Shares of One 97 Communications Ltd, parent of Paytm, closed more than 7% higher on Monday on the National Stock Exchange. In the March quarter (Q4FY22), Paytm reported an improvement in operating metrics which was encouraging.
The payment services’ take rate continued to sustain at 0.40% despite an increase in share of UPI in the payments mix. UPI is united payments interface. Analysts at Goldman Sachs (India) Securities estimate the share of UPI in Paytm’s gross merchandise value (GMV) to have increased to 55-60% in Q4 from 50% in Q3. GMV is the value of total payments made to merchants through transactions on various platforms of Paytm.
As such, this suggests better take rates on MDR (merchant discount rate) bearing instruments, also known as non-UPI instruments, which is a positive. This also reflected in payment services revenue growth of 80% year-on-year (y-o-y) which is higher than non-UPI GMV growth of 52% y-o-y.
Further, Paytm’s lending business continues to grow, which is evident from the 374% y-o-y increase in the number of loans disbursed in Q4. Also, its postpaid product–buy now pay later–is seeing higher merchant acceptance. The user base in this category has surpassed 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.
The monthly transacting users, which is the number of unique users with at least one successful payments transaction in a month, rose by 41% y-o-y in Q4.
Meanwhile, revenue growth was impacted in the commerce segment as it fell by 24% on a sequential basis. The Omicron wave in Q4 weighed on operations. Also, the base in Q3 was high on account of the festival season. However, revenue increased 24% y-o-y.
Overall, operating revenue increased 89% y-o-y to ₹1,541 crore. Contribution margin (a key metric for fintech companies) increased to 35% vis-a-vis 31.2% in Q3 and 21.4% in Q4FY21, driven by fall in payment processing charges and increased share of high margin business. Contribution profit is operating revenues less payment processing charges, promotional cashback and incentives, and other direct costs.
Ebitda (earnings before interest, tax, depreciation and amortization) before ESOP costs continues to remain in the red but it has staged improvement. ESOP refers to employee stock option plans. The measure stood at -Rs368 crores vis-a-vis –Rs420 crores in Q4FY21. The management aims to break even on Ebitda before ESOP cost by Q2FY23. However, analysts do not conform to this view. For instance, Goldman Sachs analysts expect Paytm to reach Ebitda breakeven by end of FY24.
“Paytm is currently reducing its Ebitda losses by ₹30-35 crore per quarter – which implies it could take about 12 quarters for Ebitda losses to break-even (vs 6 quarters guided by management). However, even this does not take into account the fundamental risks to the business model from increasing competition from UPI/UPI Lite and other wallet/postpaid products & regulatory risks on fees/ wallet MDRs,” said analysts at Macquarie Capital Securities (India) in a report on 23 May.
They added, “Moreover, Paytm’s financial services business continues to be dominated by BNPL (98% of loans by volume), and scaling up higher-ticket merchant loans will continue to be a challenge in a pure distribution model, in our view.”
To be sure, current share price is down more than 70% from the higher end of its issue price.