Paytm's Strategic Growth: Merchant Expansion and Diversified Revenue Streams Propel Future Profitability

Paytm's merchant network has grown 9% YoY to 43 million, aiding its finance service expansion. The focus on loan distribution, partnerships, and diverse income sources aims to boost profitability by FY27E. Despite a challenging environment, analysts maintain a Neutral rating, with a target price of INR 870.

Paytm, a major player in the digital payments arena, reported a 9% year-on-year increase in its merchant network, reaching 43 million by the third quarter of FY25, according to a report from Motilal Oswal. This growth emphasizes Paytm's strength in merchant payments, with a notable 85% of its Gross Merchandise Value (GMV) generated by merchants using its devices. The company's GMV is projected to expand at a 24% compound annual growth rate (CAGR) from FY25 to FY27E.

The expansion of the merchant network is also driving Paytm's push into loan distribution via the First Loss Default Guarantee model in collaboration with 18 lenders. Through this initiative, the company forecasts a 29% CAGR in loan disbursement from FY25 to FY27E. By FY28E, financial services are expected to contribute significantly to Paytm's revenue, reflecting a rise from 20% in FY24 to 27% of total revenue.

In a strategic move for revenue diversification, Paytm's financial services sector, encompassing activities like equity broking and financial product sales, plays a crucial role. The company continues to expand its lending partner network to pre-regulatory restriction levels, solidifying its market position. Cost optimization strategies, including reduced capital expenditure and improved capital allocation, are expected to drive profitability enhancements. A projected reduction in depreciation costs and strict cost management could lead to a positive adjusted EBITDA by Q4 FY25E, with overall EBITDA breakeven anticipated by FY27E. Additionally, an estimated PAT of INR 12.1 billion by FY27E underscores Paytm's path to profitability.

(With inputs from agencies.)