Buy This Large Cap Fintech Stock For 54% Potential Upside, Share Price Surged 50% In 3 Months
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Stock Outlook & Returns
The current market price of the stock is Rs 834.95 apiece, trading Rs 324.9 above the 52 week low and Rs 1,120.05 below the 52-week high, respectively.
The stock hit the 52-week low recently on 12 May 2022 at Rs 510.05 apiece. The 52 week high of the stock is Rs 1,955 apiece, recorded on 18 November 2021.
The stock of the company in the past 1 week gained 10.49%. In the past 1 month, it gained 19.49%. In the past 3 months moved up 50.12%. The shares have fallen 46.5% since their listing, stock was listed on the exchange lasted last year in November.
Revenue from operations buoyed by financial services and payment services to consumers
- Robust 11% QoQ growth in ‘payment service to consumers’ revenue due to growing user base on app for bill payments and other use cases. Company earned platform fees and convenience fees from customers in certain use cases.
- 3% QoQ decline in revenue from ‘payment service to merchants’ primarily due to account level rationalisation among online merchants to focus on profitable GMV (revenue impact of Rs290mn). Paytm did not record any UPI P2M government incentives revenue in Q1FY23.
- Payment services take rate marginally fell to 0.45% in Q1FY23 (vs 0.46% in Q4FY22)
- Financial services revenue grew 60% QoQ driven by an increase in postpaid and personal loan disbursements. 70-80% of financial services revenue was credit-related. Currently, the take rate in lending business is ~4-4.5%, which might increase by 25bps on account of collection incentives with better collection performance. ~70- 80% of the take rate is upfront revenue with the remaining being 50bps (take rate) which can fluctuate based on collection performance.
- Commerce revenue grew 35% QoQ primarily due to strong growth in the company’s ticketing revenue with an uptick in demand for travel and entertainment, which had a seasonally strong quarter, supported by some blockbuster movie releases.
- Increase in commerce revenue was partially offset by 11% QoQ decline in cloud revenue as marketing spend appetite of advertisers, particularly consumer internet companies, reduced due to macro-economic factors.
Net payment take rate improved
Net payment take rate improved to 13bps of GMV in Q1FY23 vs 10bps in Q4FY22. This was primarily driven by 10% QoQ decline in payment processing charges. Three driving factors for decline in payment processing charges were: better negotiations with existing partners, account rationalisation for certain online merchants, and higher incremental UPI usage which carries lower charges. Payment take rate reduced by 7bps to 23bps in Q1FY23 from 30bps in Q4FY22. Net payment take rate was also supported by continued growth in device subscription revenues and improved margins in online merchants’ business. As a result, net payment margin (as percentage of payment revenue) improved to 35% in Q1FY23 vs 26%/17% in Q4FY22/Q1FY22, respectively. This margin should continue to improve gradually.
Reduction in payment processing charges
Reduction in payment processing charges led to contribution/EBITDA (before ESOP cost) margins increase to 43%/-16% in Q1FY23 vs 35%/-24% in Q4FY22 and 27%/-37% in Q1FY22. Contribution margin increased due to improved net payment take rate. This was offset by 22% QoQ increase in promotional cashbacks and incentive costs. Such costs are linked with comebacks in ticketing and commerce business. Indirect marketing (excluding promotional and cash back incentives) increased 33% QoQ entirely due to seasonal sponsorship (IPL) spending. Total employee expenses grew 6% QoQ within which ESOP expenses declined 1% and other employee expenses increased 10% due to the impact of annual appraisals, and its continued investments in sales channels and product and technology teams. Software, cloud and data centre expenses were up 7% QoQ mainly due to cloud infrastructure costs to support growing transactions on the platform and GMV. Other indirect costs were down 9% QoQ. Consequently, adjusted-EBITDA (before ESOP cost) and EBITDA margin increased.
The brokerage said, “We expect EBITDA improvement trajectory to continue and there is some visibility of it getting into positive territory by FY26E. Annual non-cash ESOP charges of Rs10bn-18bn over FY23-FY26E will drag reported EBITDA. We forecast adjusted EBITDA margin (excluding ESOP charges) to turn positive by FY25E.”
Continued accelerated growth in lending business provides incremental revenue and earnings delta
In Q1FY23, it disbursed 8.5mn loans (up 30%/492% QoQ/YoY) through the Paytm platform – equivalent to a disbursal value of Rs55.5bn (up 56%/779% QoQ/YoY). Within the lending business, disbursements in BNPL / personal loan / merchant loan segments grew 55% / 67% / 46% QoQ to Rs34bn / Rs13bn / Rs8.3bn. The total signed-up user base for postpaid has now crossed 5.3mn (QoQ growth from 4mn). Cross-sell from postpaid continues to see traction with over 50% of Q1FY23 personal loan disbursements given to existing postpaid customers. Paytm postpaid’s reach increased to 11mn (from 9mn QoQ) online and offline merchants. In merchant loans, the repeat rate, though down to over 45% from 50% QoQ, remained healthy. Currently, Paytm is working with 5 lenders and 3 credit card issuers with large balance sheet size and appetite to source loans. Having said that, it is in the process of adding more partners. Credit loss expectation in all 3 lending products – BNPL / personal loan / merchant loan remained constant at 1.1- 1.3% / 4.5-5.0% / 5.0-5.5% QoQ. Bucket-1 resolution metrics also remained constant QoQ with postpaid business witnessing a slight decline to 81-83% in Q1FY23 from 82-85% in Q4FY22. Company is expecting the same to go back to previous levels. Merchant retention cohorts are also improving every quarter by a percentage point.
The brokerage said, “We estimate that 18mn-20mn consumers (16% of MTUs) and 1.3mn merchants (>10% of merchants with Paytm devices and >3% of total merchant base) will avail of financing products through the Paytm platform by FY26E. We forecast financial services revenue to grow at a CAGR of 67% over FY22-FY26E, comprising 23% of operating revenue (from
Strong QoQ growth momentum in key payment operating parameters
GMV grew 15% QoQ to Rs3.0tn. Growth in GMV from merchant discount rate (MDR)- bearing instruments (Paytm wallet, credit & debit cards, net banking, etc.) was constant at 52% YoY. MTUs grew adequately at 6% QoQ / 48% YoY to 74.8mn, despite ongoing audit on Paytm Payment Bank, reflecting the increased user activity on Paytm platform. RBI audit is continuing and progressing in a good manner. Paytm continues to witness strong growth in offline payment devices, which increased to 3.8mn in Jun’22 vs 2.9mn/0.9mn in Q4FY22/Q1FY22, despite being conservative about the quality of merchants onboarded. This helps Paytm in increasing its payment business as more merchants start using these devices for accepting payments. Monthly transacting user base of Paytm is likely to nearly double over FY22-FY26E to 123mn. We forecast the company’s merchant GMV to grow at 37% CAGR over FY22-FY26E to reach Rs30trn by FY26E.
