Early breakeven positive for Paytm, stock surges 6%: Should you buy?

Experts have 'buy' rating with price targets between Rs 730 and Rs 1,150

One97 Communications (Paytm) declared very encouraging results for October-December quarter of the 2022-23 financial year (Q3FY23, beating its own guidance in terms of going earnings before interest, tax, depreciation and amortisation or Ebitda-positive. According to the management, Paytm was expecting to achieve breakeven only in the Q2 of FY24 whereas it has managed this (if we exclude ESOP pay-outs) three quarters early. The results, and the absence of any UPI incentives implies that the company will book UPI incentives only in Q4. It is likely to easily over-achieve its Q4 projections for the top line. Margins also looked stable or good, across most specific segments.

Ex-subscriptions, the company produced a net margin of 8 basis points (0.08 per cent) in the payments division, while it saw 28 per cent quarter-on-quarter (QoQ) growth in the lending segment and it saw a 50 per cent QoQ jump in the commerce segment though this was probably boosted by the festive season effect.

Revenue from payments was somewhat lower than expected, mainly due to lower revenue from payment services to consumers implying lower gross payments take. But margins remained stable as the company seems to have cut processing costs.

Total Revenues were up 8 per cent QoQ and up 40 per cent year-on-year (YoY) at Rs 2,140 crore. Expenses were down 2 per cent QoQ and up 9 per cent YoY. The gross merchandise value (GMV) was at about Rs 35,000 crore, up 9 per cent QoQ and up 40 per cent YoY. The consolidated net loss dropped to Rs 392 crore in Q3, down from Rs 778 crore loss YoY while EBITDA before ESOP cost stood at Rs 31 crore with the EBITDA (before ESOP) margin at 2 per cent of revenues. The number of active monthly users hit 85 million, up from 79.7 million QoQ and 64 million (YoY).

The lending distribution business saw disbursements rising 36 per cent QoQ to Rs 10,000 crore (over 400 per cent rise YoY on a very low base) and segment revenue was up 28 per cent QoQ. The number of loans disbursed was up 14 per cent QoQ. Loans have hit higher ticket sizes.

In Commerce, revenues (up 50 per cent QoQ) were driven by travel demand and by the events business. Both have a seasonal tilt and it remains to be seen if this growth rate is sustained. The merchant device subscription business saw addition of 1 million devices, in line with guidance – the total merchant base was at 31.4 million, up from 29.5 million (QoQ) and 24.9 million (YoY). Earnings per device is around Rs 100 per month.

PayTM also activated 1.5 lakh credit cards in Q3, driving the total card base to 4.5 lakhs. Loan disbursements hit Rs 10,000 crore in Q3, up from Rs 7,300 crore in Q2. Revenues from “Other Financial Services” also grew. Ex-ESOPs, adjusted EBITDA margins could rise significantly, to 6 per cent in Q4 (+4 per cent QoQ). It is likely to receive Rs 130 crore in UPI incentives in Q4, which will fatten the top line and lead to the sharp improvement in EBITDA margins. Bounce rates and credit costs were acceptable. One regulatory concern is the Reserve Bank of India’s restrictions on the Payments Bank, where the management said that it is taking remedial steps. The payment processing margin – currently 9 basis points of GMV – is expected to stabilise at 6-7 basis points given the increasing UPI penetration.

While fintech is a very crowded space, PayTM might be capable of maintaining industry leadership in terms of growth and margins.

Beating the breakeven timelines is a positive factor and the stock has gained sharply on results, rising by 6 per cent on Monday.  Analyst consensus is buy with price targets and fair-value calculations showing a wide range between Rs 730-Rs 1,150.