One 97 Communications (Paytm) - It is worth to invest?

 Paytm Investment Review

Paytm

Paytm IPO has been one of the biggest Investment Disasters. 

• Will the company be able to bounce back now?
• What are the future plans?
• Is it now a potential candidate for investment?
• Can the stock price come back at original valuations?
  
  

Ahead of guided timeline to be profitable, to start cash flow generation in 1 to 1.5 year

• Since the past 2-3 quarters, Paytm has been outperforming expectations. 

• Company's EBITDA reduced to -9% in Q2 FY23 from -39% in Q2 FY22. 

• This gives faith in company's projection to turn EBITDA positive by Q2 FY24. 

• Management also says company would begin free cash flow generation in the next 12 to 18 months driven by improved profitability across payment & financial services distribution, cloud etc. 
  
  

Great plans in line to optimize net margins

• Paytm makes net payment margin of 7-9 basis points of GMV. Out of this, 3-4 basis points are earned from UPI transactions & 15-18 basis points come from transactions through wallets, debit cards, credit cards etc. 

• While expecting faster growth in UPI transactions, management believes blended margin to be stable at 5-7 bps further. 

• Other margin driver in payment business is subscription revenues earned by deploying devices. The company charges Rs. 100 per month from an active device. These charges may go up to Rs. 250 depending on the device. The company also receives incentives from NABARD, banks, RBI for some installations. 

• Paytm also has a minority shareholding in the company which designs & manufactures these devices. This gives Paytm an edge of being independent & innovative at the same time. For example, they are planning to launch a soundbox which would also accept card payments. 
  
  

Management confident that lending business margins would scale upwards

• Paytm makes 2.5% to 3% of loan value upfront (Highest in merchant loans followed by personal & postpaid).

•  Along with sourcing, they also collect loans for lending partners by mobile & digital capabilities. 

• Company makes 0.5% to 1.5% of current disbursement value.

• Majority of loan collections happen digitally but the company also has a collection force of 170 people for customers who default in merchant & personal loans. 

New product launches in lending business

• Paytm is mainly looking forward to launch 2 products :-

1. EMI @ POS - Mainly for lifestyle financing. Will probably launch in the next 10-12 months.
2. There are some customers who demand high tenure or high ticket size loans after completing a few cycles of personal loans. Paytm is looking forward to help them.

• The company will also focus on stock brokerage offerings where it would try to cross-sell trading products to existing payment customers. 

No plans on becoming NBFC

• Current business model looks far better to the management vs the NBFC model where there most income comes from on outstanding book & credit risk. 

• Paytm also does not want to enter the NBFC space because there are already many big companies in that industry & competing with them is not an easy task. 

The cloud & commerce businesses

• In cloud business, the company provides marketing/advertisement services to merchants & also distributes co-branded credit cards which give lifetime usage fee & distribution revenue.

• Currently they have around 3 lakh credit cards with Rs 22-24k per month as average retail spend. 

• In commerce business, merchants sell tickets, gift vouchers & deals. This business is already cash profitable.

ESOP charges to come down

• Management says the ESOPs would come down from Rs 14.1 billion in FY24 to Rs 1.4 billion in FY27 reducing gradually every financial year. 

• Total number of diluted shares would stand at around 695 million. 

No plans for mergers & acquisitions

• While Paytm currently has high cash reserves of around Rs 92 billion, it does not plan to do any mergers or acquisitions.

• This is because the company is focusing on growing profitability & growing organically would help it understand the market better. 

• There are no plans of buying back shares either.

Paytm income sheet with future projections

What will happen to Paytm share price if things go positively?

Weekly chart of One97 Communications (Paytm)

• Here is the candlestick chart of Paytm with resistance & potential price targets if management is able to execute well. But this is not a buy or sell advice. Only for educational purposes. Kindly consult your financial advisor before taking any decision.

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