Paytm's Q2 surge: A turnaround tale that sparks hope across India’s startup scene

Never underestimate a gritty founder! When it listed in 2021, Paytm had a less-than-stellar stock market debut—the stock nosedived and several experts were close to writing off the fintech company. But Founder-CEO Vijay Shekhar Sharma put his head down, met the challenges head on and pushed the company into a transformative phase.

It worked. The Paytm stock has soared more than 104% from the 52-week low in November 2022. Now its Q2 results have proved that the company is well and truly past its recovery stage and well into a growth trajectory. 

VSS—as he is known—and his team have shown that Paytm is not just a vertically-focused company, but a platform for payments, commerce and financial services. I’ve also noticed that its core payments business is enjoying better margins, its loan business is scaling, and, in the days to come, it is raring to become an AI-enabled fintech giant. 

“We believe that Paytm will have to become a completely AI company. I'm very happy to see the kind of innovation we've done in the last quarter,” Vijay said while announcing the results. (This is in keeping with VSS’ own growing interest in the space. He recently launched a Rs 30-crore fund to invest in AI and EV startups.) 

Here’s a quick run-through of Paytm’s Q2:

1. Revenue is up 32% to Rs 2,519 crore in Q2, from Rs 1,914 crore a year ago.
2. Losses have decreased 49% to Rs 291 crore.
3. Share price gained more than 68% in value since the beginning of 2023.

Let’s take a closer look at what shaped the results: 

1. Paytm’s core payments business revenue jumped 28% year-on-year to Rs 1,524 crore.
2. Its financial services and other revenue soared 64% in the same period to Rs 571 crore.  
3. A rise in payment processing margin and merchant subscription revenue pushed net payment margins up 60% to Rs 707 crore.
4. Loan distribution is expanding with Rs 16,211 crore of loan disbursement.

What this means for Paytm

What helps Paytm stand out from the competition is the remarkable network of merchants it has built. The company is continually adding to and innovating for this network. One of the big drivers for merchant subscription, which went up 90% in Q2, was the adoption of its devices. You may have spotted them while buying groceries. The company expects to deploy 1.5 million devices every quarter, over the next 12 to 15 months.

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Double click this and you can draw a line between the uptake of devices and merchant loan distribution too. The ubiquity of these boxes and the ease of payments means merchants (MSMEs) understand and trust the company. And when the time comes to upsell, these merchants are more than ready to take small working capital loans. This growing base of borrowers is prompting the company to add more lending partners, and predict growth in merchant loans by 50-60% year-on-year. 

The company has also been successful in its focus on operating profit, which is helped by consistently improving contribution profit. Contribution profit — which is how much money the company makes after its payment gateway cost, cashbacks, and direct costs — went up 69% year-on-year, while it registered an impressive contribution margin of 57%. 

That is why analysts, including Goldman Sachs and Jefferies, continue to expect Paytm to become one of the most exciting listed companies not just within India internet but also global fintech.

As a longer term gain, Paytm has also been able to silence its critics who wondered if the company had a use case beyond UPI or wallet payments. The lack of a business strategy with UPI was often one of the things the financial services firm has demonstrated in the time since it went public.

What it means for payments and India

The improving performance of Paytm is good news for the company’s brand-building efforts. It is proof that it has won enough trust among SMEs because they are willing to turn to it for short term working capital debt. For the company, it is validation that chipping away in the merchant’s direction was the right call.

Paytm’s improved and diversified services also mean good news for the economy as smaller entrepreneurs in India get access to capital. They are also able to equip their businesses with devices that transact faster and more accurately. All this should help pave the way for SMEs to become the growth engine India needs them to be.

Paytm had envisioned these deep inroads early on. As Vijay says, “The incremental growth of India’s economy is so huge. It is important for us to be a dominating player in India.”