Paytm to touch operating profitability by Q2FY23: Is it realistic?

Things change quite rapidly in terms of stock market perceptions. Just a couple of months back, Paytm was a stock that everyone wanted to avoid. Suddenly, it has become the apple of all eyes. One thing that has worked in their favour is that the holding company of Paytm, One97 Communications, has prioritised the payments and distribution of lending products businesses to determine the allocation of capital. With this renewed focus, Paytm plans to achieve operating profitability by the second quarter of FY23 and that been the kicker.

In the FY22 annual report recently put out by the company, and for the first time since the stock got listed, Paytm has reiterated the story of how the company recorded rapid growth in payments and a huge scale-up in lending and payments devices businesses. Remember, the core of Paytm’s business model is to acquire consumers and merchants. While these are acquired for payment services, the margins come to them from upselling financial services to them. In the process, Paytm largely leverages its distribution and transactional insights.

The key bread and butter business for Paytm has been the Buy Now Pay Later (BNPL). This scheme allows credit to consumers at the point of sale. In the last few quarters, it has become the most preferred product for the consumers and uses of Paytm. In addition, even the lending business, which is still nascent, has become a preferred choice for customers. This lending business has purely growth by upselling to customers who are onboarded for the payment and transaction platform and includes merchants and end consumers.

In terms of product lines, Paytm currently offers personal loans, merchant loans and BNPL or the Buy Now Pay Later options. Most of these are executed through partnerships with financial institutions. In fact, the partnership has been rather productive and the lending partners of Paytm saw more than 15.2 million loans disbursed through the Paytm platform in FY2022 which is more than five times the loans disbursed in FY21. Even the value of loans was up by more than 5 times on a yoy basis. It is the funnel to upscale revenues for Paytm.

According to Vijay Sekhar Sharma, the Paytm app has now reached a stage wherein users are increasingly coming on to the Paytm platform for everyday usage even without requiring any incentive from the company. Hence Paytm has crossed the stage when it had to pay the users to come and transact on their platform. Now, the strategy of Paytm is to expand the payments network by acquiring more of quality customers and merchants. The focus will be on merchants and customers with high activity rates and transaction frequency.

In the fourth quarter ended March 2022, Paytm witnessed a 41% yoy growth in the Monthly Transacting Users (MTU). The MTU has now surpassed 70 million and the growth has purely come from upselling loans to the onboarded customers on its transaction platform. Even the merchants are now ready to pay for the technology that made the digital payments easier and trusted. One of the biggest revenue sources for Paytm is from the enhanced usage of Paytm payment devices by merchants, which is on the rise. 

Even as the usage of the Paytm platform expands, the company is now focused on enriching its role from mere QR payments to devices to credit. The last one is the logical extension and will push the company rapidly towards operating positivity by the second quarter ended September 2022. The value chain is something like this. Once merchants accept payments through Paytm, become eligible for loans from partner lenders. After all, Paytm offers them distribution reach and customer insights, which they normally cannot imagine. That is the real value proposition.