Is Paytm still Worth Investing?

Morgan Stanley Invested in Paytm, we will find out in this blog that, is Paytm still worth investing?

The Morgan Stanley Investment Details

In recent transaction on National Stock Exchange (NSE), Morgan Stanley invested ₹ 244 crore in Paytm's parent company, One97 Communications. Financial giant acquired 0.8% stake through its affiliate, Morgan Stanley Asia (Singapore) Pte - ODI, purchasing 50 lakh shares at average price of ₹ 487.20 each.

The market response was swift, with One97 Communications' shares plummeting by 20% to close at ₹ 487.20 per piece on NSE. This decline follows RBI's directive to Paytm Payments Bank (PPBL) to halt deposits & top-ups after Feb 29.

One97 Communications Ltd holds 49% stake in PPBL, classified as associate, not subsidiary. Morgan Stanley's strategic investment raises questions about Paytm's future amidst regulatory challenges. While exact motives are speculative, such moves often signify confidence in company's long-term prospects.

As financial landscape evolves, Morgan Stanley's investment in Paytm adds complexity to unfolding narrative. Market watchers will keenly observe how this move influences Paytm's trajectory & its ability to navigate regulatory hurdles.
This strategic investment underscores broader themes of confidence, adaptation, & resilience in ever-changing world of finance.

Paytm’s 3Q-FY24 Performance

(Source:Company)

1. Paytm reported revenue of ₹2,850 Cr, 38% YoY growth.
2. Revenue from Payment services up 45% YoY to ₹1,730 Cr, partly boosted by timing of festive season.
3. Revenue from financial services & others up 36% YoY to ₹607 Cr; take rate has improved QoQ.

(Source:Company)

1. Contribution profit up 45% YoY to ₹1,520 Cr (margin of 53%, up 2 percentage point YoY).
2. Profit after tax (PAT) improved by ₹170 Cr YoY to (₹222 Cr).
3. On back of growth & operating leverage, Q3 FY 2024 EBITDA before ESOP increased by ₹188 Cr YoY to ₹219 Cr & PAT increased by ₹170 Cr YoY to (₹222 Cr).

Paytm’s Operational KPIs – Quarterly trends

Let’s have look at Paytm’s Payment Profitability

(Source:Company)

Overview

Paytm's Soundbox is portable speaker designed to provide instant audio confirmation for merchants upon receiving digital payments in their preferred regional language. With primary focus on small to medium-sized enterprise (SME) merchants, Soundbox aims to streamline transaction confirmation process during peak business hours.

Market Opportunity

India boasts approximately 40-45 million merchants, with Paytm targeting niche of 25 million medium-sized SMEs & 15-17 million smaller SMEs. Subscription-based model, charging around ₹ 100/month, offers high visibility on revenue. Paytm's estimate suggests adding approximately 15 million devices in next 2-3 years, with strong expectation of 40% EBIT margins in steady state.

(Source:Company)

Competitive Landscape

While Paytm enjoys first-mover advantage, competitors such as PhonePe & BharatPe pose challenges. Key features & pricing strategies differentiate Paytm's Soundbox from competitors, making it prominent player. Competitive scenario is carefully monitored, particularly with PhonePe's recent capital raise & potential entry of RIL's Jio financial services into this space.

Financial Outlook

Despite Paytm's stock performance being down from its IPO price, its Soundbox & high-margin lending businesses are expected to drive momentum for next 3-4 quarters. Experts predict positive outlook, anticipating upside risks to consensus estimates. Focus on cost control initiatives & growing contribution from high-margin businesses are expected to lead to faster-than-expected margin improvement.

Economics of Soundbox

A scenario analysis reveals that, unless significant competition arises, Soundbox venture is poised as high-margin & profitable business for Paytm. Estimated payback period for Soundbox is 12-14 months, & with visibility on 4-5 million Soundbox additions annually for next 2-3 years, sustained growth & improved free cash flow is anticipated.

Future Growth Prospects

As Paytm maintains its dominant position & continues to innovate in Soundbox market, it is expected to capitalize on growing digital payments landscape. Potential expansion into lending & evolving business model demonstrate Paytm's commitment to scaling aggressively while managing risks effectively.

Financial Estimates & Valuation

Considering recent turmoil, part is in making it very ambiguous to even forecast single digit number in any business before 29 Feb 24. However, company business understanding & fundamentals are still believable but company is probable on verge of losing around hundreds of Crores.

Conclusion

Paytm's venture into Soundbox market showcases its innovative approach & ability to create & dominate new niches. Positive financial outlook, strategic positioning, & continuous growth make Paytm key player in India's digital ecosystem. As company adapts to market dynamics & competition, it remains well-positioned for sustained success in evolving landscape of digital commerce & financial services.