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We hosted PayTM at our Financials tour 2022. PayTM is undergoing a model shift from chasing “growth at any loss” to “profitability at scale”. The company maintained its guidance of Adj. Ebitda profitability by Sep-23 – which we believe most investors remain skeptical of —rightly so given the sharp increase in indirect expenses since listing, negating gains in contribution margin (CM) since last year. Moderation in indirect expenses Q2 onwards should hence be a catalyst. On the other hand, contribution margin should enjoy incremental tailwinds from (i) incentive income from below-normal loss rates in syndicated loans, (ii) scale-up of co-brand credit card issuances, and (iii) potential UPI P2M (person to merchant) subsidy. We estimate incremental CM of 60% – well above 43% in Q1F23- suggesting scope for more improvement. Q2 earnings print on loss reduction rate will be a key catalyst.

Paytm’s annualised loan disbursement run-rate stands at ~Rs 290 bn as of Aug-22 and its penetration stands at 4% and <0.5% of MTU for postpaid and personal loans respectively and 4% of device merchants for merchant loans (as at Jun-22). The company sees a long runway for growth in the segment driven by potential for (i) growth in its MTU (79mn as of Aug-22; +40% y/y) and device merchant (4.5mn as of Aug-22 – guided to add ~1mn per quarter) base, and (ii) increasing penetration among the base. The company also noted that its portfolio credit losses are running below levels underwritten by financing partners, which can additionally drive scope for incentive income on its syndicated loan book.

Paytm has been improving the margins of its payments business driven by (i) scale-up of merchant devices (driving rental revenue; ~12-15 month payback on its signature Soundbox device) and (ii) rationalising processing costs. Further tailwinds to margins exist from potential UPI P2M monetisation either from MDR introduction (unlikely) or from increased subsidies from the government to support network investments. UPI’s P2M becoming monetizable via government rebate is a major mid-term positive for payment economics.

Fintech’s funding winter should reduce competitive intensity – Competitive intensity could moderate in the payments/digital lending space from fintechs given the tightening of funding and regulatory hold in the sector. In our view, this could benefit Paytm as it is well funded to drive expansion and has also highlighted that it is compliant with the digital lending regulatory guidelines, which we think can clear the regulatory overhang on the FS part of its business model.We expect PAYTM to see strong revenue growth across all its business segments thanks to device monetisation in payments, financial services cross-selling, ticketing recovery and rising ad monetisation.