Is the worst over for Paytm? The share price is up 3% intra-day after posting Rs 123 crore profit in Q1. Jefferies, a global brokerage house, upgraded One97 Communications, parent firm of Paytm, to ‘Buy’ from ‘Hold’ and raised the target price to Rs 1,250 from Rs 900, implying an upside of 19% from the current market price. The rating and target price upgrade came a day after the company reported that it has swung back to black after two consecutive quarters of loss.
Jefferies on Paytm: Revenue growth and operating leverage to lead profit
Paytm‘s Q1FY26 EBITDA of Rs 70 crore was ahead of estimates, partly aided by lower Default Loss Guarantee (DLG) cost and operating leverage.
DLG is a risk-sharing arrangement in digital lending. When Paytm facilitates a loan for a lending partner (like a bank or NBFC), Paytm may offer a DLG. This means Paytm agrees to cover a certain percentage of the potential losses if the borrower defaults on the loan.
The company’s Monthly Transacting Users (MTU) grew 3% sequentially and Gross Merchandise Value (GMV) grew by 6% QoQ, which Jefferies finds “encouraging”, but contribution margin will stabilise a tad lower over the next 2-3 quarters.
The profit growth will come on the back of revenue growth & operating leverage. Valuation is at a discount to its peer PB Fintech and expects compounding-led returns.
Paytm Q1FY26 performance
The fintech company reported a strong Q1 aided by improving core and transitionary benefits. During the first quarter, Paytm reported 3% QoQ growth in MTUs to 74 million with GMV growing by 6% QoQ and 27% YoY.
Revenue growth of 28% was led by financial services (doubled YoY), whereas marketing services (fell 12% adjusting for sale of entertainment & ticketing biz) lagged.
Contribution margin improved by 6 percentage points QoQ to 60%, aided by transitionary benefits from discontinuance of DLG on lending activity that led to lower upfront costs, while trail fees continued to be earned on the DLG portfolio.
“This should normalise over the next 2-3 quarters, and we expect contribution margin to settle at 57-58%. Degrowth in indirect costs (declined 30% YoY) was aided by lower marketing spends (-65%), and operating leverage will continue to be a tailwind,” said Jefferis.
One97 Communication stock performance
The share price of Paytm has risen 7.5% in the last five trading sessions. The stock has given a return of more than 21% in the past one month and 26% over the last six months. Paytm’s share price has given multibagger returns in the last one year, surging almost 135%.