Paytm’s optimistic growth projections boost sentiments, shares climb nearly 8%

• Analysts say that Paytm’s management appears confident of achieving adjusted EBITDA break-even by September 2023.
  
• Moreover, Paytm plans to become cash flow positive within the next 12-18 months.
  
• CLSA said that target for free cash flow is in-line with its view of cash burn ending in the next 4-6 quarters.
  
• Further, Paytm expects to largely double its unique borrower base from the current 7 million in 12 months’ time.

Shares of Noida-based digital payments and financial services company One97 Communications (Paytm) surged nearly 8% on Friday after the company’s analyst meeting on December 1 set an optimistic timeline for its future growth trajectory.

Analysts say that Paytm’s management sounded confident about achieving adjusted EBITDA break-even by September 2023. Moreover, it plans to become free cash flow positive within the next 12-18 months. EBITDA is earnings before interest, taxes, depreciation and amortisation.

Paytm’s commitment towards becoming profitable may pacify investors as the stock value is down 70% in the last one year. While many new-age tech stocks have been beaten down in November after their IPO lock-in periods ended, Paytm has seen the most value destruction.

“Public markets listing, which is considered a litmus test for valuations, has ended up becoming a poisoned chalice for a few. This trend is a clear indication that startup valuations based on “2021 parameters” in private markets are up for a bumpy ride,” said Anas Rahman Junaid, MD and chief researcher at Hurun India.

Two large block deals, with media reports suggesting Masayoshi-led SoftBank was to exit the company, also spooked investors on November 17 – the stock lost 10% of its value on that day. Moreover, the large-scale concerns on their ability to achieve profitability were exacerbated by widening net losses in the latest quarter.

In the quarter that ended in September, Paytm’s net losses widened 20% year-on-year to ₹571 crore compared to ₹473 crore in Q2 FY22. Meanwhile, its revenue grew 76% to ₹1,914 crore in the same period. However, its EBITDA losses stood at ₹538 crore in Q2 FY23.

Key notes from analysts’ call

However, the recent promise to end cash burn seems to have cooled some of the concerns that the investors had.

“While we have remained cautious on Paytm’s business model since our initiation given the high cash burn, risk on take rates in financial services business and long road to profitability, its operating metrics are gradually improving (net payment margin, ramp up of financial services) with management’s focus on increasing efficiencies and profitability, which in turn should aid Paytm achieve EBITDA breakeven by FY26E, in our view,” said analysts at JM Financial in a report.

Brokerage firm CLSA, after the analysts meeting said, “On profitability, it (Paytm) expects to become free cash flow positive in the next 12-18 months, which is in line with our view of cash burn ending in the next 4-6 quarters, as highlighted in our recent report.”

Further, Paytm has been shifting focus to its lending business. It expects to largely double its unique borrower base from the current 7 million in 12 months’ time. Currently, around 30% of the company’s BNPL (buy now pay later) customers have credit cards.

It has also tied up with multiple leading non-banking financial companies (NBFCs) to provide end-to-end digital loans across 3 categories: postpaid loans (BNPL), personal loans and merchant loans

Payments business remains a key vertical with 79.7 million average monthly transacting users and 4.8 million subscription paying merchants. Payments business has two key margin drivers – payment processing and subscription revenues, says a report by JM Financial.

Paytm believes its net payment margin will not be impacted materially even if there is a reduction in merchant discount rate (MDR). Note that MDR is a rate charged to a merchant for payment processing of a debit or credit card transaction.

While its lending and merchant businesses are growing, their penetration is still low. Only 4% of its 79.7 million monthly transacting users (MTU) avail postpaid loans. Even fewer, at 0.6% of them, avail personal loans – indicating that there is room for growth in this business.

Paytm also monetises traffic on Paytm app by providing marketing services to other businesses. It helps merchants sell their tickets, gift vouchers, deals, etc. and is currently cash profitable.

“Management stated that the journey to attain operating profitability (EBITDA before ESOP cost) via consistent margin improvement has exceeded its expectations in the past few quarters,” said analysts at ICICI Securities.

Post the management call by Paytm that provided insights on its business model, analysts have come out with largely positive reports, with at least one upgrade in stock rating.


Paytm’s analyst meeting in Mumbai was addressed by the top management including Vijay Shekhar Sharma – chairman, MD and CEO, Madhur Deora – president and group CFO and Bhavesh Gupta – COO.

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