Jefferies expects Paytm to turn profitable in next 4 quarters

Jefferies expects Paytm to turn profitable in the next four quarters. Paytm will be amongst the few large profitable fintechs globally that enjoy strong growth of over 30%, double-digit EBITDA margins and stable profitability, the brokerage says in a note while initiating coverage on the digital payments stock with a 'Buy' rating.

Paytm has accelerated monetisation of its large ecosystem with the ramp-up of credit business, according to Jefferies. Continued momentum in credit originations and margin expansion in payments (by 300 basis points) will upfront profitability ahead of market expectation, it says.

With just around 5% user penetration, Paytm's loan disbursals have surged 10 times to over $8 billion as of August, says Jefferies. In payments, revenues expanded 2.5 times with a ramp-up in merchant subscription business and margins jumped led by industry tailwinds and management shedding unprofitable lines, the brokerage says.

Jefferies has set a target price of ₹1,300 for Paytm, a 34% upside compared with its closing price on October 19.

Reacting to Jefferies 'Buy' coverage, shares of Paytm gained 2% to ₹976.75 apiece on the National Stock Exchange (NSE), taking the digital payments firm's market cap to ₹61,346 crore. The stock closed at ₹967 on the NSE. Shares of One97 Communications have gained 82% in 2023 and 53% over the past year.

In two years, Paytm's revenues have trebled, gross margins surged to 54% (from 13%) and placed the company on a path to profitability, according to Jefferies.

"We expect revenue growth to remain in the fast lane (31% CAGR over FY23-26E) driven by (a) 55% CAGR in financial services revenues led by 4x jump in credit originations, and (b) 50% CAGR in merchant subscription revenues on the back of aggressive deployment of merchant devices (3x network expansion) as Paytm asserts its market leadership," the brokerage says in its note.

Contribution profits will outpace revenues as margins improve by 300 bps to 57%, led by a rising share of financial services in revenue mix, and better core payments margins as the share of credit-linked spends in non-UPI gross merchandise value increases, says Jefferies.

The brokerage says Paytm's asset quality should hold up with an increasing share of credit-tested users. "Lending partners remain in control of risk underwriting thresholds and given the short tenor of loans, are jointly creating a large base of credit-tested users. Delinquency trends have improved in BNPL (largest product) where share of repeat users is 65%," the brokerage says.

In August, Paytm said its founder and chief executive officer Vijay Shekhar Sharma will acquire a 10.3% stake in the company from Alibaba's Antfin. Sharma's shareholding in Paytm has since increased to 19.42%, whereas Antfin's stake has come down to 13.5%. One97 Communications had made a dismal public market debut on November 18, 2021.

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