NPST 20/12/2023
Understanding the Complexities of a Fintech Company
The companies operating in the fintech domain often present intriguing, yet complex, business models. A particular such company, which I have been closely examining is NPST. This analysis is based on my readings of the company's conference call and other available resources.
The UPI Switch Business
One of the company's primary revenue streams is its UPI switch. This switch acts as an intermediary between banks and the National Payments Corporation of India (NPCI), facilitating UPI transactions. Currently, about 11 banks use this switch. However, this segment appears to be reaching saturation, with most banks already tied up with similar service providers. The challenge here is to entice banks to switch from competitors, a task that seems daunting without a clear competitive advantage.
The PA/PG Business
The second key area of business is providing Payment Aggregator (PA) and Payment Gateway (PG) some payment solutions. Typically, a merchant requires bank approval to offer various payment instruments on their website. But banks take time to give such approvals. NPST seems to offer a workaround by providing these payment instrument APIs, although the specifics of this arrangement are not entirely clear to me yet. This segment has shown a sudden increase in revenue since September 2022, possibly due to the RBI's restrictions on onboarding new merchants for existing PAs and PGs. This would mean that merchants have had to depend on new PA/PG providers who in turn would have used services offered by NPST.
Merchant Management APIs
The company is also venturing into developing APIs for banks to manage merchants. The exact nature of these services and their advantages over existing solutions, like those offered by Paytm, remains unclear to me.
Market Position and Growth Prospects
The company operates in a competitive market with about six players, where the largest holds a 40-45% market share. The company's growth prospects seem moderate, with management guiding for a 15-20% earnings growth. However, the current PE ratio of around 100 is too high for me.
Despite some growth in earnings and a shift to quarterly reporting, the reasons behind the company's significant earnings growth remain ambiguous. This is an area I plan to explore further by reviewing the company's conference call and other materials on an ongoing basis.
Concluding Thoughts
As I delve deeper into this company's business model, it becomes increasingly apparent that there are many layers to understand. The company operates in several potentially lucrative areas but faces challenges in differentiation and market competition.