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Paytm’s lending and trading business fuels Q2 revenue growth – low penetration offers room for growth, analysts say

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  • One 97 Communications, operator of digital payment platform Paytm, reported sequential revenue growth of 14% to ₹1,914 crore.
  • Leading the revenue growth was the lending and trading activities.
  • It also sequentially reduced its loss to ₹572 crore, saying it is on track to achieve adjusted EBITDA profitability by the September 2023 quarter.

Aside from dwindling losses, One 97 Communications, the operator of digital payment platform Paytm, reported a 14% sequential increase in revenue in the second quarter to ₹1,914 crore. This revenue growth is the result of the growth in lending and trading activities.

Unlike the busy payment business, these two segments offer Paytm more room for growth.

“We believe Paytm has the right building blocks to build a financial services platform; by being in the middle of the payment flow, the platform has access to a rich dataset across a wide range of consumers,” said Goldman Sachs analysts, adding that this helps Paytm keep the quality of its lending high, as well as the low penetration implies “significant room for growth”.

Right now, as these companies grow, their penetration is still low. Only 4% of the 79.7 million monthly transaction users (MTU) use postpaid loans. Even less, 0.6% of them use personal loans.

This low penetration means they offer more “significant room” for growth, analysts at Dolat Capital say.

In addition, only 4.4% of its sellers use their devices such as soundboxes. Their traders also seem hungry for loans as half of those who use loans come back for more with a 50% return rate.

Credit activities continue to grow strongly

In recent quarters, Paytm’s lending business has shown steady growth. This also signals a shift in the company’s business strategy from a mere payment platform to an integrated financial services provider.

It disbursed 9.2 million loans during the September quarter, up 8% sequentially and 224% year-on-year. The biggest contributor to this growth is the Paytm Postpaid service – which posted 449% year-over-year growth.

Still, the company says there is much more room to grow. “While our credit distribution business has scaled significantly in recent quarters, our penetration level for each product remains low and we have a long growth run ahead of us,” the company said in its second-quarter earnings conference call.

Particularities Q2 FY23 YoY change
Loan disbursements ₹7,313 crore 482%
Personal loans (average ticket size of ₹ 1.1 lakh) ₹2,055 crore 736%
Trade Loans (average ticket size of ₹1.5 lakh) ₹1,208 crore 342%
Pay afterwards ₹4,050 crore 449%

Source: Company Reports

‘Merchant subscriptions is an attractive profit pool’

Aside from lending, merchants using commodities like Paytm QR codes for soundboxes, point-of-sales machines, online payments and advertisements provide an attractive proposition, the company says.

“We are expanding our revenue base as users and merchants grow. Merchant subscriptions are an attractive profit pool for us, leading to higher payment volumes, subscription revenue and trade loan distribution,” the company said.

Paytm’s business model for merchants consists of subscription revenue, merchant discount percentage (MDR), and advertising revenue. Moreover, since UPI payments attract zero MDR from merchants, the government reimburses the company.

Trade services revenue was ₹624 crore in the second quarter, up 12% sequentially and 56% year-over-year. The number of devices used by merchants also increased in the quarter to 4.8 million, from 3.8 million in the previous quarter.

Here’s what the analysts say:

Paytm’s margins have improved sequentially and analysts attribute this to strong growing verticals that are also profitable.

“The improvement in operating profit margin was led by strong growth in profitable lending (up 29% quarter-on-quarter), along with an improvement in payments business margin of 229 basis points quarter-on-quarter,” said a report from Dolat Capital. .

As a result of these changes, analysts are confident that the company is on track to achieve adjusted EBITDA profitability in FY24, as promised by the company.

“We expect margins to improve further and predict that FY24 will be the first full year of adjusted EBITDA profitability for Paytm,” Goldman Sachs said in its report, adding that they expect momentum in the lending industry to continue.

Analysts at JP Morgan and Dolat Capital say that at the current pace, Paytm could deliver adjusted EBITDA profitability ahead of schedule.

Brokerage Rating Target price upside down
Citi Research To buy ₹1.055 64%
Goldman Sachs To buy ₹1100 71%
JP Morgan overweight ₹1100 71%
Morgan Stanley Equal weight ₹785 22%
Dolat Capital To buy ₹1400 118%

Source: Real Estate Reports | Upward from closing price on November 9, 2022

Here’s Paytm’s Q2 in numbers:

Particularities Q2 FY23 Q1 FY23 Q2 FY22
Revenue from operations ₹1,914 crore ₹1,680 crore ₹1,086 crore
Net profit -₹572 crore -₹644 crore -₹474 crores
EBITDA -₹538 crores -₹634 crores -₹452 crore
Users who transact monthly 79.7 million 74.8 million 57.4 million

Source: Company Reports

$PAYTM.NSE Paytm is technically making a lower parallel channel after a breakout of range and 100 EMA, indicating weakness in bulls. Basically the P/E of the industry close to 40, but the fintech giant is still losing money. Shows consistent sales growth over the last 5 quarters. Sales in Sept qtr are 1900+ cr which is almost double compared to Sept 2022. Fundamentally stocks are still overvalued despite sales growth due to massive consistent losses. #paytm

— (@tradegainers) 09 Nov 2022

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