Paytm to achieve EBITDA breakeven by FY25: Analysts

Analysts at brokerage firm Motilal Oswal estimate Paytm to achieve an overall EBITDA breakeven (after ESOP cost) by FY25, on the back of improvement in contribution margin and operating leverage, driving its operating profitability. 

The financial services firm had achieved a breakeven in adjusted EBITDA last year, during the third quarter of FY23 ending September, three quarters before its estimates.

The analysts estimate the adjusted EBITDA margin to further improve to 11.5% by FY25 and expect Paytm to achieve overall EBITDA breakeven by FY25.

Giving a 'buy' tag to Paytm shares, the brokerage valued the stock at Rs 865 for the long term, a 34% upside over its Wednesday's closing of Rs 646.50 on the Bombay Stock Exchange.

As per a report by Motilal Oswal, Paytm will benefit from surging mobile payments, which are projected to grow at ~5x to $3 trillion by 2026. Further, an increase in QR deployment will drive merchant payment, which is likely to jump ~6x to $2.7 trillion by 2026. 

“Paytm will thus be a big beneficiary from this surge as it has a strong positioning in both digital payments and lending businesses,” the report read. 

The brokerage firm forecasts the payment revenue to clock a healthy 21% CAGR, while loan disbursements are estimated to register a 64% CAGR over FY23-25. 

“With consistent growth in merchants having subscription device and robust disbursement run-rate, we estimate contribution profit to post 42% CAGR over FY23-25 with margins improving to 56.8% by FY25 from 30% in FY22. 

"Further, Paytm has been witnessing higher ESOP cost, which is expected to remain elevated till FY25 and is likely to moderate from FY26 onwards. The total number of ESOPs outstanding as on 31st March, 2022 stood at 29.9 million. 

“Expense growth is likely to lag revenue growth as operating leverage in the business continues to improve. We estimate a 25%/27% CAGR in direct/indirect expenses over FY23-28, with indirect expenses as a percentage of total revenue falling from 51% to 40%,” the report said. 

Key issues to watch out for 

As per analysts, stake sale by potential large shareholders (Softbank) can remain an overhang on the stock’s performance. 

Since January, Alibaba has sold 6.3% stake in the company and has completely exited its holding from Paytm. At present, Ant Financial holds 25.5%, Softbank holds 13.2%, and SAIF Partners holds 15.5%, while 9% is held by CEO Vijay Shekhar Sharma and 5% by the trust. 

Changing laws and regulations, slower-than-expected adoption of digital payments, and increase in payment processing charges to financial institutions or card networks are some of the key risks listed out by the brokerage firm, which may impact Paytm's growth in future.

“The RBI has banned Paytm Payments Bank from onboarding new customers and a prolonged ban could potentially impact user growth for Paytm. Further, increase in competition could impact the growth trajectory for Paytm. This could result in lower take rates, lower market share and higher selling and marketing expenses/cash burn,” the firm said.

Paytm shares were trading at Rs 659.30 on the National Stock Exchange on Thursday 1:27 pm, up by 2.34%.

(The headline was updated to fix a typo.)