One 97 Communications Ltd Rating: Overweight | Margin improvement in payment activities

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We welcomed PayTM on our Financials 2022 tour. PayTM is undergoing a model shift from pursuing “growth at all costs” to “profitability at scale”. The company maintained its Adj advice. Ebitda profitability by September 23 – which we believe most investors remain skeptical of – rightly given the sharp increase in indirect spend since listing, negating contribution margin (CM) gains since last year. The moderation in indirect spending from Q2 should therefore be a catalyst. On the other hand, contribution margin is expected to benefit from additional tailwinds from (i) incentive revenue from lower than normal loss rates in syndicated loans, (ii) increased credit card issuance co -marked and (iii) potential UPI P2M (person to merchant) subsidy. We estimate incremental CM at 60% – well above 43% in Q1F23 – suggesting further room for improvement. The impression of second quarter earnings on the rate of loss reduction will be a key catalyst.

Paytm’s annualized loan disbursement rate stands at ~Rs 290 billion as of Aug 22 and its penetration stands at 4% and

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Paytm has improved margins in its payments business through (i) scaling merchant devices (generating rental revenue; ROI of approximately 12-15 months on its signature Soundbox device) and (ii ) rationalization of processing costs. Further margin tailwinds exist due to the potential monetization of UPI P2M, either the introduction of MDR (unlikely) or increased government subsidies to support network investment. UPI’s P2M becoming monetizable via a government rebate is a major medium-term benefit to the payments economy.

Fintech Funding Winter Expected to Reduce Competitive Intensity – Competitive intensity may moderate in the fintech digital payment/lending space given the funding crunch and regulatory grip in the sector. In our opinion, this could benefit Paytm as it is well funded to drive expansion and also highlighted that it is compliant with digital lending regulatory guidelines, which we believe can remove regulatory overhead from the game FS of its business model.
We expect PAYTM to see strong revenue growth across all of its business segments driven by device monetization in payments, cross-selling of financial services, ticket retrieval and growing monetization of advertisements. .

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