Paytm Q2 results preview: Will One97 Communications continue on path to profitability?

One97 Communications Ltd, the parent company of fintech platform Paytm, will announce its September quarter earnings on Friday. Brokerage largely expects the Vijay Shekhar Sharma-led company to report a strong operational performance. Paytm is likely to remain Ebitda positive on an adjusted basis in the July-September 2023 period, analysts said while adding that revenue is likely to grow 40 per cent to about Rs 2,600-2,700 crore.

Domestic brokerage firm Motilal Oswal expects operating profitability to increase, driven by improvement in contribution margin & operating leverage. It also sees a healthy growth in total revenue. Steady growth in loan disbursements and gross merchandise value (GMV) can be seen, with a number of subscription payment devices to show a decent traction. Paytm's revenue from operations may increase 36 per cent on a year-on-year (YoY) basis to Rs 2,600 crore, while adjusted to Ebitda is seen at Rs 180 crore, which was a loss of Rs 170 crore in the same quarter previous year. Net loss of Paytm is seen contracting to Rs 280 crore in Q2FY24 from Rs 570 crore in Q2FY23, Motilal which said while suggesting a buy rating on the stock with a target price of Rs 1,000. Shares of Paytm settled at Rs 968.70 on Thursday on BSE, up 2 per cent. The company was commanding a total market capitalization of close to Rs 61,500 crore. YES Securities sees an overall growth in revenue from operations at Rs 2,681 crore, up 14 per cent quarter-on-quarter (QoQ) basis and 40 per cent YoY. It sees payment processing charges (PPC) as a proportion of payments revenues to come in at 54.5 per cent, almost flat on a sequential basis. "We arrive at a total expenses (ex PPC) growth to ease down to 7 per cent on a QoQ basis, which was around 11 per cent in Q1FY24," said YES Securities. This would result in an EBITDA margin (ex-other income and after ESOP cost) to improve about 591 basis points (bps) QoQ to -6.6 per cent, the brokerage added in its report. YES Securities has a target price of Rs 1,025 on Paytm. Shares of Paytm have gained about 13 per cent in the last one month, while the stock has rallied about 50 per cent in the last six months. It is up 85 per cent in the year 2023 so far. The stock has surged more than 120 per cent from its 52-week low at Rs 439.60 hit in November 2022. Bernstein Research in a recent note said that Paytm does appear to be on the right side of disruption with its dominant payments platform and a head start in digital credit products. It has leveraged its large monthly transacting user (MTU) base, thanks to its dominant position in payments, to gain a head start in the digital lending segment. It pegs Paytm at Rs 1,100 with a 'buy' rating. "Its underwriting and collection outcomes are impressive too, but remain untested through a full credit cycle. We expect PayTM to continue its strong growth in the lending business (50 per cent CAGR between FY23-30E," Bernstein added. "A rise in payments volume will ensure that the business turns profitable in FY25E and achieves an EPS of Rs 130 by FY30E." Goldman Sachs suggested 30 per cent YoY revenue growth for Paytm in Q2FY24 at the higher end of our India internet coverage, with a 6.3 per cent EBITDA margin. At $200 million in FY25 Ebitda, Goldman expects Paytm to be the most profitable company within India internet, and see the company turning net income positive in FY25 as a catalyst for the stock. "We see upside to both Paytm earnings and multiples as we expect continued momentum in lending and payments, with strong operating leverage in the business model. In addition, resolution of outstanding regulatory issues and/or inclusion of a bank as a lending partner could act as catalysts for Paytm," said Paytm. At 37 times FY26 P/E, Paytm trades at a 20 per cent and 50 per cent discount to Zomato and Nykaa, respectively which we do not see as justified given Paytm’s growth profile, it added while reiterating a 'buy' on Paytm with a target price of Rs 1,250, suggesting an upside of 30 per cent in the stock. Paytm, India's leading payments player, has accelerated monetization of its large eco-system with ramp-up of credit business, said Jefferies, which recently initiated coverage on the stock. Continued momentum in credit originations and margin expansion in payments (300bps) will upfront profitability ahead of market expectation, it said "In four quarters, Paytm will enter the global list of large profitable fintech and are yet to reflect its changed profile. Its valuations at 3.6 times FY25 EV/revenue remain at a 40 per cent discount to this group, Jefferies said with a 'buy' and a target price of Rs 1,300. It has cited asset quality deterioration impacting credit business, supply pressure from PE selling and regulatory issues as key risks.