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Paytm reported another strong quarter with positive Adj. EBITDA further aided by UPI incentive of INR 1.9bn received during the year. Payment services revenue (adj for UPI incentive) grew +7% QoQ/+23% YoY with net payments yields improving slightly to 14bps (+1bps QoQ). Management continues to indicate that payments yields are expected to decline in the medium term with rising share of lower yielding UPI (payment processing margins to stabilize at 5-7bps vs 7-9bps now). Financial services revenue grew +7% QoQ, +1.6x YoY, though there was a minor moderation in headline take-rates on distribution business during the quarter – management indicated that this was on account of changes in postpaid loan provisions and is EBITDA neutral (also result in reduction in payment processing charges). Cloud and commerce revenues were down -6% QOQ, +23% YoY largely driven by seasonal trends. Consequently, contribution margins were broadly steady at 51.2% (vs 50.8% QoQ). Overall GMV grew +38% YoY, MTUs grew +27% YoY and value of loans disbursed stood at Rs12bn (15% QoQ). Management continues to be confident of expanding the Adj. EBITDA margin further and achieve positive cash flows in medium term. We expect 38% revenue CAGR over FY23-25E for Paytm, with contribution margins sustaining at 50%+ incrementally. We maintain our BUY rating on the stock with revised target price of INR855 (valuing it at FY30e EV/EBITDA discounted back to FY24).

* Payment margin sustain: Paytm’s payment services revenue (adj for UPI incentive) grew +7% QoQ/+23% YoY with net payments yields improving slightly to 14bps (+1bps QoQ). on the back of a) conscious effort to reduce payment processing charges and b) expansion across MTUs, merchant base and GMV (increasing by 6%, 7% and 3% QoQ). Management continues to guide for blended payment margins to stabilize around 5-7bps (vs 7-9bps now) given lower yielding UPI is growing at a much faster pace. Management remains optimistic on the growth opportunity for the payments business in India with a potential of 100mn merchants and more than 500mn payment customers and opportunity to cross sell financial services and commerce business offerings to them.

* Financial services business growing at rapid pace: Disbursals hit annualized runrate of c.Rs480bn in 4Q23 with 1.6x YoY growth in revenues. Paytm continues to be confident of the growth runway in the financial services space given the low penetration in existing base (BNPL at 4.3% of MTUs, PL at 0.9% of MTUs and Merchant Loans at 5.9% of devices merchants). There was a minor moderation in headline take-rates during the quarter – management indicated that this was on account of changes in postpaid loan provisions and is EBITDA neutral (also result in reduction in payment processing charges). While we remain concerned on the downside risks to the take-rates (sourcing revenues 2.5-3.5% of loan value) in financial services business, management remains optimistic in this regard. Further, collection incentives (0.5%-1.5% of revenues after portfolio closure) should start to become meaningful revenue contributor incrementally.

* Cloud and commerce business impacted by seasonality: Cloud and commerce services revenues were down 6% QoQ; +23% YoY largely driven by seasonal trends. Cloud business saw a decline of 4% QoQ due to weakness in marketing cloud though partially set-off by higher growth in credit card distribution business. Co-branded credit cards forms part of the cloud business and management remains confident of this proportion going up in the near to medium term aided by strong growth in the credit card sourcing.

* Valuations and view: While we have remained cautious on Paytm’s business model since our initiation given the high cash burn, risk on take rates in financial services business and long road to profitability, its operating metrics are gradually improving (net payment margin, ramp up of financial services) with management’s focus on increasing efficiencies and profitability, which in turn should aid Paytm to turn profitable by FY26E, in our view. We raise our EBITDA estimates given scale up in financial services and now expect a normalized EBITDA breakeven for Paytm in FY25E. We expect 38% revenue CAGR over FY23-25E for Paytm, with contribution margins sustaining at 50%+ incrementally. We maintain our BUY rating on the stock with revised target price of INR855 (valuing it at FY30e EV/EBITDA discounted back to FY24).

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