Paytm Q4 Results Review: Analysts Remain Positive On Improving Profit Metrics

Shares of One97 Communications Ltd., the operator of payments platform Paytm, gained after analysts maintained their 'buy' calls on the stock, following the company's improving fourth-quarter earnings metrics.

On May 5, Paytm posted a second consecutive quarter of operating profitability, if one doesn't take into account ESOP costs. Overall, it posted a net loss of Rs 168.4 crore during the March quarter, as against an estimated loss of Rs 369.20 crore. The company had posted a net loss of Rs 392 crore in the preceding December quarter.

Its revenue grew 13.2% to Rs 2,334.50 crore on an increase in gross merchandise value, higher merchant subscription revenue, and the growth of loans distributed.

Paytm's next milestone is to be free cash flow positive in the near future, with an eye on AI-first offerings this year, said Vijay Shekhar Sharma, chief executive officer and founder of One97 Communications.

Shares of the company gained as much as 5.2% to Rs 725.6 apiece on Monday, compared to a 0.9% gain in the S&P BSE Sensex.

Of the 13 analysts tracking the company, 10 maintain 'buy', three suggest 'hold' and none recommend 'sell'. The return potential of the stock implies an upside of 26.5%.

Here's what analysts made of Paytm's Q4 performance:

• Maintains 'buy' rating. Raises target price to Rs 1,144 from Rs 1,103 apiece, implying a potential upside of 66%.

• Paytm has several growth/profitability tailwinds: digital payments continue to see robust growth and significant headroom for increase in penetration of lending products into existing consumers.

• In devices, despite competition, Paytm continues to ramp up growth, as well as monetisation.

• RBI IT-audit and FDI approval for the payment aggregator subsidiary are outstanding.

• Credit is incrementally being enabled on unified payments inteface rails (currently via PPI wallets and RuPay credit cards).

• Reiterated the guidance of 7-9 basis points net payment margins (excluding device subscriptions) in the near term and 5-7 bps over the medium term — currently trending near the high-end of the band.

• Maintains 'outperform' rating and target price of Rs 800, implying a potential upside of 21%.

• Paytm reported Ebitda before ESOP costs at Rs 230 crore vs their expectation of Rs 160 crore, largely because of higher UPI incentive fees.

• Loan distribution business is the key driver behind growth in revenues, as well as overall profitability in their view. The revenue from this disbursement is up 2.8 times YoY and 3.5 times for Q4 FY23 and FY23 respectively.

• Take rates are down to 4.4% in FY23 from 5.7% seen in FY22. We are expecting a 50% CAGR between FY23-26E in distribution business revenues, assuming a constant take rate of 4%.

• Concentration of lending partners is a concern. Out of the total two bank and five non-banking financial company partners Paytm has, HDFC Bank Ltd. doesn’t participate in lending. In other words, lending is done through six partners. It is quite possible that some partners could constitute more than 20% of the credit that Paytm distributes through their platform, which signifies concentration risk in our view.

• Though Paytm does not carry any balance sheet risk on the loans originated, it carries significant business and reputation risk. Few months of bad performance could result in lenders withdrawing their credit lines, significantly affecting its ability to grow.

• There are risks related to competition as well as regulatory issues, as Paytm frequently seems to be facing regulatory ire for lapses on its part.

• The brokerage said a lot more needs to be done on corporate governance, by getting an independent non-executive chairman, more independent members on the board etc.

• Maintains 'buy' rating and target price of Rs 1,150, implying a potential upside of 66%.

• After reporting unchanged credit metrics for five consecutive quarters, Paytm has for the first time reported an improvement in expected credit loss in its BNPL portfolio and reduction in bounce rates across its BNPL and personal loan portfolio.

• Sustainability of Paytm’s credit metrics has been a key investor pushback/concern, and these results should help build confidence around the scalability of the company’s lending book.

• March 2023 was the second consecutive quarter of Paytm reporting operational profitability, which the brokerage projects will drive consensus estimates higher.

• While the brokerage expects Paytm’s revenue growth to decelerate to 23% YoY in FY24E (vs. 60% YoY growth in FY23), on account of a high lending base and slower payments segment growth, it expects profitability to continue to improve.

• It continues to expect Paytm to become the most profitable company within its India Internet coverage starting FY25.

• The brokerage said these results should largely put to rest debates around Paytm’s business model traction and profitability, and it sees resolution of outstanding regulatory issues (ban on Paytm Payments Bank and online merchant onboarding), as the next set of catalysts for the stock.

• Paytm’s revenue growth profile is in line with its India Internet peers, with profitability higher, and valuations that are at the lower end vs. peers; the brokerage sees risk-reward as skewed to the upside.

• Maintains 'buy' rating with a target price of Rs 900, implying a potential upside of 31%.

• Paytm reported a healthy quarter, with a net loss moderating. Total revenue was supported by healthy growth in GMV and disbursements. Momentum for the addition of subscription devices remained strong.

• We believe that a constant improvement in contribution margin and operating leverage will continue to drive operating profitability.

• Maintains 'buy' rating and raises the target price to Rs 750 from Rs 700, implying a potential upside of 9%.

• Greater profitability is to be driven by operating leverage and not a rising contribution margin.

• There is room for the adjusted Ebitda margin, however, to continue to move up for several years, driven by operating leverage.

• Maintains 'buy' rating with a target price of Rs 1,250, implying a potential upside of 81%.

• Improving monetisation and a large underpenetrated user base provide a continued runway for growth, while sustained focus on profitability affirms our positive stance on Paytm’s ability to leverage its scalable fintech platform.

• Going forward, in view of the elevated interest rate scenario in FY24, Paytm would focus on ensuring book quality in lieu of higher growth.

• In the next quarter, we expect a decline of 1.7% QoQ growth in revenue as we expect the lending business to moderate and a lack of UPI incentives. We expect EBIT margin loss to lower by 75bps QoQ, led by continued improvement in direct and indirect costs.