Buy One 97 Communications Ltd for the Target Rs.1,600 By Emkay Global Financial Services Ltd
Strong execution drives beat
One97 Communication (Paytm)’s Q2FY26 revenue was marginally ahead of the Street’s estimate, while profitability significantly beat expectations. Contribution profit increased 4.8% QoQ, while the decline in indirect expenses resulted in EBITDA increasing to Rs1.4bn in Q2, from Rs0.72bn in Q1FY26. Paytm is executing well on acquiring merchants by leveraging its superior Soundbox products and distributing loans to them. With low penetration of loans, we see a long growth runway for this business. On strong control over costs, we have increased our FY26E and FY27E EBITDA by 35% and 14%, respectively. The stock trades at 30x FY28E EV/EBITDA. Considering cash on the books of Rs13.1bn, the long growth runway for payments and financial services, and the various optionalities (such as BNPL, Wallet, scale-up of Rupay Credit Cards), we believe the risk-return is attractive. We retain BUY with a revised TP of Rs1,600 (earlier Rs1,500).
In-line revenue; big margin beat
Paytm reported revenue of Rs20.6bn, up 24.2% YoY, versus the Street’s estimate of Rs20.2bn. Contribution profit increased 4.8% QoQ to Rs12.1bn despite the 150bps QoQ decline in contribution margin. Indirect costs declined 1.3% QoQ to Rs10.7bn (including ESOP cost), resulting in EBITDA increasing to Rs1.41bn, from Rs0.72bn in Q1FY26, significantly higher than our estimate and the street’s. Reported PAT for the quarter was Rs210mn, impacted by an exceptional one-time charge for full impairment of the Rs1.9bn loan to its JV, First Games Technology Private. Adj PAT was Rs2.1bn vs the street’s estimate of Rs1.52bn.
Large opportunity in revolving consumer credit in India
Access to revolving credit or credit cards eases consumers’ liquidity constraints, allowing for smooth consumption over time and stimulating aggregate demand. We believe credit on UPI and RuPay credit card will be the fundamental drivers in expanding the ~45mn unique credit card customer base. We believe Paytm is well placed to capitalize on this shift, with strong credit on the UPI product (Postpaid) and a QR-based acceptance network to capitalize on RuPay credit card spends. As these businesses are very small currently, and Paytm has started with a small set of users (also, a relatively smaller bank partner), merchant awareness for credit line on UPI is low; we will watch the company’s scale-up before incorporating this development into our estimates.
Outlook and valuations – Improving profitability to aid valuations
We build in 25% revenue CAGR for Paytm over FY25-27E, with PAT of Rs16.5bn in FY27E. The stock is trading at 30x FY28E EV/EBITDA. As the company would be turning EBITDApositive and profitable in FY26E, PAT and EBITDA CAGR would be much higher, albeit from a low base. We retain BUY with a revised DCF-based TP of Rs1,600 (Rs1,500 earlier), as we factor in higher profitability.
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