Paytm set for a rebound as it recovers from regulatory disruption

While Paytm (One97 Communications) is not completely past regulatory hurdles, its share price has gained in the last month or two. The Paytm handle migration is complete along with FDI clearance necessary for the Payment Aggregator (PA) license. UPI consumer data indicates stable market share, and expansion in partner networks in financial distribution. All this implies Paytm could be set to meet guidance of turning Adjusted EBITDA breakeven by Q4FY25 (ex of UPI-incentives).

One97 Communications is an Indian technology company that provides digital payment and other financial services to consumers and merchants, through subsidiaries, etc under the Paytm brand.

The divestment of the movie ticketing business, which it sold to Zomato for Rs 2,048 crore cash, will strengthen the balance sheet. The @paytm handle has been migrated to four partner banks – Axis, SBI, HDFC and Yes Bank.

In March 2024, NPCI approved Paytm’s request to function as a third-party application provider (TPAP), allowing Paytm to continue offering UPI. The migration allows Paytm to add new users (Monthly transacting users stood at 78 million at the end of Q1’FY25).

In late August, Paytm reported the Ministry of Finance had approved FDI investment into its subsidiary, PPSL (Paytm Payments Services Ltd), for a Payment Aggregator license. RBI returned Paytm’s earlier filing in 2022, citing need for approval from the Finance Ministry. Paytm will now re-submit an application for a PA license and RBI approval would enable Paytm to add new merchants for its online payment business.

NPCI data for June-Aug suggests that Paytm’s UPI market share by value of transactions is steady. Merchant subscriber base for devices has been good at 10.9 million in Q1, and management is confident of improving ARPU (average revenue per user) and accelerating addition through customer re-activations and outreach (an annual transacting base of over 180 million is presently inactive). Device features have improved with longer battery life, lower latency, NFC built-in device, etc.

In loan distribution, Paytm’s partner banks and NBFCs continue to rely on the Paytm platform (11 partners in all, including 3 banks and 8 NBFCs). There has been a conscious decision to go slow on personal loans, due to an adverse credit quality cycle. Since Q4FY24, the strategy has been a ‘distribution-only’ model for personal loans. In merchant loans, Paytm undertakes distribution as well as collections. The management is bullish on demand.

Paytm management is looking for higher contributions from other financial services like insurance distribution, equity broking, mutual fund distribution, etc. Loan distribution is currently 90 per cent of the mix, and 10 per cent is other financial services. Management targets pushing the contribution of Other Financial Services to around 30 per cent.

In Q1FY25, Paytm guided a savings of Rs 400-500 crore in annual employee costs. Employee cost (ex-ESOP) was down 9.3 per cent quarter-on-quarter (QoQ) and average sales employee saw a headcount reduction from 36,500 to 31,600 QoQ. Further reductions of 5-7 per cent QoQ are expected through H2. Two one-off items related to campaign on ‘Power of 4 banks’, and technology migration cost had an aggregate impact of Rs 80-100 crore, which are not expected to recur. Ex-UPI incentives, the company may achieve positive adjusted EBITDA by Q4FY25.

The deal with Zomato to sell the ticketing business will boost cash reserves by Rs 2,048 crore (Cash balance at end of Q1FY25 was Rs 8,600 crore). Savings should accrue from headcount reduction after the sale of the events business.  

Overall, Paytm seems poised for a rebound after the disruption caused by the regulatory stance. The company continues to possess diverse use cases, solid customer base and robust tech platform. The guidance implies it could turn EBITDA-positive (unadjusted) by FY26 and PAT positive by FY27.