Shares of One97 Communications Limited, the parent of PaytmThe National Stock Exchange closed with a gain of more than 7% on Monday. In the March quarter (Q4FY22), Paytm reported an improvement in operating metrics which was encouraging.
The take rate for payment services remained at 0.40% despite an increase in the share of UPI in the payment mix. UPI is the United Payments Interface. Analysts at Goldman Sachs (India) Securities estimate that the share of UPI in Paytm’s Gross Merchandise Value (GMV) has increased from 50% in Q3 to 55-60% in Q4. GMV is the value of total payments made to merchants through transactions on various platforms of Paytm.
As such, it suggests better rates on instruments with MDR (Merchant Discount Rate), also known as non-UPI instruments, which is a positive. This is reflected in paid services revenue growth of 80% year-on-year (YoY) which exceeds the non-UPI GMV growth rate of 52% year-on-year.
In addition, Paytm’s lending business continues to grow, as evidenced by the 374% year-on-year growth in the number of loans disbursed in Q4. Moreover, its postpaid product–Buy Now Pay Later– is seeing high merchant acceptance. The user base in this category has crossed 4 million. It offers upsell opportunities in personal loans and credit cards. As of now, over 40% of Paytm branded credit cards are being issued to existing postpaid customers.
Monthly transacting users, which is the number of unique users with at least one successful payment transaction in a month, grew 41% year-on-year in Q4.
Meanwhile, revenue growth in the commerce segment was hit as it declined by 24% on a sequential basis. Omicron wave in Q4 weighed on the conduction. Also, the base was higher in the third quarter on account of the festive season. However, revenue grew 24 per cent year-on-year.
Overall, operating revenue increased by 89% 1,541 crores. Contribution margin (a key metric for fintech companies) increased to 35% compared to 31.2% in Q3 and 21.4% in Q4FY21. Contributing profit is operating revenue less payment processing fees, promotional cashback and incentives, and other direct costs.
Ebitda before ESOP cost (earnings before interest, taxes, depreciation and amortization) remains in the red but has improved. ESOP refers to employee stock option plans. The measure stood at Rs -420 crore as compared to Rs -368 crore in Q4FY21. Management aims to achieve better EBITDA by Q2 FY23. However, analysts do not agree with this view. For example, analysts at Goldman Sachs expect Paytm to reach EBITDA breakeven by the end of FY24.
“Paytm is currently reducing its Ebitda losses 30-35 crores per quarter – which means it may take around 12 quarters to break the EBITDA loss (versus 6 quarters as directed by the management). However, this also does not take into account fundamental risks to the business model from increased competition from UPI/UPI Lite and other wallet/postpaid products and regulatory risks on fees/wallet MDRs,” said analysts at Macquarie Capital Securities (India) A report on 23 May.
He further added, “Furthermore, Paytm’s financial services business continues to be dominated by BNPL (98% by volume), and in our view, growing high-ticket merchant loans in a pure disbursement model will continue to be a challenge.” “
To be sure, the current share price is more than 70% below the high end of its issue price.