Paytm reports improved net take rate, ICICI Securities

One 97 Communications Ltd (Paytm) reported a consolidated loss of Rs7.6bn in Q4FY22, marginally lower than the loss of Rs7.8bn 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% QoQ 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 target price of Rs1,285 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% QoQ/YoY) through the Paytm platform – equivalent to a disbursal value of Rs35.5bn (up 63%/415% QoQ/YoY). Within the lending business, disbursements in BNPL / personal loan / merchant loan segments grew 83% / 56% / 19% QoQ to Rs22bn / Rs8bn / Rs5.6bn. 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. This provides upsell opportunities in personal loans and credit cards, as already being witnessed: (1) over 40% of Paytm-branded credit cards are being issued to existing Postpaid users, and 2) 50% of postpaid customers are being offered personal loans. Paytm postpaid is now available at more than 9mn online and offline merchants. In merchant loans, the repeat rate is healthy at over 50%. Furthermore, more than 75% of loans are disbursed to merchants with a Paytm payment device. In terms of repayment behaviour in all 3 products – BNPL / personal loan / merchant loan – credit loss is expected at 1.1-1.3% / 4.5-5.0% / 5.0-5.5%. We estimate that 18mn-19mn consumers (15% of MTUs) and 1.2mn merchants (>10% of merchants with Paytm devices and >3% of total merchant base) will avail financing product through the Paytm platform by FY26E. 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% QoQ to Rs2.6bn. While it grew 105% YoY, GMV from merchant discount rate (MDR)-bearing instruments (Paytm wallet, credit & debit cards, net banking, etc.) grew 52% YoY. Against apprehension of the risk of onboarding new users with embargo on Paytm Payment Bank, MTU increased 10% / 41% QoQ / YoY 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. Total offline deployed devices increased to 2.9mn in Mar’22 vs 2.0mn/0.8mn in Q3FY22/Q4FY21. This could lead to increase in its payment business as more merchants start using these devices for accepting payments. Monthly transacting user base of Paytm is likely to double over FY22-FY26E to 117mn. We forecast the company’s merchant GMV to grow at 35% CAGR over FY22-FY26E to reach Rs28trn by FY26E.
• Modest 6% QoQ growth in revenue from operations vs 34%/22%/9% QoQ growth in Q3FY22/Q2FY22/Q1FY22. Robust 15% QoQ 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% QoQ. 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. We believe this would be due to growth in bill payment use cases and deployment of subscription-based payment devices. Nonetheless, ‘payment service to merchant’ take rate was marginally impacted (0.22% vs 0.23% in Q3FY22) due to seasonally strong festive demand in its online and offline merchant payment business in Q3FY22. Financial services revenue grew 35% QoQ on the back of rising disbursements in the lending business. Commerce revenue growth was impacted (down 24% QoQ) due to covid disruption in the first few weeks of Q4FY22 and higher base of Q3FY22. This was partially offset by 6% increase in cloud revenue. Overall commerce and cloud service revenues declined 6% QoQ.
• 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 QoQ and the percentage of GMV was lower at 0.3% in Q4FY22 (vs 0.31% in Q3FY22). This implies QoQ improvement in net payment take rate to 0.16% from 0.14% in Q3FY22, which we believe was driven by optimisation of transaction routing, improvements in transaction rates and increase in share of low-cost instruments in mix including for wallet loading. This coupled with 0.8%/7.1% QoQ increase in promotional cashbacks and incentive cost / other direct expenses led to increase in contribution margin. Furthermore, indirect marketing & promotional expenses declined 21% QoQ. Employee expenses (excluding ESOP)/other indirect expenses, nonetheless, increased 15%/8% QoQ. Paytm increased its field force to drive up the penetration of devices and also added people in its technology team. Management believes that current headcount is sufficient to achieve FY23 growth plans. Software, cloud and data centre expenses were up 16% QoQ 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 expansion 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. Annual non-cash ESOP charges of Rs10bn-18bn over FY22-FY26E will drag reported EBITDA. We forecast adjusted-EBITDA margin (excluding ESOP charges) to turn positive by FY25E.

Read more – https://www.communicationstoday.co.in/paytm-reports-improved-net-take-rate/

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