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Steady performance amid high uncertainty

Adj. EBITDA beat estimates; business metrics tracking well despite curtailment in postpaid disbursements

* Paytm reported a net loss of INR2.2b (vs. est. of INR2.6b loss) in 3QFY24. Total revenue grew 38% YoY/13% QoQ to INR28.5b (broadly in line), driven by healthy growth in GMV and an increase in merchant subscription revenues, partly offset by some moderation in disbursements.

* Net payment margin grew 63% YoY/6% QoQ to INR7.5b, which, along with healthy financial services and commerce revenue, resulted in contribution margin of ~53% (vs. est. of 55%).

* We increase our adj. EBITDA earnings estimate by 19%/2% for FY24/FY25, and we expect Paytm to turn profitable in FY26 and expect it to report EBITDA of INR3.6b by FY25. We retain our BUY rating on the stock.

GMV beat estimates; Healthy traction in high-ticket PL, ML segments

* Paytm reported a loss of INR2.2b in 3QFY24 vs. a loss of INR2.9b in 2QFY24 (vs. est. of INR2.6b loss). 3QFY24 GMV grew 47% YoY/13% QoQ to INR5.1t (6% beat). Loan disbursements moderated as Paytm curtailed disbursements in small-ticket BNPL (17% QoQ decline). The other two lending products Merchant and Personal Loans posted healthy growth of 9% and 14% QoQ respectively.

* Total revenue growth was healthy at 38% YoY/13% QoQ to INR28.5b (broadly in line), led by an increase in GMV and growth in subscription revenues.

* Revenue from payment and financial services grew 43% YoY/10% QoQ to INR22.9b (broadly in line), with 36% YoY/6% QoQ growth in Financial services revenue and healthy growth in payments to merchants at 69% YoY/17% QoQ. Mix of Financial services in total revenues has seen some moderation amid slower disbursements to 21% vs 23% in 2Q24.

* Revenue from commerce and cloud services grew at a healthy pace of 22% YoY (up 21% QoQ) to INR5.1b. The majority of the cloud business is now advertising services and co-branded credit cards, while marketing cloud business continues to decline. The number of active cards increased by 0.14m to ~1.01m.

* Payment processing margin moderated but remained in the 7-9bp range because of the festive season and the rise in usage of non-UPI instruments like EMIs and cards. Thus, net payment margin grew 63% YoY/6% QoQ to INR7.5b, aided by healthy subscription revenue as the number of subscription devices increased to 10.6m from 9.2m in 2Q.

* Direct expenses stood at 47% of total revenues (43% in 2QFY24), mainly driven by an increase in payment processing charges and opex. Contribution profit stood at INR15.2b, with contribution margin of 53% (est. 55%).

* Adjusted EBITDA stood at INR2.2b vs. INR1.5b in 2QFY24. Adjusted EBITDA margin improved to 7.7% from 6.1% in 2QFY24.

Highlights from the management commentary

* Disbursements under Paytm postpaid moderated on expected lines and the next quarter will have the full impact.

* Paytm has more than 20m whitelist users and the company aims to expand the list of potential customers as well as platform partners. 3Q saw disbursements of INR4.9b in the high-ticket PL segment, with INR2b in Dec’23 itself.

* The Postpaid business has higher opex, and thus the moderation in the disbursement run rate will have a limited impact on EBITDA.

Valuation and view

Paytm reported a steady quarter amid high uncertainly, with sustained momentum in GMV. However, disbursements saw some moderation. Strong traction in subscription devices further supported healthy revenue growth and helped the company build a robust pipeline for its merchant loan business. Contribution margin moderated slightly on seasonally high payment processing charges, but the management expects to sustain it in mid-50s. Adjusted EBITDA came in better than our estimates. We estimate a 25% CAGR in disbursements over coming years, led by continued traction in PL & ML segments. The company is already seeing healthy demand in high-ticket segments. We estimate Paytm to achieve EBITDA breakeven in 2HFY25 and start reporting profits in FY26. We value Paytm based on 20x FY28E EBITDA and discount the same to FY26E at a discount rate of ~15%. We thus value the stock at INR975, which implies 4.2x FY26E P/Sales.

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