Goldman Sachs says Paytm’s offline payments leadership could drive device rental revenue

Paytm, India’s mobile payments and QR code pioneer, is expected to report robust for January-March 2023 earnings, with revenue growth of 49% YoY, and the second consecutive quarter of positive margins, Goldman Sachs said in a recent report. The foreign brokerage has maintained its 'buy' rating and 12-month target price at ₹1,150 apiece, implying a potential rally of 78% from current market price.

"We see the improving profitability as a meaningful catalyst for the stock, and expect Paytm to be net income profitable in FY25E," analysts at Goldman Sachs noted. It added that Including income on Paytm’s ₹80 bn of current cash balance, it expects Mar ‘23 quarter to also be FCF profitable (after accounting for device capex). “We have further raised our FY23E-25E adjusted EBITDA estimates up to 8% for Paytm,” it said.

The brokerage believes Paytm’s margin print in the fourth quarter of the fiscal will help further increase the street’s confidence around the  increasing traction of Paytm’s business model and the company’s ability to be profitable on a sustained basis. It estimates ₹1.7 bn to be Paytm’s share of UPI incentives for FY23E to be recognized in the company’s 4QFY23 revenues, or 7% of Paytm total revenues.

The brokerage firm also noted that Paytm’s payment device deployment saw a strong quarter, with 1 mn devices added in 4QFY23; cumulative base is now at 6.8 mn, implying 21% of the company’s merchant base. "We estimate device rental to make up 14% of Paytm’s payments revenues in 4QFY23E, vs. 11% in 4QFY22," it added. 

Paytm’s business model, of acquiring customers through payments, and monetizing them through lending, commerce and cloud, has continued to show strong traction, with revenue growing 60%YoY in FY23E and adjusted EBITDA margin improving from -31% in FY22 to -2% in FY23E, the brokerage firm said. “With our expectation of share of financial services in Paytm’s revenues further rising to 30% in FY25E, we forecast the EBITDA margin to improve to 13% in FY25E,” it added.

Goldman Sachs forecasts 4QFY23E revenue growth for Paytm at 49%YoY, with 32% YoY growth in Payments, and 207% YoY growth in financial services. It expects Paytm’s cloud business to grow 5% qoq (14% YoY), driven by growth in its digital advertisement segment. Commerce and cloud makes up 18% of Paytm’s 4QFY23 revenues, vs. 21% in 4QFY22. We forecast adjusted EBITDA of ₹2.3 bn in 4Q, translating into 10% margin, with ₹1.7 bn of UPI incentives entirely flowing through to EBITDA.