Paytm: Still on course to achieve its guidance of going cashflow positive

The One97 Communications stock saw a surge in interest as the company’s operating performance update for August was considered positive by the Street.

In addition, there was a news buzz as the company released a new hitech soundbox, which has longer battery life and processes all major cards.

The performance indicates that the company, which is better known by its Paytm brandname, is still on course to achieve its guidance of going cashflow positive by the end of the 2023-24 financial year (FY24).

Soundbox penetration has grown and so have card penetration, loan disbursals and gross merchandise value or GMV.

By the end of August, the company had 8.7 million devices deployed, almost doubling from 4.5 million in August 2022.

The merchant payment volumes, in terms of GMV for July and August, stood at Rs 3 trillion, which is a growth of 43 per cent year-on-year (Y-o-Y).

The average monthly transacting users (MTU) stood at 94 million for quarter-to-date (averaged for July & August 2023) which is up 20 per cent Y-o-Y.

The company claims increase in GMV is visible in non-UPI instruments like EMI and cards.

Growth in payments volumes drives profitability, through the net payments margin and also from the direct upsell potential.

The value of loans distributed via the Paytm platform was at Rs 5,517 crore in August 2023.

The loan distribution business (in partnership with lender partners) saw disbursements of Rs 10,710 crore, with Y-o-Y growth of 137 per cent and 88 lakh loans (Y-o-Y growth of 47 per cent) disbursed in July & August 2023 through the Paytm platform.

Paytm claims improving credit quality and reducing credit costs by around 10-20 basis points (bps).

It currently has eight lending partners (including credit card distribution) and the company is seeking to onboard another 3-4 partners in FY 24.

These are all volume-driven, low margin revenue streams.

So growth is critically important.

Management guided (after first quarter or Q1 of FY24 that the company would achieve 7-9 bps of net payments margin(NPM), including UPI incentive, but it seems to have achieved the same without UPI incentive, which is creditable.

Improvement in NPM may be driven by traction for higher-margin products such as EMI and card transactions.

The interchange cost for wallet and postpaid has reduced as well.

Take rates in the loan distribution business may have hit bottom.

If the Reserve Bank of India doesn’t hike policy rates, the take rate would remain stable and may inch up in Q3 and Q4.

The guidance for take rate in the loan distribution business is 3.5-3.75 per cent.

The commerce and cloud business appears to have seasonality since it is affected by movie ticket sales and other entertainment events.

We can expect a pick up here in the festival season (Q3FY24 onwards).

The stock continues to receive recommendations and support from analysts and the operating performance updates for July & August look positive.

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