Paytm's Strategic Growth: Path to Profitability by FY27

Paytm is ramping up its merchant network, financial services, and loan distribution to achieve profitability by FY27. With a focus on cost optimization and partnerships, Paytm is on track for a 25% revenue CAGR from FY25-28. Challenges remain, but revenue diversification is key to success.

Paytm has reported a 9% year-on-year increase in its merchant network, expanding to 43 million by the third quarter of FY25. The number of merchants using Paytm's devices also rose by 10% YOY to 11.7 million, according to a report from Motilal Oswal. Despite a slowdown in Unified Payments Interface (UPI) market share, Paytm remains dominant in merchant payments, attributing 85% of its Gross Merchandise Value (GMV) to merchants. The company anticipates a 24% compound annual growth rate (CAGR) in GMV from FY25 to FY27.

Leveraging its expanding merchant network, Paytm is boosting loan distribution through the First Loss Default Guarantee (FLDG) model in partnership with 18 lending institutions. This strategy is expected to increase loan disbursement at a CAGR of 29% from FY25-27. As a result, financial services are projected to contribute 27% to total revenue by FY28, up from 20% in FY24, and drive a 25% CAGR in total revenue during this period.

Financial services are crucial for Paytm's revenue diversification, contributing 15-20% from non-lending activities like equity broking and financial product sales. The firm is expanding its network of lending partners beyond pre-regulatory restriction levels, bolstering its market position.

Paytm's cost optimization efforts and efficient capital allocation aim to improve profitability. By reducing capital expenditures and depreciation costs, the company plans to achieve positive adjusted EBITDA by Q4 FY25 and breakeven EBITDA by FY27. An estimated profit after tax (PAT) of INR 12.1 billion by FY27 is projected. Moreover, potential changes in Merchant Discount Rates (MDR) on UPI transactions could enhance Paytm's revenue from consumer payments.

Projected to improve its contribution margin to approximately 58% by FY28, Paytm anticipates a 25% annual revenue growth from FY25-28E, with a slower 21% CAGR in direct costs. The company expects financial services revenue to grow at a 33% CAGR and GMV at a 23% CAGR over the same period. Net payment margins, including subscription fees, are expected to remain at 12 basis points of GMV by FY28E.

Focusing on scaling its loan distribution business, Paytm is strengthening lender partnerships and growing its customer base following NPCI approval to onboard new UPI users. Approvals for wealth management services are poised to unlock new revenue streams. Despite challenges, including UPI market share fluctuations and changing regulations, analysts maintain a Neutral rating on Paytm stock with a revised target price of INR 870, based on a 17.7x Sep'26E EBITDA.

(With inputs from agencies.)