Motilal Oswal Sees Paytm’s EBITDA Breaking Even By FY25, Advises Investors To ‘Buy’

SUMMARY

With strong growth numbers across services, Motilal Oswal expects Paytm, which achieved EBITDA profitability before ESOP costs in Q3 FY23, to achieve overall EBITDA breakeven by FY25

While Paytm’s loan disbursals have been growing steadily, the brokerage sees a significant headroom for growth given the large customer and merchant base

Motilal Oswal has set a price target of INR 865 on Paytm, which implies an upside of 34.2% to the stock’s close on the BSE on Wednesday

Brokerage Motilal Oswal expects fintech major Paytm to emerge as a key beneficiary of the increasing size of India’s payments ecosystem and reach EBITDA breakeven by FY25. The brokerage has initiated its coverage on the stock with a ‘buy’ rating.

Motilal Oswal, in a research report, noted that the total payments industry is predicted to double to $16 Tn by 2026, within which the mix of digital payments is likely to increase to 65%. Thus, digital payments are expected to surge about 3X to $10 Tn by 2026 from $3 Tn in 2021.

As one of the leading service providers in the burgeoning industry, Paytm is among the largest payments platforms, with a gross merchandise value (GMV) of about INR 13.2 Lakh Cr in FY23, it stated.

The brokerage also noted that Paytm offers payments, financial services, commerce, and cloud services to a large consumer and merchant base of about 350 Mn and 31.4 Mn, respectively, as of Q3 FY23.

With strong growth numbers across services, Motilal Oswal expects Paytm to achieve an overall EBITDA breakeven by FY25. Earlier, the startup claimed that it achieved its target of EBITDA profitability before ESOP costs in Q3 FY23.

“While Paytm will continue to invest in growth and merchant base expansion, the improvement in operating leverage will nevertheless aid profitability,” Motilal Oswal said.

The brokerage has set a price target (PT) of INR 865 on Paytm, which implies an upside of 34.2% to the stock’s close on the BSE on Wednesday (April 19).

It must be noted that Paytm’s net loss halved year-on-year (YoY) to INR 392 Cr in Q3 while its operating revenue surged 41% YoY to INR 2,062 Cr. Motilal Oswal expects Paytm’s operating revenue to stand at INR 7,850 Cr in FY23 and surge to INR 13,220 Cr in FY25.

Growth in Unified Payment Interface (UPI) transactions and credit cards will keep the business momentum healthy for Paytm, the brokerage believes. Paytm is in the third position, after PhonePe and Google Pay, in terms of processing of UPI transactions. In March, Paytm processed 14.66% of total UPI transactions.

Besides, its lending business is also growing steadily. Paytm disbursed 4.1 Mn loans worth INR 4,468 Cr in March, which was a 63% and 206% YoY growth, respectively. In February this year, the company disbursed 40 Lakh loans worth INR 4,158 Cr.

“Paytm’s lending business has demonstrated a robust traction in loan disbursals… We further note that penetration for Paytm remains lower at 0.8-5.2% of MTU (monthly transacting users) and thus there remains a significant headroom for growth given the large customer and merchant bases. We thus forecast disbursements to register 64% CAGR over FY23-25,” said Motilal Oswal.

Uptick in commerce activities, along with healthy traction in credit cards distribution, will also keep the revenue healthy, as per the brokerage. “We expect commerce and cloud revenues to witness a healthy 22% CAGR over FY23-25 v/s a decline of 10% over FY19-22,” it said.

It is also pertinent to note that the National Payments Corporation of India (NPCI) recently issued a circular allowing prepaid payment instrument (PPI) issuers to charge an interchange fee of 1.1% for merchant transactions of more than INR 2,000. With Paytm Payments Bank allowing wallet interoperability for UPI transactions, many analysts believe that it would be an additional revenue stream for the associate company of Paytm.

Motilal Oswal said that while this would be beneficial for PPI issuers, as it will aid the overall revenue, the total impact for Paytm would depend on its wallet usage on non-Paytm QR or online merchants. Further, some of the revenue is likely to get offset by the implementation of wallet-loading charges, it said.

While the brokerage remains positive on Paytm’s overall business, it noted that regulatory changes by the Reserve Bank of India (RBI) is one of the key risks to Paytm’s growth trajectory. Besides, growing competition in the space could also be an obstacle.

The central bank recently asked Paytm Payments Bank to stop onboarding new customers and reapply for a payment aggregator (PA) licence last year. The matter is still pending and Paytm received a time extension from the RBI to resubmit its application for the licence last month.

Shares of Paytm were trading 2% higher at INR 657.5 on the BSE at 3.15 PM IST on Thursday.