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2025-07-25 06:05:45 pm | Source: JM Financial Services
Buy One 97 Communications Ltd For Target Rs. 1,330 By JM Financial Services
Buy One 97 Communications Ltd For Target Rs. 1,330 By JM Financial Services

Paytm reported INR 19.2bn revenue (+4% QoQ) with contribution margin (CM) rising sharply to 60% (+560bps QoQ). As expected, resulting operating leverage ensured that the company delivered first quarter of reported EBITDA (INR 717mn) as well as PAT (INR 1.2bn) profitability. Furthermore, management has guided towards mid-high fifties CM going ahead, higher than earlier guidance of 54-56%. With robust topline growth at these CMs and controlled indirect expenses, we expect a very sharp ramp-up in Paytm’s profitability to reach INR 14.5bn in PAT in FY27. We find Paytm attractively positioned considering the robust operating performance along with multiple growth optionalities such as MDR on UPI and return of Paytm wallet. We reiterate BUY with Jun’26 TP of INR 1,320, valuing Paytm at 40x Jun’27 Adj. EBITDA multiple.

* Core Payments business remains strong: Paytm’s Payment services revenue stood at INR 11.1bn, growing 8% QoQ (excluding INR 700mn UPI incentive in 4QFY25). The growth was mainly driven by higher subscription revenue on the back of growth in merchant devices as well as better payment processing margin. Payments GMV improved 6% QoQ (+27% YoY). Merchant device subscriptions grew to an all-time high of 13mn, 5% QoQ growth, reflecting deeper market penetration in Tier 2+ cities driven by technologically superior devices and efficient service network. Management noted that Paytm’s proprietary full-stack model, including software, hardware (like Soundbox and EDC machines), and service network, gives it a strong edge against competitors, especially those reliant on outsourced hardware. While MTU base also improved to 74mn in Jun’25 (72mn in Mar’25), it was despite company remaining highly disciplined in marketing investments. We expect the company to focus on customer acquisition via tech-led innovation with marketing investments rising only once Paytm Wallet or MDR on UPI is allowed. Management also noted that there have been market share gains due to early signs of user growth and retention (led by product innovation instead of marketing) which will further drive monetisation by cross-selling

* Trail revenue in Financial Services drove CM beat: In 1QFY26, Financial Services revenue increased to INR 5.6bn vs. INR 5.5bn in 4QFY25 (+2.8% QoQ, 100% YoY) mainly due to higher share of merchant loans, higher trail revenue from DLG portfolio and better asset quality. Merchant loans saw robust growth with non-DLG model loans accounting for majority of loans. While the company did see trail revenue on loans issued in the previous quarters, there was minimal DLG expense in the quarter, resulting in sharp spike in CM that is expected to normalise as trail revenue declines. While CM would still stabilise in mid-high fifties, revenue growth would be lower than disbursals growth as we proceed in FY26.

* Management sees initial signs of recovery in Personal Loans: Personal loans disbursements continue to struggle due to tightening in unsecured lending. However, basis discussions with merchant partners, management noted early signs of recovery in credit cycle though it could take 2-3 quarters to see a proper turnaround. BNPL (Buy Now Pay Later) remains paused due to

* Marketing services revenue declines: Revenue from Marketing services (includes advertising, ticketing, credit card distribution, deals & gift vouchers) stood at INR 2.5bn (-7.7% QoQ, -23.1% YoY). On a like-to-like basis, revenue has declined 12% YoY after adjusting for the sale of the entertainment ticketing business in Q2FY25. GMV for ticketing, deals, and vouchers stood at INR 20.9bn (-6.7% QoQ, -25.9% YoY) with some seasonal softness in travel. Going forward, company expects MTU growth and higher ROI for advertisers through AI to become the key drivers of revenue growth. Management noted that MTUs and revenue would not be directly correlated as advertisement income sees seasonality.

* Significant expansion in margins that would sustain ahead: Contribution margin (CM) improved 560bps QoQ (~10ppts YoY) to 60% mainly due to decline in other direct expenses on the back of reduction in collection cost for Personal Loans (PL) and expenses related to entertainment ticketing business (sold to Eternal) and cost optimisation across businesses. Also, as the mix shifted towards non-DLG along with trail revenue from DLG over previous quarters, there was an incremental boost to CM that would normalise over the coming quarter. Along with CM expansion, significant cost control on account of disciplined investments in marketing and productivity improvement due to AI, led to improvement in Adj. EBITDA margin to 5.3% in 1QFY26, 110bps higher QoQ. Furthermore, company reported first ever PAT positive quarter with PAT profit of INR 1.2bn compared to loss of INR 5.5bn last quarter. Management guided for mid-high CMs going ahead, which would result in sharp rise in profits due to robust operating leverage

 

*Our base case scenario still assumes probability of MDR on higher-ticket UPI transactions: Despite the tweet from Finance ministry post the media article suggesting UPI on transactions above INR 3,000, we still believe MDR on UPI transactions above a certain threshold is a question of “when” and not “if”. Our conviction comes from 1) rising expenses of sustaining the rapidly growing UPI ecosystem (annual expenses of INR 100bn+) with declining government subsidies, and 2) business case analysis suggesting no need for UPI ecosystem to subsidise large online merchants as well as offline merchants who are anyways taking credit card / debit card payments with significantly higher MDR (c.100-350bps).

* Key takeaways from management commentary: 1) Company expects contribution margin to remain in the mid to high fifties, with some quarterly volatility (Q1 CM stood at ~60%). 2) Management reiterated its medium term target of achieving 15-20% EBITDA margin over the next 2–3 years, supported by cost discipline and margin expansion. 3) From 2QFY26 onwards, only reported EBITDA will be shared; no adj. EBITDA/PAT or ESOP exclusions will be reported going forward. 4) D&A is expected to be in the range of INR 5-6bn in FY26, lower than FY25. 5) Lending is structurally moving towards non-DLG models as lenders gain confidence; expected to reduce costs but will also moderate revenue trajectory. 6) Price hikes on POS devices were tested and well-received, indicating strong product differentiation and merchant stickiness. 7) There are currently 1mn+ PoS devices, out of total 13mn devices deployed across merchant base. 8) Company’s key focus areas remain merchant payments, where management sees ample growth headroom, followed by scaling BNPL once credit conditions stabilises. Also deepening merchant base into tier 2+ cities and integrating AI across every product to drive efficiency are also key focus areas. 9) Management sees multi-layered GMV growth driven by on-boarding new merchants, deepening monetisation of large existing merchants, and same merchant growth. Importantly, it believes the payments business still has 4–5x growth potential over the medium term. 10) Paytm’s EMI product has at least 5 parties including brands, retailers, consumers, banks, and Paytm itself, to bear the subvention cost, unlike others that rely on just one partner. Also, as it has multiple bank partners, it could offer more offers (card offers) for smaller retailers in smaller cities.

* Reiterate ‘BUY’, Jun’26 TP rises to INR 1,320: We cut our revenue estimates by 2-4% over FY26-28E, which is largely superficial, as mix of DLG based loans is expected to be lower going ahead. We increase contribution margin (CM) estimates by 260-390bps over FY26-28E, in-line with management guidance of mid-high 50s margins. We are on the higher side as we also bake-in 30% probability of MDR on higher-ticket UPI transactions. With Paytm still exercising tight control over fixed costs, the resulting operating leverage takes our EBITDA margin higher by 180-380bps over the forecast period. As a result of these changes, our Jun’26 TP rises to INR 1,320 (vs. INR 1,230 earlier), valuing Paytm at 40x Jun’27 Adj. EBITDA. We maintain ‘BUY’.

 

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