Amid the looming regulatory scrutiny around Paytm with Paytm Payments Bank Limited (PPBL) receiving regulatory warnings and RBI imposing severe business restrictions on the subsidiary company, Motilal Oswal Financial Services estimated that Paytm’s FY25E revenue is expected to decline by 24 per cent. “We remain watchful on the ongoing business transition and Paytm’s ability to recover lost business and resume growth trajectory over FY25- 26E. We thus estimate FY25E revenue to decline by 24 per cent, while contribution profit declines 30 per cent,” Motilal Oswal stated in an analysis report.
It also stated that the company’s contribution margin is expected to sustain at 51 per cent over FY25E (vs. 56 per cent in FY24). “We will revisit our rating post Q4 results and in the interim maintain our Neutral stance on the stock,” it said. Further, the analysis report also stated that the restrictions have put the company at risk of losing customers and merchants, disrupting its growth trajectory.
Earlier on March 14, the National Payments Corporation of India (NPCI) had given a nod to Paytm’s parent company One97 Communications Ltd (OCL) to become a third party UPI app. The Third-Party Application Provider (TPAP) approval has been granted under the multi-bank model, the official statement by the NPCI had said. The four banks that will be part of this multi-model include – YES Bank, State Bank of India, HDFC and Axis Bank. This will enable it to work like its peers, Google Pay and PhonePe.
Leakage in customer, merchant base
Paytm has witnessed a significant decline in its Gross Merchandise Value (GMV) in February following the RBI restrictions and per the report by Motilal Oswal, this trend is likely to persist in March. It said that while some of this decline can be attributed to no additions in the new user base, there is also a looming risk of losing customers and merchants to competitors.
PPBL has around 1.8 million merchants onboard and the company’s ~40k field employees are currently assisting these merchants in switching their settlement accounts to alternative banks. Additionally, the company is also sending push notifications to remind merchants about this transition to ensure minimum business loss. However, according to Motilal Oswal, even as Paytm is anticipated to retain the majority of its merchant base after it received approvals from the NPCI, it is expected that around 15-20 per cent of merchants may churn.
Meanwhile, on the customer front, the company has 60-70k customers with e-NACH mandates with PPBL, potentially resulting in a moderate impact on the consumer front.
Payment revenue to drop
Given the decline in GMV, impact on wallet transactions, and loss in merchant and customer base, the company’s FY25E payment revenues is expected to decline by 27 per cent. In line with this, Motilal Oswal has projected a 28 per cent cut in payment processing margin to a range of ~7bp. This, it said, is primarily due to reduced business volumes and an adverse mix as the share of high-yielding wallet business sharply declines. “We expect GMV growth to recover gradually, estimating ~20 per cent CAGR over FY25-27E vs. ~45 per cent CAGR witnessed during FY22-24E,” it said.
Financial business to see sharp drop
In the backdrop of the regulatory warnings by the RBI, the financial business too experienced moderation in select lending segments. Initially, the company had moderated growth in the Personal loan segment. However, with regulatory concerns surrounding small-ticket loans, Paytm opted to further reduce origination of postpaid loans (17 per cent QoQ decline in 3QFY24). Postpaid loans sanctioned through PPBL have been suspended due to RBI’s concerns. Additionally, Merchant Loans are currently on hold as the company awaits additional data on the QR transition before resuming loan sanctioning. However, the report stated that PL loans have fared relatively well with the company anticipating to reach normalcy over the next few quarters. “The company is also considering entering the secured business loan segment to sustain growth in its financial business over the medium term. We thus cut our disbursements by 10%/40% for FY24E/FY25E,” it said.
Commerce & Cloud biz likely witness minimal impact
According to the analysis by the financial services company, Paytm’s commerce and cloud business segment is expected to witness minimal impact. Within this segment, merchants offer discounts, deals, gift vouchers, and other digital goods such as tickets. The company provides brand marketing, advertising, and loyalty services to brands and businesses. All customer activity within this segment is independent of the PPBL business segments. The analysis report stated that the commerce and cloud business revenues are estimated to register a CAGR of ~20 per cent over FY25-27E.
EBITDA losses likely to continue over FY25E
Motilal Oswal Financial Services anticipates revenue losses for Paytm attributed to churn in both merchant and customer bases. “We thus cut our FY25E revenue estimate by 24 per cent and estimate EBITDA losses to sustain at elevated levels of Rs 11.1b. Additionally, we are factoring in higher expenses as the company endeavors to stabilize its merchant and customer base. We estimate Paytm to achieve EBITDA breakeven in FY26E however remain watchful on the progress in business migration and recovery in Payments and financial business over coming quarters,” it concluded.