Since its debut on Dalal Street three years ago, Paytm has been battling several challenges.
There were high expectations that its initial public offering (IPO), which raised ₹18,300 crore, would lead to a blockbuster listing. However, investors oversubscribed just 1.89 times, and their enthusiasm turned to despair when the stock was listed at ₹1,950, a 9% discount to the issue price of ₹2,150.
On the day of Paytm's market debut, Macquarie dropped a bombshell, saying its business model lacked focus and direction. According to an article in Mint, it cut its target price by 40% to ₹1,200, calling the business a cash guzzler.
It also said Paytm's focus on multiple business lines limited its ability to dominate any category except wallets, which were losing relevance due to UPI growth. Competition and regulations may hurt its unit economics and growth, Macquarie said, adding that Paytm must focus on lending.
It didn’t stop there. In March 2022, Macquarie once again lowered its target price to ₹450. A year later, it raised it to ₹800. Then in February 2024 it once again lowered the target to ₹275 after the Reserve Bank of India (RBI) imposed curbs on Paytm’s payments bank.
The stock hit a low of ₹310 in May 2024 down 85% from its issue price. However, it has surged 200% since then to a recent high of ₹939. So what's in store for Paytm shareholders?
In January, the RBI dealt Paytm a huge blow when it barred it from adding new customers and ordered it to shut its banking services from 29 February due to serious regulatory lapses related to its operations.
The restrictions hit Paytm’s business, which focuses on customer monetisation, causing it to lose a source of income. The company earns revenue when customers use its UPI services and through commissions on loans. Though the RBI’s action did not directly affect its lending business, its partners became cautious.
It also allowed competitors PhonePe and Google Pay to gain market share in UPI. Paytm’s market share collapsed from a high of 11% in December 2023 to about 6% in September 2024. Its monthly transacting users (MTU) declined from 7.8 crore in Q1 FY25 to ₹7 crore in Q2 FY25.
Paytm earns revenue from three business segments: financial, payment and marketing services. Payment and financial services contribute 79.6% of its revenue, while the rest comes from marketing (18.2%) and other operating revenue (2.2%).
The RBI's action caused Paytm’s operating model to change significantly as lenders turned cautious. Previously, its lending business focused on the distribution of loans with guarantees for the original lender. However, it has now moved to the default loss guarantee model (DLG), in which Paytm absorbs the first loss if a borrower defaults on payments. This change was also necessitated by the RBI’s tightening of lending norms, especially unsecured lending, which made lenders cautious about partnering with Paytm.
DLG has given lenders the comfort of additional security and better asset quality, rekindling their interest in partnering with Paytm. Moreover, this model has met the regulator’s and lenders’ expectations, which will help increase disbursements.
Paytm will recognise the entire DLG cost of ₹225 crore upfront, resulting in higher upfront costs and revenues over the loan tenure. Its assets under management in DLG stands at ₹1,625 crore as of Q2 FY25.
It disbursed merchant loans worth ₹3,303 crore, up 32% from the previous quarter, and personal loans worth ₹1,977 crore, down 21% from the previous quarter. The slowdown in personal loans was an industry-wide issue caused by the RBI's attempt to curb the growth in unsecured loans.
Paytm's take rate is the highest in merchant loans, contributing 62.6% to its overall loan portfolio. The remaining comes from personal loans.
During Q2 FY25, 600,000 unique consumers and merchants availed of financial services through Paytm, up from 590,000 during Q1 FY25 but down from 790,000 during Q4 FY24. Paytm expects this segment to grow due to lower engagement and higher customer participation on its platform.
Moreover, the company has exited the buy-now-pay-later segment (Paytm Postpaid) and reduced its reliance on loans under ₹50,000.
Revenue from financial services surged 34% quarter-on-quarter owing to a higher collection bonus on merchant loans, on which the take rate is higher.
In addition to the lending business, it is also increasing its focus on distributing insurance to merchants and consumers, scaling up its mutual funds, and offering other wealth management products.
Paytm earns revenue from the payment processing margin. It also charges merchants for various recurring monthly services such as soundboxes. This segment is on a solid footing. More than 11.2 million merchants now use its services, up from 10.7 million in March.
It has also started using its soundboxes to play advertisements for brands such as Coca-Cola, Mondelez, Dabur and Meesho.
This opens up another source of revenue for the company, in addition to the recurring revenue from soundboxes. It has also improved its payment processing margin and aims for a 5-6 bps margin in FY25. Overall, its current margin stands at 0.12% of gross merchandise value (GMV).
All of this has contributed to a 9% quarter-on-quarter rise in its payments revenue from ₹900 crore to ₹981 crore. After a slight dip, GMV has recovered to ₹4.5 trillion, up 5% from the previous quarter. It expects GMV to increase further owing to the festive season.
This includes advertising, loyalty services, deals, vouchers and credit cards. Revenue from marketing services stood at ₹302 crore, down 6% from Q1.
This was mainly due to the sale of the entertainment ticketing business and fewer monthly transacting users. Its credit card disbursal has been robust, with 1.38 million active credit cards as of September, compared to 870,000 last year.
Paytm is yet to match its peak revenue of ₹2,519 crore in Q2 FY24, when it reported a loss of ₹292 crore. However, revenue is now improving sequentially.
Revenue grew 11% sequentially to 1,660 crore in Q2, and contribution profit rose 18% to 894 crore, with a margin of 54%. At the same time, Ebitda loss narrowed from ₹388 crore to ₹404 crore.
Paytm recentlysold its ticketing business, Paytm Insider, to Zomato at a profit of ₹1,345 crore, exiting a non-core business. This exceptional item helped it post a profit of ₹930 crore and boosted its cash reserves to ₹9,999 crore.
At the time of listing, Paytm’s valuation was a whopping 30 times sales, something Macquarie expressed concern about in its note.
However, the stock now trades at a modest 6.9 times sales after hitting a low of 2.2 times. This is slightly higher than its average market-cap-to-sales ratio of 5.8.
Not surprisingly, mutual funds increased their shareholding to 7.86% during Q2 FY25 from 6.15% in Q4 FY24. On the other hand, FIIs reduced theirs by 4.88 percentage points to 55.53% as of Q2 FY25.
As Macquarie said in its note, Paytm's focus on several vertices has indeed affected its business, as has competition and regulatory action.
Therefore, the company has been focusing on lending and distributing financial services to its base of sticky merchants and customers. The results have been good, as evidenced by the increase in loan disbursals. The slowdown in personal loans is also expected to reverse once the RBI eases the rules around unsecured lending.
Paytm has also looked to aggressively acquire more UPI customers after getting regulatory approval, and ramp up merchant payment innovations such as soundboxes. This is in addition to reactivating merchants and redeploying inactive devices to new merchants over the next two to three quarters, which will help increase revenue. The company is also using AI to reduce costs. It expects to save ₹400-500 crore on staff costs, which would narrow its Ebitda loss.
Emkay Global expects that this, the improving traction in its broking business, and interest income from the proceeds of the entertainment business, should help it turn operational-Ebitda-positive (excluding employee stock options and UPI incentives) by Q4 FY25E.
All of this is reflected in its share price, which is trading in a beautiful rising channel.
Bernstein has said Paytm's stock price could double, driven by significant growth catalysts. It expects earnings per share (EPS) to nearly double by FY30. This growth will be supported by margin expansion, increased lending from its balance sheet, and the revival of critical products such as BNPL, it said.
Bernstein expects the payment processing margin to recover to 15 basis points, delivering a 25% upside to EPS. Additionally, it foresees an 8% increase in EPS from reclaiming market share in UPI. There is also a potential 30% upside if Paytm channels more loans through its balance sheet after securing a non-banking financial company (NBFC) license.
However, realising this optimistic scenario depends on favourable regulatory changes and management's willingness to re-enter heavily regulated segments such as BNPL.
Paytm has made its big new bet. While the stock market may be signalling success, whether this bet pays off remains to be seen.
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Note: Throughout this article, we have relied on data from Screener.in and Tijorifinance. Only in cases where the data was not available have we used an alternate, but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only.
Madhvendra has been a passionate follower of the equity market for more than seven years and is a seasoned financial content writer. He loves reading and sharing his honest opinion about publicly listed Indian companies and macroeconomics.
Disclosure: The writer does not hold the stocks discussed in this article.
