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Two-pronged strategy to drive profitability | EBITDA to break-even in FY25E

* Scale matters: One 97 Communications Ltd (Paytm) is India’s leading payments app and FinTech enterprise offering payments, financial services, commerce, and cloud services to its large consumer/merchant base of ~350m/ ~31.4m, respectively as on 3QFY23. It is among the largest payments platform, with GMV of ~INR13.2t in FY23 (INR8.5t in FY22).

* Huge cross-sell opportunity: The company has grown its Monthly Transacting Users (MTUs) to 90m as of FY23 that provides a ready customer base to cross-sell financial products to consumers; while, robust growth in subscription devices has helped improve throughput and supported growth in merchant loans.

* Disbursements to surge: During FY23, Paytm reported a 4.6x jump in the value of loans disbursed to reach an annualized run-rate of INR500b. We estimate disbursements to report a steady 64% CAGR over FY23-25, thus driving the mix of financial revenue upwards to 31%.

* Contribution margin to expand: Paytm has achieved a breakeven in adjusted EBITDA during 3QFY23, well ahead of its guidance. We estimate contribution margin to improve to 56.8% by FY25 from 30% in FY22, fueled by improvement in operating leverage and rise in financial business mix.

* Initiate with a BUY: We estimate Paytm to achieve an overall EBITDA break-even by FY25. We value the stock at INR865 based on 18x FY28E EV/EBITDA and discounting the same to FY25E at ~15%, which implies 4.5x FY25E P/Sales. We initiate coverage on the stock with a BUY rating.

Digital payments – the new face of commerce

Total payments industry is forecasted to double to USD16t by 2026, within which the mix of digital payments is likely to increase to 65%. Thus, digital payments are expected to surge ~3x to USD10t by 2026 from USD3t in 2021. Mobile payments are projected to grow even faster at ~5x to USD3t by 2026. Further, an increase in QR deployment will drive merchant payment, which is likely to jump ~6x to USD2.7t by 2026. Paytm will thus be a big beneficiary from this surge as it has a strong positioning in both digital payments and lending businesses.

Payment business posting healthy growth; estimate 21% revenue CAGR

Paytm has reported a healthy traction in growing its GMV at 55% CAGR over FY19-23. While the growth was slightly softer due to Covid-19, the same pickedup strongly post-Covid. GMV clocked 81% CAGR over FY21-23. With increasing use cases, we expect GMV to report a healthy 27% CAGR over FY23-25. Paytm also posted steady growth in MTUs to ~90m as of FY23 while the number of subscription payment devices rose to 6.8m. As the penetration among merchants remains low, we expect the traction to sustain with a quarterly addition of ~1.0m devices. We forecast the payment revenue to thus clock a healthy 21% CAGR over FY23-25.

Financial revenue to grow exponentially; mix to improve to 31% by FY25E

Paytm’s financial business further augments the profitability of core payment business due to its inherently higher contribution margin. In financial business, Paytm primarily offers three types of loans, viz.: a) Paytm Postpaid – offers short

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