Recent developments have shown promise for Paytm, as it has gained approval from the National Payments Council of India (NPCI) to operate as a third-party app, allowing it to operate similarly to competitors such as Google Pay and PhonePe. Additionally, Paytm has forged partnerships with Axis Bank, HDFC Bank, SBI and Yes Bank to facilitate seamless business migration, indicating proactive measures to address operational concerns.
The brokerage maintained its neutral rating on the stock with a target price of ₹530, indicating a 30 percent upside potential.
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“Paytm has been under regulatory scrutiny for some time, with its subsidiary PPBL receiving multiple regulatory warnings. This led to the RBI imposing severe business restrictions on PPBL. The restrictions put the company at risk of losing customers and merchants, disrupting its growth trajectory. Despite that, the business volumes in Feb show a moderate impact. We anticipate a further decline in UPI transaction volume/value data in Mar’24 as well. We review our numbers and estimate payment processing margin to decline as the mix of high-producing wallet business is sharply declining, while the impact on financial business (loan production volumes) further suppresses revenue and profitability,” MOSL said in its latest report.
After a steep 47 percent decline in February, the stock recovered some losses and turned positive for the month of March, up half a percent year to date. Meanwhile, it jumped 20 percent in January 2024.
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The stock is currently trading more than 27 percent higher from its 52-week low of ₹318.35, hit on February 16, 2024. Meanwhile, it is still more than 59 percent away from its 52-week high of ₹998.30, hit on October 20, 2023.
In the last year as well, the shares have lost more than 34 percent.
Despite the company’s extensive reach, Paytm’s ability to mitigate the business impact will largely depend on execution capabilities over the coming quarters, MOSL noted. It remains cautious about the ongoing business transition and Paytm’s ability to recover the lost business and resume a growth trajectory during FY 25-26. The brokerage estimates Paytm’s FY25E revenue to decline by 24 percent, while contribution margin declines by 30 percent. It also expects the contribution margin to continue at 51 percent over FY25E (versus 56 percent in FY 24).
Read here: Questions on Paytm issues: What will work after March 15? Here’s what users need to know
The brokerage further stated that it will revise its rating for the company after its March (Q4FY24) results.
Stay alert for leakage in the customer, dealer base
Following recent RBI restrictions, Paytm experienced a notable decline in its Gross Merchandise Value (GMV) in February, expected to continue till March. This decline is attributed in part to the lack of new user additions and poses a risk of losing customers and merchants to competitors, affecting overall business performance, the brokerage said.
It also informed that currently, Paytm Payments Bank Limited (PPBL) boasts of 1.8 million merchants, with approximately 40,000 field staff actively assisting merchants in smoothly transitioning their settlement accounts to alternative banks. Push notifications are used to remind traders about this transition to minimize trade loss.
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Despite efforts to retain its business base, MOSL anticipates that around 15-20 percent of businessmen may swing, especially those with settlement accounts with PPBL. On the customer side, with 60-70,000 customers having e-NACH mandates with PPBL, there may be a moderate impact. Accordingly, marketing spend is expected to increase as Paytm aims to regain lost users, it added.
Cut payroll revenue by 27 percent
MOSL estimates that payment revenues for FY25E will decline by 27 percent, primarily attributed to the decline in Gross Market Value (GMV), impact on wallet transactions and loss in the merchant and customer base. Accordingly, a 28 percent reduction in payment processing margin is projected to a range of approximately 7 basis points (bp), it predicted. This decline is mainly due to reduced trading volumes and an unfavorable mix as the share of high-yield wallet trading is sharply decreasing. MOSL anticipates a gradual recovery in GMV growth, estimating a compound annual growth rate (CAGR) of around 20 percent over FY25-27E compared to the around 45 percent CAGR witnessed during FY22-24E.
Financial business also see a sharp fall
Amidst regulatory interventions, MOSL pointed out that Paytm’s financial business witnessed moderation in lending segments. Initially, growth in the Personal loan segment was moderated. However, due to regulatory concerns around small-ticket loans, Paytm further reduced the origination of postpaid loans, resulting in a 17 percent quarter-on-quarter decline in 3QFY24. Postpaid loans sanctioned through Paytm Payments Bank Limited (PPBL) have been suspended due to RBI’s concerns, it informed.
Additionally, Business Loans are on hold as the company is waiting for more data on the QR transition before resuming loan sanctioning. However, Personal Loans have done relatively well, and Paytm expects a return to normalcy over the next few quarters, it added. Paytm is also considering entering into the secured commercial loan to support growth in its finance business in the medium term. As a result, expenses for FY24E / FY25E have been reduced by 10 percent / 40 percent, the brokerage noted.
Read here: Paytm job cuts? Teams may be reduced by 20% in size, report says, company denies
Estimate EBITDA losses to continue during FY25E
In light of looming regulatory challenges, MOSL anticipates that Paytm will suffer revenue losses due to a drop in its merchant and customer bases. It also estimates that the company could lose approximately 15-20 percent of its combined dealer and customer base to competitors. Accordingly, MOSL has cut its FY25E revenue estimate by 24 percent, expecting EBITDA losses to remain at high levels of ₹1,110 crores. Additionally, higher expenses are factored in as Paytm strives to stabilize its merchant and customer base.
MOSL also projects Paytm to achieve EBITDA break-even in FY26E but remains mindful of progress in business migration and recovery in payments and finance businesses over the coming quarters.
Rating and view
The recent regulatory restrictions have significantly impacted Paytm’s business environment and growth outlook. Despite the company’s extensive reach, its ability to mitigate the business impact will largely depend on execution capabilities over the coming quarters, the brokerage said.
It expects a decline in Paytm’s market share within the overall payments market. Therefore, it is revising its estimates, expecting the payment processing margin to decrease. This decline is primarily attributed to the sharp drop in the high-yield portfolio trading mix. Additionally, the impact on the financial business, particularly on loan origination volumes, is projected to further depress revenue growth and profitability for Paytm.
Disclaimer: The opinions and recommendations made above are those of individual analysts or trading companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 22 Mar 2024, 16:42 IST