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Recuperation to be protracted; initiate coverage with REDUCE

We initiate coverage on One97 Communications (OCL-Paytm) with REDUCE and a ~13% downside. Following the recent regulatory salvo, the stock has corrected ~55% (~80% from its post-IPO peak in Nov-21), echoing the expected business/revenue dislocation in the Payments/Financial Services verticals; this was aggravated by high KMP attrition. We believe Paytm’s path to profitability will be arduous, mainly due to i) higher operational burn in Payments, given absence of the high-MDR Wallet and rising share of low MDR UPI business; ii) its jeopardized monetization strategy, with sharp slowdown in Financial Services revenue amid rising asset quality and partner attrition/business scale-down risks. Paytm is likely to see significant business disruption in FY25E; recuperation would commence thereafter, subject to no business/regulatory hurdles ahead. It would turn EBITDA-positive not before FY28E and net profit-positive only by FY29E, in our view. Based on DCF, our TP stands at Rs300/sh, implying FY26E P/operating revenue of 1.8x, P/BV of 2.5x.

Payments business – Operational burn to aggravate in absence of Wallet business and higher share of UPI

We believe RBI’s recent suspension of the Paytm Payment Bank’s high MDR wallet business will not only erode Paytm’s Wallet GMV and hurt Payments margin, but impact customer engagement too, as it is a hook product for many customers. This will call for higher cash burn for retaining/engaging customers on the App. Further, UPI spends would come under pressure (down 9% MoM in Apr-24) leading to a moderated payment business GMV CAGR of 21% over FY24-28E vs 45% over FY22-24E. This, coupled with rising share of UPI transactions in overall Payments GMV, should hit margins as well, as P2P (peer-to-peer) transactions are free, whereas only select P2M (peer-to-merchant) transactions attract a low MDR. Factoring in the revenue slowdown, margin pressure and the operational burn, we believe Paytm’s Payments business would see losses for a prolonged period, unless MDR for UPI is made broad-based across P2M categories by the GoI/Regulator.

Loan distribution business to witness sharp slowdown on rising asset quality and regulatory noise, and on partner attrition risk

Paytm has the early mover advantage and has successfully monetized its huge Payments customer/Merchant base via the loan distribution business. It registered Rs466bn GMV in 9MFY24, helping it turn EBITDA-positive (ex-ESOPs). However, we believe that recent regulatory actions (higher risk weights), rising asset quality noise in low-ticket unsecured loans, and increasing risk of further partner attrition/scale-down (after AB Capital) could derail the business momentum in the near-to-medium term. This could even compel the company to pivot from its LSP (lending service provider) position toward on-balance sheet lending, subject to securing the NBFC license. We expect loan disbursement to dip in FY25E and gradually improve thereafter, reporting 10% CAGR over FY24-28E, subject to no further disruption.

Business recuperation to be protracted; initiate coverage on Paytm with REDUCE

We believe Paytm is still in the disruption phase amid ongoing customer, KMP & lendingpartner attrition. Business normalization and growth re-acceleration is likely to be a long drawn out process. Thus, we expect Paytm to turn EBITDA-positive only in FY28E and net profit-positive not before FY29E. This thus derails Company’s plans of turning PATpositive in the near future. Also, regulatory risks remain high, with its payment aggregator license in abeyance. Based on DCF methodology, we arrive at a TP of Rs300/share, implying FY26E P/Op Rev of 1.8x and P/BV of 2.5x. We initiate coverage on Paytm (OCL) with a REDUCE recommendation and ~13% downside. Our bull-case fair value (FV) is Rs470/share and bear-case FV is Rs140/share.

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