Paytm to generate free cash flow by year end, says CEO Vijay Shekhar Sharma

Paytm Founder and CEO Vijay Shekhar Sharma Image: Amit Verma

Paytm Founder and CEO Vijay Shekhar Sharma, in an earnings call, said that growth for the fintech major in the three months ending June 2023 came on account of expansion in payments, financial services and commerce business.

One97 Communications, Paytm’s parent, reported a 39.4 per cent rise in revenue from operations to Rs2,341 crore during the April to June 2023 quarter, up from Rs1,679 crore in the year-ago period. Ebitda before Esop grew to Rs84 crore, up 20 percent from the year-ago period.

The fintech major also narrowed its consolidated net loss to Rs358 crore in the reported quarter, from Rs645 crore in the corresponding period last year.

However, the company’s net loss widened compared to the loss of Rs168 crore reported in the preceding three months ending March 2023. This was because of a 22 percent increase in indirect costs on account of higher employee costs as the annual appraisals were doled out, expansion of sales and technology teams and higher marketing costs related to the IPL, Paytm’s Chief Financial Officer Madhur Deora said.

Even so, Shekhar was confident of becoming free cash flow positive company soon. "We are on our committed guidelines of becoming free cash flow positive by the year-end," he said.

In line with that the business has reported strong growth this quarter. The consumer base continued to expand with monthly transacting users (MTU) growing to 9.2 crore in the three months ending June, up from 7.5 crore MTUs seen in the same three-month period a year ago (YoY). The number of merchants paying subscription fees for Paytm’s point-of-sale (PoS) and Soundbox machines grew to 79 lakh as of June, up from 38 lakh as of June 2022. As a consequence Paytm’s merchant payments volume or GMV grew 37 per cent YoY to Rs4.05 lakh crore in reported quarter.

“The sustained growth in the deployment of devices enables robust transaction volumes and drives healthy growth in merchant and consumer loans,” says Nitin Aggarwal, research analyst at Motilal Oswal.

Also read: Paytm turns operationally profitable. But can it sustain the momentum?

Indeed, the key driver of Paytm’s growth is its loan distribution business which jumped 167 percent YoY, disbursing loans worth Rs14845 crore in value. The number of loans disbursed increased 51 percent to 1.28 crore. Loan ticket sizes increased from Rs10,000 in April to Rs12,500 in May, and the quality of loans also improved, notes Ansuman Deb, lead analyst at ICICI Securities. With the addition of Shriram Finance as a new lending partner during the quarter, Paytm now has eight bank and NBFC partners across all its products, said Deora. Paytm plans to add another two to three partners in the current financial year.   

The healthy growth in business metrics prompted brokerages raise their target price of Paytm’s stock.

Global brokerage CLSA, which expects Paytm to generate free cash flow over the next few quarters, maintained a ‘Buy’ rating on the stock and raised the target price to Rs1,050 per share from Rs850 earlier.
 
Citi raised Paytm’s target price to Rs1200 per share with a ‘Buy’ rating on the stock.

JM Financial also maintained a ‘Buy’ rating and raised Paytm’s target price to Rs1,060 per share from Rs855 earlier. “Paytm’s cash burn has sustainably reduced given strong ecosystem benefits and continued momentum in loan distribution business along with better performance metrics,” it said in a report.
Motilal Oswal Financial Services, which believes the company is on track to achieve Ebitda breakeven by FY25, also has a ‘Buy’ call on the stock and a target price of Rs1,000 per share.

“I am very happy to see the amount of technology and opportunity coming up and there’s an incredible amount of business we could do in the next few years,” said Sharma. That’s largely because there’s still huge headroom for Paytm to grow. Postpaid loans (BNPL) as a percentage of average MTUs were a mere 4.5 percent in the quarter ending June 2023, while personal loans as a percentage of MTUs were 1.1 percent. Merchant loans as a percent of device merchants were 6.2 percent and device penetration as a percentage of total merchants was around 20 percent.

At noon on Tuesday, Paytm’s share price was trading at Rs763.5 apiece on the Bombay Stock Exchange (BSE).