in the near future? And also, if you can give some color around what percentage of the total income on the cloud business would be coming from credit card business? And going ahead, let's say, [Technical Difficulty] number of cards. What would be the proportion of this in the cloud business?
So let me take the cards question in some detail, and then I'll hand it over back to Madhur. The cards business, I don't think our business is linked to any kind of festivity because we don't have an off-line distribution of the card business. It's purely played on the digital journeys that customers are whitelisted by the issuers and they consume it. So yes, the short answer is that the run rate of 50,000 is not issued cards. It is activated cards because we don't track issued cards.
Our belief is that we only want our partners to look at where the cards are getting activated on which they can get spends and we can make money. So 50,000 is the run rate that we've been doing for the last couple of months. And I believe revenue is going to become better. And I had said in my conversation in the past that we aspire to look at about 1 million cards to be issued over the next 12 to 18 months and we are sticking to that guidelines. Madhur?
4 Yes, Gaurav, credit card as a percentage of cloud revenue would be about 20% to 25%, and we do expect that to grow given the credit cloud is a business expected to grow faster given the variable penetration that we have.
All right. Just last question, if I can squeeze in. On the sales force, we've added about 5,000 on an average. There has been a 5,000 employee uptake in this quarter. And I understand this would be largely towards the merchant business acquisition that has been so successfully doing. Just wanted to understand [Technical Difficulty] hello, am I audible?
Yes, we lost you for a second. You can continue, please.
Okay. In terms of the device run rate, we've been adding 300,000 every month or about 1 million every quarter. Going forward, given that the headcount has increased, can we expect this run rate to improve going ahead?
The answer is yes. We're already seeing metric for January become better over December. And we do believe that this number is going to become better than what we've reported in the past.
We'll have time to take one more question. And the last question of the session will be from Mr. Manish Shukla of Axis Capital.
So first, on the sales force of about 29,000, how many would be off roll?
So, Manish, we don't have off role as a concept in sales force. So this theme is on the role of either our subsidiary or directly [indiscernible].
So the cost that you report, it fully accounts for this entire 29,000 people?
Yes. There would be attrition in the front end. So they may not have spent a full time. The guy may not be earning 4-month salary, et cetera. As you can imagine, people who generally spend more than 30, 45 days, they continue to remain in the system a long period of time on which we spend the entire salary and incentive, but yes, we will pay to these people even if they're staying for one day.
Okay, sure. The next question is the interchange for post-paid that you reported. That roughly works about 1.5% of the postpaid loans for the quarter. You think that's broadly the right run rate to look at it going forward.
Yes. So it's a good question you ask. So this used to be -- when you started this business, maybe 2 years back, we had to incentivize merchants and users to either take or accept postpaid. This number used to be higher [indiscernible] 2.5%, 3%. We've seen over the last 2 years, the number has now fallen to 1.5%. And as for the new digital lending guidelines, where in this particular product has to be disbursed [Technical Difficulty] merchant through payment aggregators. Hence, it will become interchange.
We do see that over a period of time with the scale that we've achieved, hopefully, this number to settle down more closer to where interchanges are for credit cards -- of low-value credit cards. But at this point in time, 1.5 is seemingly optimum the way our lending partner look at. But our endeavor is to make sure this number can fall down to 1.5% to maybe closer to 1%, 1.2% over a longer period of time.
Then if I were to look at payment processing charges, excluding interchange, that works out to roughly about 55% of gross payment revenues. Is there scope to optimize this further because obviously, this has come down quite drastically over the last couple of years.
Manish, that's not quite how you look at the business. So I would discourage you from looking at that as a metric because by that metric, you wouldn't do credit card business, for example. In credit card, you can charge the merchants let's say 1.5%, 1.7%, 1.8%. But a large chunk of that becomes payment processing cost. You still make a chunky margin. You still might make 10, 15, 20 basis points on that GMV, which is absolutely worthwhile for us to do.
But we don't really sort of manage this number to say, okay is it 55% or 60% or 50%. So I wouldn't quite look at it like that. I would look at it in the way that we had explained in December and earlier today, which is what is that as a percentage of GMV overall as a net payment margin which is revenue minus processing cost, what is that as a percentage of GMV? And that -- for that, we have sort of said we are currently at 7 to 9 bps. And over time, because of mix effect, this might go down slightly.
Okay. The last question, if I look at the growth in financial services revenue, that is less than the growth in value of the loans disbursed. So if one were to calculate take rate as financial services revenue to loans disbursed, that has been trending down. What is causing that?
Revenues of previous year's loans and disbursement revenue is of this year's loan. So it's a combination of incentive of collection plus disbursement. Because incentive of collection as of the previous year, which is 400% less. So [indiscernible] number will look small.
Should one look at it as 6-month lag or 12-month lag, what is the right method?
The length of credit, we are talking average length [indiscernible] in different, different loan line items are 12, 14 months.
With that, we come to an end of the Q&A session. A reminder that the presentation discussed today, a replay of this earnings call and the transcript will be made available on the company website. Thank you for joining.
Thank you so much everybody for joining, and it was great to have detailed discussion. We are available any which ways any other specific questions that you have.
Thank you very much. Thanks, everyone.