Neutral One 97 Communications Ltd For Target Rs.950 by Motilal Oswal Financial Services Ltd
Revenue, GMV in line; on path to turn EBITDA +ve by FY27
Contribution margin misses estimates amid higher DLG cost
* One 97 Comm. (PAYTM) reported a net loss of INR2.1b, lower than our estimated loss of INR3.6b due to better revenues and lower indirect and ESOP cost. Revenue from payments rose 6% QoQ to INR10b, while revenue from financial services grew 34% QoQ to INR5b, aided by DLG loans, which have better revenues.
* Total revenue thus grew 10% QoQ to INR18.3b (largely in line), while GMV stood at INR5.04t (in line, 13% QoQ). Subscription revenue improved owing to an increase in merchants and revenue per merchant, while disbursements rose 6% QoQ from the lows of 1Q (down 64% YoY).
* Net payment margin grew 5% QoQ (down 35% YoY) to INR4.9b (10bp of GMV vs. 10bp in 2QFY25), while contribution margin declined to 52.5% amid higher direct expenses (owing to DLG cost) and higher payment processing charges.
* We largely maintain our contribution profit estimates. We estimate PAYTM to turn EBITDA positive by FY27. We value PAYTM at INR950, based on 18x FY30E EBITDA discounted to FY26E, which corresponds to 6.1x FY26E sales. We retain NEUTRAL rating on the stock.
Adjusted EBITDA to break even by 4QFY25E; merchant expansion on track
* PAYTM reported a net loss of INR2.1b (vs. our est. of loss of INR3.6b). GMV broadly stood in line at INR5.04t, while disbursements grew 6%, of which DLG loans disbursements jumped 157% QoQ.
* During 9MFY25, PAYTM posted a net loss of INR1.2b (incl. exceptional gains in 2Q). We expect the loss to narrow to INR0.3b in 4QFY25.
* Total revenue rose 10% QoQ (down 36% YoY) to INR18.3b (largely in line), supported by healthy growth in both payment and financial services revenue.
* Revenue from payment and financial services improved 14% QoQ (-34% YoY) to INR15.1b, while revenue from financial services grew 34% QoQ (-17% YoY), aided by DLG loans, which have better revenue.
* Revenue from marketing services (erstwhile commerce and cloud) fell 48% YoY to INR2.7b, while no. of credit cards grew only 1% QoQ to 1.39m as card issuers are cautious, which is evident from slower growth in the industry.
* The company expects payment processing margin to settle in the range of 5- 6bp. Net payment margin improved by 5% QoQ to INR4.89b. As the DLG model continues to gain traction, leading to healthy disbursement growth, overall take rates are expected to further improve.
* Direct expenses declined 35% YoY (up 13% QoQ) as expenses related to DLG increased, while employee cost and ESOP cost reduced, as it aim to focus on merchant acquisition and improving productivity of sales employees. Contribution profit stood at INR9.6b, with contribution margin at 52.5%. Adjusted EBITDA loss declined to INR0.4b and net loss stood at INR2.1b.
Highlights from the management commentary
* Expects contribution margin, excluding UPI incentives, to remain in the 50-55% range, and including UPI incentives, it is expected to be in the 55-60% range.
* Continues to see increased interest from lenders to partner using the DLG model for both merchant and personal loans, which will help to increase disbursements with the existing partners and expand partnership with new lenders. About 80% of merchant loans came from the DLG model.
* ECL has come down to 4.5% to 5.0% due to improvement in collection efficiency. and earlier there was elevated churn on merchant which has also led to more ECL earlier.
* Merchant loans distribution continues to see strong growth, with a significant proportion of merchant loans distributed under the DLG model. More than 50% of loans distributed are to repeat borrowers.
Valuation and view
* PAYTM continues to witness an improvement in its business metrics. Disbursements have started to recover and are off the lows of 1Q. GMV improves at a steady rate.
* Most of the business metrics continue to improve. We expect that steady business recovery should lead to a 29% revenue CAGR over FY25-27E.
* Contribution margin declined slightly to 52.5% vs. 53.9% in 2QFY25, amid an increase in direct expenses relating to DLG. Management expects contribution margins to remain healthy, led by cost control and steady growth in merchant financial business.
* We estimate a 29% CAGR in disbursements over FY25-27E, while the take rates should be healthy as the company now forays into DLG arrangements. Payment processing margins are expected to moderate to 5-6bp vs. the historical rate of 7-9bp, primarily due to the discontinuation of more profitable products.
* We largely maintain our contribution profit estimates for FY25/FY26. We estimate PAYTM to turn EBITDA positive by FY27. We value PAYTM at INR950, based on 18x FY30E EBITDA discounted to FY26E, which corresponds to 6.1x FY26E sales. We retain NEUTRAL rating on the stock.
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