Path to profitability getting clearer for Paytm, says Dolat; sees 90% upside

One97 Communications, the parent company of Paytm, has been an underperformer since listing on the stock exchanges last year. The stock is currently trading around 65 percent below its issue price of ₹2,150 and has lost 45 percent just this year (2022) so far.

Since its listing in November 2021, investors have been concerned regarding the profitability of the firm. While different brokerages have expressed different views on the firm, a domestic brokerage house Dolat Capital, in a recent report said that the path to profitability is getting clearer for the firm.

The brokerage has retained its bullish stance on the stock and has a target price of ₹1,400 for the stock, implying a potential upside of 90 percent in 12 months.

However, it is important to note that this target price still remains around 35 percent below its issue price of ₹2,150.

“We largely subscribe to the management confidence on achieving Adjusted EBIDTA breakeven by the first half of FY24. Our confidence is stemming from multiple aspects in the business that indicate that would add to profit pools in the near future,” the brokerage firm said in a report.

Rationale

As per the brokerage, Paytm has the significant advantage of being a true PLATFORM with no real-world marginal cost attached to most of its business use cases and thus can scale up with significant leverage. It has reduced its operating losses by ₹58 crore from Q2FY22 to Q4FY22 despite very strong growth of 42 percent (incremental revenues of ₹450 crore), added the report.

"It is also going to accrue a strong incentive-based revenue stream on its Personal/Merchant loan portfolio in FY23 that would add ₹50 crore straight to Operating Profits. Also, the introduction of platform fees on consumer payments would mean better monetization even on UPI-based payments," it said.

Meanwhile, scale-led improvement in Payment Processing Charges and operating leverage on employee costs and marketing costs will ensure a timely path to profitability by H1FY24, and the eventual creation of large profit pools added Dolat.

Since its launch in 2010, Paytm has rapidly advanced from a basic recharge platform to a digital payments giant, the brokerage further said.

"Steady development, adoption and scale-up of multiple use cases (payments, lending products, investment products, insurance, Commerce) have hereby created a potentially large ’Life-Time-Value from Customer’ metric. Thereby serving both, ‘Wants and Needs’ side of consumers, and these use cases present a high probability to further scale up a much larger user base and is far ahead compared for other Internet peers," it pointed out.

Contribution Margin improves

Dolat noted that Paytm’s Contribution Margin showed an improvement of 383bps QoQ to 35 percent with a Contribution Profit of ₹540 crore in Q4.

"This improvement was driven by margin improvement in Payments and growth in high margin offerings such as lending and cloud service. Additionally, multiple factors like reduction of Processing Charge Cost and better leveraging of the platform via optimization of transaction routing, improvements in transaction rates, and increase in the share of low-cost instruments in the mix such as UPI led to better performance.

The brokerage added that Paytm’s ESOP costs have also gone down by 7 percent. “Paytm shared going forward, present employee base is sufficient for FY2023, company remains at adequate capacity. The growth rate in employee cost is expected to moderate over time, along with indirect expenses,” the report said.

Business Segment

As per Dolat, Paytm’s FY22 GMV (gross merchandise value) was up 111 percent YoY at ₹8.51 lakh crore driven by growth in transacting users, and increasing in-store presence at merchants via Paytm QR and devices.

The company’s take rate has also stabilised at 0.6 percent in FY22 - flattish for all quarters, but is down 16 percent on a YoY basis, added Dolat.

"A broad trend of consumers, as well as merchants in Tier-2 and Tier-3 towns using mobile as a primary way of payment and transactions, augurs well for Paytm. The company believes that it can achieve very large scale in GMV/Revenues from its current base of MTUs (average monthly transacting user) as users increase their engagement on the App over time," explained the brokerage.

Loan growth

Paytm has posted a 779 percent increase in loan disbursements for the quarter ended June 30 to ₹5,554 crore. On a sequential basis, its lending operations grew 56 percent, the company said in an exchange filing. Paytm has disbursed 85 lakh loans during the quarter, an improvement of nearly 500 percent YoY. The Vijay Shekhar Sharma-led company’s credit portfolio annualised run rate improved to ₹24,000 crore.

“The rapid growth of our lending products brings us an attractive profit pool. We are also seeing increases in average ticket size due to the scale-up of the personal loans business in particular,” the company said.

Q4 Earnings

The firm reported a widening of consolidated net loss to ₹763 crore for the quarter ending 31 March 2022. The firm had posted a loss of ₹778.5 crore in the December quarter and ₹444 crore in the year-ago period. The consolidated revenue from operations grew 89 percent year-on-year (YoY) to ₹1,540.9 crore in the quarter under review as compared with ₹815.3 crore in the corresponding quarter last year.

The main drivers were an increase in merchant payments processed through MDR-bearing instruments (Paytm Wallet, Paytm bank account, cards, etc) and disbursements of loans through our partners on the Paytm platform, the company said in a regulatory filing.

For the full year FY22, the company saw its revenue jump by 77 percent to ₹4,974 crore from ₹2,802 crore the previous year.

Risks analysis

In Mar’22, RBI directed Paytm Payments Bank to halt the on-boarding of new customers due to certain supervisory concerns but maintained 'business as usual' for existing customers. Despite this hitch, data on payments, MTU, and credit remains encouraging, while management except curb lifting within the next 3-6 months possible, Dolat pointed out.

It added that Paytm has very little regulatory risk as it is not giving credit and it is enabling financial inclusion by targeting customers that have weak financial data history to seek loans from traditional banking channels.

Valuation and outlook

The brokerage believes that the company can compound its revenues by 17x over a decade and would turn highly profitable and positive on cash generation by FY25E.

"The growth momentum is factored in two stage projections wherein over FY22-FY30E we expect revenue CAGR of 35 percent and in second stage revenue CAGR of 15 percent over FY30-FY40E. We expect it to turn PAT break even in FY25E and reach steady state EBIT Margin of 21 percent over FY30-FY40E," forecasts Dolat.

It further added that improving Revenue growth, scaling up the lending business, revival of commerce business, rising contribution profitability, and aspiration to achieve break-even for adjusted EBITDA (by Q2FY24) all suggest bettering financial performance.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.