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Paytm’s lending and commerce businesses drive revenue growth in Q2 – low penetration provides room for growth, analysts say

By on November 10, 2022 0
  • One 97 Communications, operator of digital payment platform Paytm, reported sequential revenue growth of 14% to ₹1,914 crore.
  • The main revenue growth activities were its lending and trading businesses.
  • It also sequentially reduced its loss to ₹572 crore and said it was on track to achieve Adjusted EBITDA profitability by the September 2023 quarter.

Along with the reduced losses, One 97 Communications, the operator of digital payment platform Paytm, reported a 14% sequential increase in second quarter revenue to ₹1,914 crore. This revenue growth is explained by the growth in lending and trading activities.

Unlike the crowded payments industry, these two segments provide Paytm with more room for growth.

“We believe Paytm has the building blocks needed to build a financial services platform; being in the middle of the payment stream gives the platform access to a rich set of data on a large number of consumers,” Goldman Sachs analysts said, adding that this helps Paytm maintain its high lending quality, and also said that low penetration implies “significant room for growth”.

Currently, while these companies are growing, their penetration is still low. Only 4% of its 79.7 million monthly transacting users (MTU) benefit from postpaid loans. Even less, 0.6% of them benefit from personal loans.

Thanks to this low penetration, they offer a “larger growth margin” for growth, Dolat Capital analysts believe.

Moreover, only 4.4% of its merchants use its devices as sounding boards. Their merchants also seem eager for loans, as half of those who use loans come back for more with a return rate of 50%.

Credit activity continues to grow

Over the past few quarters, Paytm’s lending business has seen steady growth. It also signals a shift in the company’s business strategy from a simple payment platform to an integrated financial services provider.

It disbursed 9.2 million loans in the September quarter, up 8% sequentially and 224% year-on-year. The main contributor to this growth is the Paytm Postpaid service, which saw 449% year-over-year growth.

Still, the company says there’s still plenty of room to grow. “While our loan distribution business has grown significantly over the past few quarters, our level of penetration for each product remains low and provides us with a long avenue for growth,” the company said on its earnings conference call. second trimester.

Details Q2 AF23 Annual change
Loan disbursements ₹7,313 crore 482%
Personal loans (average note size ₹1.1 lakh) ₹2,055crore 736%
Merchant loans (average ticket size ₹1.5 lakh) ₹1,208 crore 342%
paytm postpaid ₹4,050crore 449%

Source: Company Reports

“Merchant subscriptions are an attractive profit pool”

In addition to loans, merchants, who use basic products such as Paytm QR codes for sounding boards, point-of-sale machines, online payments and advertising, are an attractive proposition, according to the company.

“We are expanding our monetization base with user and merchant growth. Merchant subscriptions are an attractive profit pool for us, driving higher payment volumes, subscription revenue as well as merchant loan distribution “, said the company.

Paytm’s merchant business model includes subscription revenue, merchant discount rate (MDR), and advertising revenue. On top of that, since UPI payments attract no MDRs from merchants, the government reimburses the company.

Merchant services revenue was ₹624 crore in the second quarter, up 12% sequentially and 56% year-on-year. Devices used by merchants also increased in the quarter to 4.8 million from 3.8 million in the prior quarter.

Here’s what analysts are saying

Paytm’s margins have improved sequentially and analysts attribute this to high-growth verticals that are also profitable.

“The operating profit margin improvement was driven by strong growth in the profitable lending business (up 29% quarter-on-quarter), as well as a payment business margin improvement of 229 bps in quarter-over-quarter,” said a report from Dolat Capital.

Based on these changes, analysts are confident that the company is on track to achieve Adjusted EBITDA profitability in FY24, as promised by the company.

“We expect margins to continue to improve and expect FY24 to be the first full year of Adjusted EBITDA profitability for Paytm,” Goldman Sachs said in its report, adding that they believe expect the momentum in the lending industry to continue.

Analysts at JP Morgan and Dolat Capital say that at the current pace, Paytm could reach adjusted EBITDA profitability sooner than expected.

Brokerage Evaluation Target price Upside down
Citi Research To buy ₹1,055 64%
Goldman Sachs To buy ₹1,100 71%
JP Morgan Overweight ₹1,100 71%
Morgan Stanley Equal weight ₹785 22%
Dolat Capital To buy ₹1,400 118%

Source: Brokerage Reports | Up from the closing price on November 9, 2022

Here’s Paytm’s Q2 in numbers:

Details Q2 AF23 Q1 FY23 Q2 FY22
Exploitation product ₹1,914 crore ₹1,680,000,000 ₹1,086,000,000
net profit ₹ -572,000,000 ₹ -644,000,000 ₹ -474,000,000
EBITDA ₹ -538,000,000 ₹ -634,000,000 -₹452,000,000
Users transacting monthly 79.7 million 74.8 million 57.4 million

Source: Company Reports

$PAYTM.NSE Paytm is technically creating a parallel lower channel after a breakout of the range and 100 EMA, indicating bull weakness. Basically, the industry P/E is close to 40, but the fintech giant is still in losses. Showing consistent revenue growth over the past 5 quarters. Earnings in quarter seven are over 1900 cr, which is almost double compared to September 2022. Basically, the stock is still overvalued despite growing earnings due to massive and consistent losses. #paytm

— (@tradegainers) November 09, 2022

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