During Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) 2018 annual shareholder meeting, Warren Buffett admitted that not investing in Amazon (NASDAQ:AMZN) and Google -- now Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) -- was a mistake. It seems Berkshire Hathaway doesn't want to repeat that mistake -- even less so when there's an opportunity in India, one of the world's fastest-growing economies.
Berkshire Hathaway has invested in India-based fintech start-up Paytm, its first direct investment in the nation, according to The Economic Times (ET). While the details aren't out yet, here's what we do know as of this writing: The deal is led by Todd Combs, one of the two investment managers responsible for several of Berkshire's recent stock investments, and Combs is joining the board of Paytm's parent, One97 Communications.
Berkshire's foray into India isn't really surprising; it was only last year that Buffett called India a "huge and enormous market" in an interview with ET Now. What matters, though, are the kind and size of opportunity Paytm offers. They're huge, to say the least.
Make no mistake: Paytm is a multibillion-dollar company
Paytm, which calls itself India's largest "digital goods and mobile commerce platform," is One97 Communications' flagship brand, backed in part by Alibaba (NYSE:BABA). ET reports that Berkshire Hathaway has scooped up a stake of 3% to 4%, worth around $356 million, in One97. That might be a small number on Berkshire's balance sheet, but it'll push Paytm's valuation to nearly $10 billion, second only to the highest-valued internet start-up in India, Flipkart. Investors may recall that Walmart recently acquired a 77% stake in Flipkart.
Paytm, in fact, counts Flipkart and Amazon among its key competitors today, having come a long way since launching its digital wallet services in 2014.
India's demonetization drive in 2016 -- when the government withdrew high-value notes, or nearly 86% of the cash in circulation, in a bid to crack down on the country's shadow economy -- proved a windfall for Paytm, as people were suddenly forced to turn to cashless and digital payments. Paytm's wallet user base has since crossed 300 million, from only around 115 million before demonetization. For perspective, the next closest e-wallet competitor, MobiKwik, had around 100 million users as of the end of 2017.
Paytm is leveraging its swelling customer base to expand its product portfolio, offering Berkshire Hathaway an entry point into several potentially high-growth areas in the world's second-most populous country, which is why this deal isn't to be taken lightly.
Why Paytm caught Berkshire Hathaway's attention
Berkshire Hathaway isn't just betting on a digital payments company: Paytm's torrid growth reminds me of Amazon and how it wants to be pretty much everywhere. To give you an idea, here are just some of the areas Paytm has already made forays into:
- Paytm Wallet -- a gamut of wallet services, including travel, event, and entertainment ticketing. Paytm claims to sell nearly 4 million air, rail, and bus tickets monthly, giving India's largest online travel aggregator, MakeMyTrip (NASDAQ:MMYT), a run for its money. For perspective, MakeMyTrip sold around 72.9 million air and bus tickets in fiscal 2018. Paytm aims to double its ticketing volumes in fiscal 2019. On a separate note, Softbank (OTC:SFTBY) -- one of Paytm's stakeholders -- is teaming up with the company to launch digital payment services in Japan.
- Paytm Mall -- already the third-largest e-commerce company in India after Amazon and Flipkart. Paytm Mall generated annualized gross sales worth $3.5 billion in June, according to Livemint; the company is targeting $10 billion in annualized sales by March 2019. Alphabet's Google is now reportedly eyeing a partnership with Paytm Mall to buy a stake in India's largest retailer, Future Group, and join the hot hypermarket and online-grocery race in India.
- Paytm Payments Bank -- one of only 11 such banks in India to get a payments bank license. This allows it to offer restricted banking services such as low-cost savings accounts, deposits, cards, and fund transfers, primarily targeting India's "unbanked and underbanked" population.
- Paytm Money -- a mutual fund distribution platform that will start operations soon.
- Financial services -- expanded offerings including loans, insurance, gold, and foreign exchange. Paytm aims to become the world's "largest digital bank," with 500 million accounts, according to Bloomberg.
- Paytm Inbox -- a messaging service app akin to Facebook's WhatsApp that also allows money transfer, and will soon offer live television, games, and entertainment videos. Paytm Inbox has more than 120 million monthly active users.
- Paytm AI Cloud -- a cloud-based data storage center service, recently launched in partnership with key stakeholder Alibaba.
Clearly, Paytm has some big plans up its sleeves, especially in industries that Buffett already has strong conviction in. One fine example is banking and financial payments, going by the number of banking and payment-processing stocks that Berkshire Hathaway holds in its portfolio. As an emerging banking fintech in a rapidly growing economy, Paytm suits Berkshire's palate.
Also, as the leading digital payments company, Paytm has an economic moat in a business with a powerful network effect. We already know what a big fan of moats Buffett is.
Finally, Paytm's founder and CEO, Vijay Shekhar Sharma, has his skin in the game -- another typical Buffett criterion for an investment. (Importantly, Sharma owns a majority stake in Paytm Payments Bank, per regulatory requirements.) Here's what One97's shareholding pattern looked like before Berkshire's investment, as per data from ET:
Paytm isn't profitable yet, but its top line is growing at a strong pace. At the same time, Sharma's thirst for growth appears insatiable even as he prioritizes cash flow over profit. To be sure, it won't be an easy ride among such stiff competition. But with Credit Suisse projecting India's digital payments industry to grow fivefold to hit $1 trillion by 2023, and Morgan Stanley pegging the nation's e-commerce market to be worth $200 billion by 2026, Berkshire Hathaway might have finally found the Amazon-like opportunity that it missed out on before.