One 97 Communications Ltd (Paytm) reported a consolidated loss of Rs 760 cr in Q4FY22, marginally lower than the loss of `780 cr in Q3FY22. The quarter was characterised by: (1) improved penetration for lending products and uptick in lending business led by the company’s ‘Buy Now Pay Later’ (BNPL) product; (2) enhanced contribution/adjusted-EBITDA (before ESOP) margins due to increased net payment rate, rising contribution of financial services revenue and contained marketing expenses; (3) sustained momentum in monthly transacting user (MTU) growth and deployment of offline devices. What failed to cheer: (1) moderate sequential revenue growth due to decline in ‘payment service to merchants’ and commerce revenues; (2) lower growth of 4% q-o-q in gross merchandise value (GMV) than earlier envisaged.
Management is confident of achieving operating profitability (positive EBITDA before ESOP cost) by Q2FY24 on the back of improving contribution margins and decreasing indirect expenses as a percentage of operating revenues. We remain conservative and expect the company to be EBITDA-positive by FY25E. Maintain Buy with an unchanged TP of Rs 1,285 based on customer lifetime value methodology.
Improved penetration and uptick in lending business: Lending through Paytm’s platform is gaining traction providing incremental delta to revenues. In Q4FY22, it disbursed 6.5mn loans (up 48%/371% q-o-q/y-o-y) through the Paytm platform – equivalent to a disbursal value of `35.5 bn (up 63%/415% q-o-q/y-o-y). Company has partnered with 9 banks and NBFCs in Q4FY22 to provide digital loans to MSMEs and consumers from small cities and towns. The total signed-up user base for Postpaid has now crossed 4mn offering. We forecast financial services revenue to grow at a CAGR of 58% over FY22-FY26E, comprising 19% of operating revenue (from <5/10% in FY21/FY22).
GMV sequential growth lower than earlier envisaged; however, other key payment operating parameters were encouraging: GMV grew only 4.0% q-o-q to Rs 2.6 bn. While it grew 105% y-o-y, GMV from merchant discount rate (MDR)-bearing instruments grew 52% y-o-y. Against apprehension of the risk of onboarding new users with embargo on Paytm Payment Bank, MTU increased 10/41% q-o-q/y-o-y to 70.9mn, which reflects the increased user activity on Paytm platform. As far as offline payment service to merchants is concerned, Paytm is accelerating its footprint with around 2.1mn devices being deployed in last 12 months. We forecast the company’s merchant GMV to grow at 35% CAGR over FY22-FY26E to reach `28 trn by FY26E.
Modest 6% q-o-q growth in revenue from operations vs 34%/22%/9% q-o-q growth in Q3FY22/Q2FY22/Q1FY22: Robust 15% q-o-q growth in ‘payment service to consumers’ was partially offset by 2% decline in revenue from ‘payment service to merchants’, and overall payment service revenues grew 5% q-o-q. Payment services take rate marginally improved to 0.46% in Q4FY22 (vs 0.45% in Q3FY22) despite rising proportion of UPI (zero MDR) in overall GMV, which suggests better take rates on MDR-bearing instruments.
Contribution/EBITDA (before ESOP cost) margins increased to 35%/
-24% in Q4FY22 as compared to 31%/-27% in Q3FY22 and 21%/-52% in Q4FY21. Payment processing charges were flat q-o-q and the percentage of GMV was lower at 0.3% in Q4FY22 (vs 0.31% in Q3FY22). This implies q-o-q improvement in net payment take rate to 0.16% from 0.14% in Q3FY22. This coupled with 0.8%/7.1% q-o-q increase in promotional cashbacks and incentive cost/other direct costs led to rise in contribution margin.
Software, cloud and data centre expenses were up 16% q-o-q mainly due to expansion of cloud infrastructure to support growing transactions on the platform, GMV and investments made in key licenses to drive up customer acquisition and engagement. Consequently, adjusted-EBITDA (before ESOP cost) margin increased. This, along with 9% decline in ESOP expenses, also led to EBITDA margin growing to -47% from -54% in Q3FY22.
We expect EBITDA improvement trajectory to continue and there is some visibility of it getting into positive territory post FY26E. We forecast adjusted-EBITDA margin (excluding ESOP charges) to turn positive by FY25E.
