Near-term sales growth, profitability on fintech giant Paytm's horizon

One97 Communications (Paytm) maintains its lead position in the fintech space. Momentum in credit and margin expansion in the payments business may help it beat expectations.
 

In Q2FY24, Paytm reported revenue growth of 7.6 per cent Q-o-Q, led by monthly transaction users (MTU) growth of 3.3 per cent Q-o-Q and average revenue per user (ARPU) growth of 4.2 per cent. The merchant business grew at 9.4 per cent sequentially and strong device addition (up 1.3 million devices versus past quarter); financial services saw traction in merchant loans (value of loan went up 19 per cent Q-o-Q).

Revenue was at Rs 2,518.6 crore and payment processing charges were up 6.5 per cent Q-o-Q and were 54.4 per cent of payments services revenue. The contribution profit was at Rs 1,426 crore, up 9.4 per cent Q-o-Q, translating to a contribution margin of 56.6 per cent, up 93 basis points. Expenses (excluding payment processing charges) were up 3.5 per cent sequentially.

The standard operating loss was Rs 231 crore, lower by 21 per cent Q-o-Q, while the profitability improved by 330 bps Q-o-Q to -9.2 per cent.
 

The adjusted operating profit before ESOP improved to Rs 153.6 crore (Q1FY24 was Rs 84 crore), with contribution margin increasing by 93 basis points; there was a 4 per cent Q-o-Q increase in indirect costs.
 

The total device base was around 9.2 million in Q2. It also introduced three new devices – Paytm Card Soundbox (card tap and pay), Pocket Soundbox (portability), and Music Soundbox (feature) -- to serve diverse needs. The target is to install 1.5 million devices per quarter. Sales employee addition at 35,000 (up 57 per cent Y-o-Y) indicates that merchant business growth may accelerate.
 

Personal loans saw a decline in value and number of loans of 3 per cent and 20 per cent Q-o-Q, respectively. There was a deliberate shift of focus to reduce risk exposure.
 

The management remains bullish amid a reduction in bounce rates by 25 basis points and an expected credit loss reduction by 25 basis points, while continuing to project double-digit growth overall.
 

The improvement in terms of credit-tested users have led to lower delinquency in the largest category of BNPL (buy now pay later).
 

The value of the loan disbursed amounted to Rs 16,210 crore. About Rs 300 -400 crore of personal loans mature every month and this is available for upsell and hence, there’s an improved renewal opportunity. Personal loans would remain muted for two more quarters and 30-40 per cent Y-o-Y growth can be expected. Merchant loan growth shall be in excess of 50-60 per cent and blended total credit growth would be 40-50 per cent. The commerce gross merchandise value is up 39 per cent Y-o-Y driven by all-round growth in travel, entertainment, deals and gift vouchers.
 

Q3FY24 should see strong revenue growth due to the festival season. The Ebit margin loss should be lower by close to 5 per cent sequentially due to an improvement in contribution margin. Paytm hopes to turn profitable in the next four quarters with strong growth, double-digit Ebitda margin, and stable profitability. The key risks are asset quality deterioration, supply pressure from private equity selling, and regulatory risk.
 

The stock remains volatile but some analysts have targets in the range of Rs 1,100-1,400 per share which implies significant upside.