Paytm's lending and merchant businesses drive revenue growth in Q2 – low penetration offers headroom for growth say analysts

Paytm's lending and merchant businesses drive revenue growth in Q2 – low penetration offers headroom for growth say analysts
Lending and merchant business drive Paytm's revenue growth in Q2BCCL
  • One 97 Communications, operator of the digital payments platform Paytm reported 14% sequential revenue growth to ₹1,914 crore.
  • Leading the revenue growth were its lending and merchant businesses.
  • It also narrowed its loss sequentially to ₹572 crore, and said it is on track to achieve adjusted EBITDA profitability by the September 2023 quarter.
Apart from narrowing losses, One 97 Communications, the operator of digital payments platform Paytm, reported a 14% sequential rise in Q2 revenue to ₹1,914 crore. This revenue growth has come on the back of growth in lending and merchant businesses.

Unlike the crowded payments business, these two segments offer Paytm more space for growth.

“We believe Paytm has the right building blocks to build a financial services platform; being in the middle of payments flow gives the platform access to a rich data set on a large number of consumers,” said analysts at Goldman Sachs, adding that this helps Paytm in maintaining its lending quality high, and also said the low penetration implies “significant growth headroom”.

As of now, while these businesses are growing, their penetration is still low. Only 4% of its 79.7 million of monthly transacting users (MTU) avail postpaid loans. Even fewer, at 0.6% of them avail personal loans.

Thanks to this low penetration, they offer more “significant headroom” for growth, say analysts at Dolat Capital.


Moreover, only 4.4% of its merchants use its devices like soundboxes. Their merchants also seem hungry for loans as half of those who avail loans, come back for more with a return rate of 50%.

Lending business continues to grow strong

Over the last few quarters, Paytm’s lending business has been showing steady growth. This is also signalling a shift in the company’s business strategy away from being a mere payments platform to an integrated financial services provider.

It disbursed 9.2 million loans during the September quarter, up 8% sequentially and 224% YoY. The biggest contributor for this growth is the Paytm Postpaid service — that recorded a 449% growth YoY.

Yet, the company says there’s a lot more room to grow. “While our loan distribution business has scaled significantly in the last few quarters, our penetration level for each product remains low, and gives us a long growth runway ahead,” the company said in its Q2 earnings conference call.

ParticularsQ2 FY23YoY change
Loan disbursals₹7,313 crore482%
Personal loans (avg ticket size of ₹1.1 lakh)₹2,055 crore736%
Merchant loans (avg ticket size of₹1.5 lakh)₹1,208 crore342%
Paytm Postpaid₹4,050 crore449%
Source: Company reports

‘Merchant subscriptions is an attractive profit pool’

Apart from lending, merchants, who use basic products like Paytm QR codes to soundboxes, point-of-sales machines, online payments and advertising, make for an attractive proposition, the company says.

“We are expanding our monetization base with growth of users and merchants. Merchant subscriptions is an attractive profit pool for us, driving higher payment volumes, subscription revenues as well as merchant loan distribution,” the company said.

Paytm’s merchant business model consists of subscription revenues, merchant discount rate (MDR), and advertising revenue. In addition to this, since UPI payments attract zero MDR from merchants, the government reimburses the company.

Revenue from merchant services stood at ₹624 crore in Q2, up 12% sequentially and 56% YoY. The devices used by merchants also increased during the quarter to 4.8 million, from 3.8 million in the previous quarter.

Here’s what the analysts are saying

Paytm’s margins have been improving sequentially and analysts are attributing this to high growth verticals which are also profitable.

“The operating profit margin improvement was led by high growth of profitable lending business (up 29% QoQ), along with payments business margin improvement of 229 bps QoQ,” said a Dolat Capital report.

On the back of these changes, analysts are confident that the company is on track to achieve adjusted EBITDA profitability in FY24, as promised by the company.

“We expect margins to further improve, and forecast FY24 to be the first full year of adjusted EBITDA profitability for Paytm,” said Goldman Sachs in its report, adding that they expect the momentum in the lending vertical to continue.

Analysts at JP Morgan and Dolat Capital say that at the current pace, Paytm could achieve adjusted EBITDA profitability ahead of schedule.

BrokerageRatingTarget priceUpside
Citi ResearchBuy₹1,05564%
Goldman SachsBuy₹1,10071%
JP MorganOverweight₹1,10071%
Morgan StanleyEqual-weight₹78522%
Dolat CapitalBuy₹1,400118%
Source: Brokerage reports | Upside compared to closing price on November 9, 2022

Here’s Paytm’s Q2 in numbers:

ParticularsQ2 FY23Q1 FY23Q2 FY22
Revenue from operations₹1,914 crore₹1,680 crore₹1,086 crore
Net profit-₹572 crore-₹644 crore-₹474 crore
EBITDA-₹538 crore-₹634 crore-₹452 crore
Monthly transacting users79.7 million74.8 million57.4 million
Source: Company reports


$PAYTM.NSE Paytm technically making a lower parallel channel after a breakout from range and 100 EMA, indicating weakness in bulls. Fundamentally industry P/E near 40 but fintech giant still in losses. Showing consistent revenue growth from last 5 quarters. Revenue in sept qtr is 1900+ cr which is almost two-fold comparing sept 2022. Fundamentally stock is still overvalued despite revenue growth because of massive consistent losses. #paytm

— (@tradegainers) November 09, 2022


Nykaa’s fashion foray and pipeline-style biz model worries analysts

Bears weigh on Indian markets due to negative global cues

Ahead of India’s semifinal, here’s how the men in blue have performed against England in T20