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Strong quarter led by efficiencies

Paytm reported strong 3QFY24 results with adj. EBIDTA of INR 2,200mn (+43% QoQ). EBITDA margin moved up +160bps QoQ to 7.7%. Payment services vertical continued its stellar run with net payments yield largely stable at 15bps on the back of a) increase in GMV of non-UPI instruments like EMI and cards b) slight increase in payment processing margins on non-UPI instruments and c) online sales during festive season. Financial services revenue grew +6% QoQ, +36% YoY on the back of steady run-up in disbursements from instant personal loans (+14% QoQ) and high ticket merchant loans (+9% QoQ), sequential improvement in take rates and higher revenue from Insurance business. As the company announced reduction in its BNPL business recently, it has already whitelisted 20mn users to tap opportunities in high ticket loans while mgmt. guides to add 3-4 new lending partners by Q1FY25 (from 2 lending partners currently) which should aid in continued growth in disbursals going forward. Commerce business revenue were up +22% YoY, +21% QoQ on the back of strong commerce GMV growth of +48% YoY and take rates above the guided range of 5-6%. Cloud business revenue growth was tad lower (+2% QoQ, +14% YoY) on account of slight decline in margins. Elevated total direct expenses on account of higher promotional cashback offers led to decline in contribution margins to 53.3% (vs 56.6% QoQ). GMV grew +46% YoY, MTUs grew +18% YoY and value of loans disbursed stood at INR 155.4bn (+56% YoY). Management continues to be confident of expanding the Adj. EBITDA margin further. We expect 29% revenue CAGR over FY23-26E with contribution margins sustaining at 50%+ incrementally. We maintain our positive stance on the stock and now see a) reduced cash-burn given its benefits from strong ecosystem and b) pick up in high ticket merchant and personal loans distribution with improved performance metrics. We maintain our BUY rating with target price of INR 1,120 (valuing it at FY30e EV/EBITDA discounted back to FY26). 

Payment margin remains stable: Paytm’s payment services revenue grew +13.5% QoQ/+45% YoY with net payments yields largely stable at 15bps (-1bp QoQ) as the increase in gross payment yields was set-off against slight rise in payment processing charges. Further, management indicated that payment yields were supported by a) increase in GMV of non-UPI instruments like EMI and cards b) slight increase in payment processing margins on non-UPI instruments and c) online sales during festive season. Merchant subscriptions grew 15% QoQ to 10.6mn and the company deployed 1.4 mn devices (revenue of INR 100-500 per month per device) during the quarter. As the payments yields are expected to decline with rising share of lower yielding UPI (payment processing margins to stabilize at 5-7bps vs 7-9bps now), mgmt. remains optimistic on the growth opportunity for the payments business in India with a potential of 100mn merchants, >500mn payment customers and opportunity to cross sell financial services and commerce business offerings. 

Financial services business shifting to higher ticket segment: Disbursals were down -31% QoQ in 3QFY24 on account of run-down in BNPL book while the revenues were up +36% YoY/+6% QoQ on the back of steady run-up in higher ticket loan disbursements from instant personal loans (+14% QoQ) and high ticket loans (+9% QoQ), sequential improvement in take rates and higher revenue from Insurance business. As the company announced reduction in its BNPL business recently, it has already whitelisted 20mn users to tap opportunities in high ticket loans while mgmt. guides to add 3-4 new lending partners by Q1FY25 (currently working with only 2 lending partners). Paytm continues to be confident of the growth runway in the financial services space given the low penetration in existing base (BNPL at 3.7% of MTUs, PL at 1.1% of MTUs and Merchant Loans at 6.1% of devices merchants). Collection incentives (0.5%-1.5% of revenues after portfolio closure) should start to become meaningful revenue contributor incrementally. While we remain concerned on the downside risks to the take-rates (sourcing revenues ~3.9% of loan value) in financial services business, higher volumes should set-off the potential loss in revenue.

Commerce and cloud business show healthy growth: Commerce business revenue was up (+22% YoY, +21% QoQ) on the back of strong commerce GMV growth of +48% YoY. Take rates were above the guided range of 5-6% due to higher contribution of the events business which has higher take rate as well as high direct costs. Cloud business revenue growth was a tad lower (+2% QoQ, +14% YoY) on account of slight compression in margins. Company continues to scale up credit card marketing with 1.01mn activated credit cards during the quarter (vs 0.45mn YoY).

Valuations and view: We believe Paytm has continued demonstrated ability to sustainably reduce its payment processing charges. In terms of loan distribution business, reduction in postpaid products would lead to a slight slowdown, however this degrowth will likely be offset by strong growth from focus on higher ticket loans going forward. We maintain our positive stance on the stock based on: a) visibility to sustain higher take rates on payments business for larger time frame and b) continued momentum in loan distribution business along with better performance metrics. We maintain our BUY rating on the stock with target price of INR 1,120 (valuing it at FY30e EV/EBITDA discounted back to FY26).

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