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Move over Bitcoin, here comes UPI, the next big investment idea Investment exposure to the Indian digital payment ecosystem requires investing in US stocks

 

Bitcoin was, and is, touted as a tool of financial inclusion. After 13 years, Bitcoin has an estimated 100-120 million users out of a worldwide household population of two billion. Contrast this with UPI with more than 600 million users in India, in a household population of around 300 million. This means that, on an average, there are nearly two users of UPI in each household.


UPI: The next big stock idea


According to the June 2022 data from NPCI, the total value transacted, annualised, is at $1.5 trillion. In terms of transactions, annualised, more than 70 billion transactions are carried out on the UPI platform. It is being extended to more than 30 countries worldwide. UPI is developed and managed by the National Payments Corporation of India (NPCI), an Indian company — talk about Make in India and Make for the World.


UPI costs nothing to the users and is a real-time payments system. It instantly deducts amounts as low as Re 1 from a bank account and credits it to another. This revolutionary platform, growing at more than 100 percent compounded annualised growth rate (CAGR) over the last five years, has been hailed as a world leader in real-time payments by ACI Worldwide, and the rest of the world is forced to look to India to learn what the future looks like.


You can use UPI on more than 70 apps, with new ones being launched daily. However, three apps dominate the landscape with nearly 95 percent market share.



PhonePe is the largest with nearly 50 percent market share.


GPay is the second-largest with nearly 35 percent market share.


Paytm is the third-largest with nearly 10 percent market share.


The remaining prominent apps are from Indian private banks, some state-owned banks, Amazon Pay and some fintech companies.


Another interesting one is WhatsApp Payments. While WhatsApp payments has very few users compared to the Big 3, it has been allowed a maximum registered user base of 100 million. However, the total user base of the main WhatsApp platform in India is nearly 500 million.


So, who owns PhonePe? PhonePe is owned by Flipkart, which, in turn, is owned by US-based Walmart. GPay, also known as Google Pay, is owned by US-based Alphabet Inc. Paytm is, of course, listed on the Indian stock exchanges. But, Berkshire Hathaway Inc., Warren Buffett’s company, also holds shares in Paytm via its international holding company, BH International Holdings.


Amazon Pay is owned by Amazon.com, Inc. WhatsApp payments is owned by Meta Platforms, Inc. (erstwhile Facebook, Inc.). (See Disclaimer below.)


Of course, these US-based companies own the UPI payments platforms via various international and Indian subsidiaries. Also, currently, there is no direct revenue from UPI payments. However, note that there is monetisation via promotions, but compared to their core revenue streams, it is negligible.


Customer data brings revenues


One might tend to dismiss these platforms since hardly any revenue is being generated. However, that would be a huge mistake.


Given the mass scale of adoption of these platforms in India, one should compare them to other platforms which also generate no direct revenue from subscription fees but have a huge user base in India. Consider platforms like Google search engine, YouTube, Facebook, Instagram, etc. These have large number of users who use the platforms for free.


Despite the “free” use of its platforms, Google India had gross advertising sales of nearly Rs 14,000 crore in FY2021. Similarly, Facebook India reported gross advertising revenues of nearly Rs 9,000 crore in FY2021.


The above examples show that a “free” platform can still generate a lot of revenues. However, that is hardly the real story.


The real secret to bear in mind is the data. With 50-100 billion transactions annually, by more than half a billion people, transacting more than a trillion USD, it is a world of fantasies for an Artificial Intelligence (AI) entity. Of course, the Government of India has framed, and is formalising several more laws, rules and regulations on data privacy and storage within the Indian jurisdiction to provide safety to Indian citizens.


The monetisation from this rich and large source of finance transactions data cannot be imagined today. This could add value to the users in the form of highly customised offers on products and services. The more the value-add to the users, the more the monetisation for the company which own the platforms.


Of course, this is what we at OmniScience call a ‘latent growth vector’. The growth vector exists, but it is latent and yet to be significantly monetised. This is more like a high-risk, high-return, venture capital-like investment.


How to make the most of the UPI wave?


The interesting thing is that most of the above companies, which are listed on the US stock exchanges, have strong revenues and cash flows, and are currently available at significant discounts to their intrinsic values. Their core businesses themselves are sufficient to justify their intrinsic values, which are, in our estimate, much more than their market value.


These mega companies are also growing in double-digits and one is getting the digital payments growth vector for free.


Taking exposure to UPI seems to be more weighted towards US stocks due to the 85 percent share of PhonePe and GPay. For those who prefer investing in Indian stocks, there is a smallcase on Fintech, Digital Payments & Banking, which provides exposure to the broader digital payments space, including other channels, such as RTGS, NEFT, IMPS, etc., besides the apps. This basket consists of Indian private banks, PSU banks, other financial services and technology stocks.


Disclaimer: Please note that any mention of company names is not a recommendation to buy, sell or hold. One should invest based on the advice of their financial advisor based on their investment objectives, financial situation and risk profile. OmniScience Capital, its management and employees and its clients might be buying, selling or holding the mentioned companies.

 

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