Paytm’s right to win

November 2024: Paytm’s Q2 FY2025 earnings and its next steps

Author

Arjun Juneja
November 08, 2024

Short note: This post focuses on Paytm’s Q2 FY2025 earnings, my quantitative insights and qualitative beliefs. Please reply to my email or comment here with your thoughts and new post ideas. Enjoy reading and please ✅ drink water today. Thank me by sharing my newsletter with acquaintances and family. Newsletter link here.

Table of Contents

1. Introducing Paytm

Paytm was founded in 2010. This mobile-first digital payments company has come a long way with its offerings evolving from bill payments/ recharges to a wallet, a standalone payments bank and a UPI payment stack. Major inflection points include demonetisation in November 2016 and the Covid-19 outbreak in March 2020.

The company publicly listed in November 2021 and suffered a horror listing as the stock closed down 27% on its first day. Ever since, it has been waging a battle to turn its first rupee of profit and regain market share lost to its peers. The stock was battered following regulatory action on Paytm Payments Bank Limited (PPBL) in January 2024 and slid to a lifetime low of ₹310 in May 2024. It has since recovered and closed at ₹798 on November 6, 2024.

It serves merchants and customers alike with its iconic tagline: ‘Paytm karo’. The company pioneered an India-first innovation called the sound box that was rapidly copied by every other fintech player in town. Paytm competes with PhonePe and Google Pay in the UPI ecosystem, and Navi and Cred in the personal loans space.

Paytm SoundBox variants

Its present offerings include:

a) Payment services (payment processing and device subscriptions)
b) Financial services (cross-sell of investment products, insurance and loans)
c) Marketing services (advertising, credit card distribution, deals and gift cards)

2. Business in Numbers

a) Key takeaways from Q2 FY2025

i) Paytm entered into a First loss default guarantee (FLDG) agreement for merchant lending with SMFG India Credit in Q2 FY2025. In Q2 itself, SMFG achieved an AUM of ₹1,651 crore i.e. ~50% of all Q2 merchant loans disbursed.

ii) Paytm secured board approval to provide DLG up to ₹225 crore. As per the earning call mention that DLG is meaningfully below 5%, we can assume 4% DLG. This translates to allowable loan issuance of ~₹5,625 crore against the present assets under management (AUM) of ₹1,651 crore (assume with loan repayments, disbursals touched ₹1,800 crore).

iii) Increased focus on merchant loans over personal loans in Q2 FY 2025. In Q1, the ML: PL ratio stood at 50:50 and in Q2, it moved to 63:37. Increased share of high take-rate merchant loans and collection bonus helped drive a 34% QoQ growth in financial services revenue even as overall loan disbursals only grew 5% QoQ.

iv) Average monthly transacting users (MTUs) fell from 7.8 crore (Q1) to 7.1 crore users (Q2). A new metric-- # of key financial service customers marginally rose from 5.9 lakh (Q1) to 6 lakh (Q2). In % terms (Key FSC over MTU), this improved from 0.75% to 0.84% QoQ. This indicates headroom for growth but this new metric should be defined better to identify the actual monetizable base.

b) Q2 FY2025 earnings overview

Paytm exists in a highly regulated financial services ecosystem. This ecosystem necessitates partnerships with regulated entities (REs) and a set of licences issued by regulators including RBI, SEBI, IRDAI and NPCI.

In Q2 FY 2025, Paytm achieved operating revenue of ₹1,660 crore (up 11% QoQ). Payment services at ₹946 crore grew 7% QoQ while financial services at ₹376 crore grew 34% QoQ. Marketing services at ₹302 crore dipped 7% QoQ as its ticketing and live events business was sold to Zomato on August 27, 2024.

Paytm Insider

Its payment GMV rose 5% QoQ to ₹4.5 lakh crore. The firm achieved similar growth (up 5% QoQ) in merchant and personal loans as it disbursed ₹5,280 crore. The sale of its live events and ticketing business resulted in the firm declaring a PAT of ₹930 crores and boosted its cash balance to ₹9,999 crore.

The firm still targets achieving breakeven EBITDA before ESOP in a full quarter by the end of FY2025. In Q2 FY2025, it delivered ₹(186) Cr against this metric.

3. Paytm’s right to win

Paytm has taken blow after blow in the last 3 years since its Nov-2021 listing.

Paytm Payments Bank Limited (PPBL) was disbarred from onboarding new customers in March 2022. In January 2024, the regulator announced that PPBL had to cease operations (across wallet, FasTag, bill payments, UPI payments et al) and terminate Paytm’s nodal accounts. Its stock price fell continously and every day brought a new low. Its captive user base was spooked and many left the platform.

Paytm had to migrate 130 million users and 200 million UPI handles from its defunct PPBL partnership to hold onto its user base. Without distribution, the company would fall into a death spiral.

It lost high-margin offerings including its iconic Paytm wallet and Fastag payments. Its lending initiatives slowed and its BNPL (Paytm Postpaid) was closed in May 2024 with regulatory guidance among other factors. Paytm also laid off employees to optimise costs considering lowered monetisation. In August 2024, it sold its ticketing and live events business to return to its core of financial services.

All of this happened as it strove for relevancy in UPI payments, merchant and consumer lending, and insurance & wealth management (to a lesser extent). The beleaguered fintech has used up nine lives and it still stands. It totters, slips and trips, but it has stayed put in a fiercely competitive industry. Does it have a right to win?

It can if,

a) Lending on steroids

Paytm has to figure out how to facilitate higher merchant loan disbursals with a control on the expected credit loss. In Q2 FY2025, it provided DLG to SMFG Credit India that architected a ₹1,651 crore AUM in merchant lending (~50% of quarterly disbursals).

It can leverage its own funds to enter FLDG agreements with more lenders and unlock capital for its creditworthy merchants. This is a high-margin business and with Paytm’s willingness to have skin in the game, lenders will have fewer inhibitions in signing up.

For context, Paytm facilitated ₹5,280 crore in loans in Q2 FY2025, 67% lower than its ₹16,211 crore in loans in Q2 FY2024. Paytm Postpaid is now dead-- in Q2 FY2024, it enabled ₹9,010 crore in consumer loans.

b) Regaining UPI market share

Paytm’s focus on wallet payments blinded it from the shift to UPI payments. Google Pay and PhonePe seized the opportunity and now drive 85%+ of UPI transactions (October 2024). Paytm’s market share has slipped to 7% (October 2024) from 13% (January 2024).

The company received NPCI approval to onboard new UPI users in end-October 2024. It can still go all out to reacquire its lost users. Following the PPBL debacle, it lost 30% of its monthly transacting users in the last 3 quarters and presently services 7.1 crore users.

Paytm has time, funds and brand goodwill strong enough to attract churned and fresh users. It has to pursue UPI market share before upstarts including Navi and Flipkart’s superUPI catch up.

c) Innovation + Efficiency

The company is still picking itself up from the PPBL debacle. It has performed as evidenced by its share price surge but it has to move faster. It has to unlock greater efficiencies and continue to innovate with existing and new products.

Paytm has a single-minded focus on achieving breakeven EBITDA before ESOP by Q4 FY2025. Last quarter, it shared an estimate of 5%-7% savings in employee costs for Q2, but it exceeded this and achieved 13% cost savings. This saving can cost morale and innovation at the workplace. 

Paytm has led consumer education and adoption of digital payments for 10+ years. It must not succumb to quarterly pressures and compromise on the next great payment solutions. It has to safeguard employee morale, tease out efficiencies and monetise with courage.

4. Conclusion

Paytm is up against payment behemoths backed by corporate houses (Walmart for PhonePe and Google for Google Pay). It has no business being here. It had no business listing on the public markets at its valuation. It also had no chance of scraping through the PPBL fiasco with its user base intact (albeit depleted).

Thus far, Paytm has disappointed everyone, its supporters and its detractors. And this is why I will not write the company off as long as it shows up. A ₹50,000 crore market cap company with ₹9,999 crore in the bank is acting as an underdog- this is Paytm’s right to win.

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