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Result Highlights

* Revenue from operations: Revenue at Rs 20,622mn was up 7.7%/41.6% QoQ/YoY, sequentially driven by Financial Services and Commerce businesses

* Payment processing charges: Payment proc. charges were down -1.1%/-5.8% QoQ/YoY and were 64% of Payments Serv. Rev., up/down 41/-1498 bps QoQ/YoY

* Contribution profit: Contribution profit at Rs 10,480mn was up 24.3%/131% QoQ/YoY, translating to a Contribution margin of 50.8%, up 678bps QoQ

* Expenses (excl Payment proc. charges): Total expenses were down/up - 3.0%/13.3% QoQ/YoY. The YoY growth was driven by Emp. and Other Op. Exp.

* Standard EBITDA (Calculated): EBITDA loss, at Rs –3,307mn, lower -38.5%/-58% QoQ/YoY, translating to an EBITDA margin of -16%, up 1206bps QoQ

Our view – Loan distribution business serves to enhance both revenue and margin

The share of Financial Services in overall revenue continues to rise even as there were some negative one-offs for the quarter: Total revenue was 42% YoY to Rs 20.62bn for the quarter, driven by merchant subscription, loan distribution and commerce business. The quarter was negatively impacted by the timing of the festival season and lack of UPI incentive for the quarter. The Financial Services revenue was up 257% YoY to Rs 4.46bn for the quarter, contributing 22% to total revenue. This was driven by loan distribution as the value of loans disbursed amounted to Rs 99.58bn for the quarter, up 357% YoY.

There were a variety of factors aiding both contribution margin as well as EBITDA margin, with EBITDA before ESOP cost turning positive: The improvement in contribution margin was driven by payments profitability and growth of high-margin businesses such as loan distribution. Indirect expenses as a percentage of revenue has declined to 49% for the quarter compared with 53% for 2Q and 58% in 3Q last year. As a result, EBITDA before ESOP cost as a percentage of revenue has turned positive at 2% for the quarter, for the first time, compared with -9% in 2Q and -27% in 3Q last year.

We maintain ‘Neutral’ on PAYTM with a revised price target of Rs 600: We value PAYTM at 3.9x FY24 P/S to arrive at our price target of Rs 600.

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