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Upgraded to BUY for the first time in March, Paytm prices in some positives

Our view –

Goal of EBITDA breakeven this year looks real, driven by cost control and other aspects Revenue aspects – Key revenue lines displayed reasonable sequential traction: Revenue from Payments services was up 7.0% QoQ to Rs 9.46bn. Revenue from Financial Services business was up 34.3% QoQ to Rs 3.76bn. As a result, total revenue from operations was up 10.5% QoQ to Rs 16.6bn for the quarter. Profitability – The company reiterated that it would achieve EBITDA breakeven by the end of the year: EBITDA before ESOP cost stood at -Rs 1.86bn, which translated to an adjusted EBITDA margin of -11.2%, as against -36.3% in 1QFY25. There has been a material reduction in cost base. In 10 months, there has been a 60% reduction in manpower cost in the support function.

Business pivot –

Paytm introduces FLDG approach for the first time in its lending business: Paytm stated that the DLG (default loss guarantee) model has become an industry practice and is well within regulatory guidelines. The lender partner feedback has been that their appetite for the DLG model is somewhat higher. We maintain a very recently-assigned ‘ADD’ rating on PAYTM with a revised price target of Rs 800: We value PAYTM at 4.8x FY26 P/S to arrive at our price target. We had upgraded PAYTM to BUY for the first time in our report dated Mar 2024. We assigned an ADD rating in our Sector Preview authored earlier this month. (See Comprehensive con call takeaways on page 2 for significant incremental colour.)

Other Highlights

(See “Our View” above for elaboration and insight)

* Revenue from operations: Revenue at Rs 16,595mn was up/down 10.5%/-34.1% QoQ/YoY, sequentially driven higher by all business segments except Marketing.

* Payment processing charges: Payment proc. charges was flat QoQ but down - 36.7% YoY and were 54.6% of Payments Serv. Revenue, down/up -387/18bps QoQ/YoY.

* Contribution profit: Cont. profit at Rs 8,937mn was up/down 18.3%/-37.3% QoQ/YoY, with a Contr margin of 53.9%, up/down 354bps/-276bps QoQ/YoY.

* Expenses (excl Payment proc. charges): Total exp. were down -13.0%/-20.0% QoQ/YoY, YoY driven lower by Employee exp and Marketing exp.

* Standard EBITDA (Calc.): EBITDA loss was at -Rs 4,033mn, against -Rs. 7,922mn in 1QFY25 and -Rs. 2,310mn in 2QFY24, translating to an EBITDA margin of - 24.3%, improved by 2845bps QoQ.

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