One97 Communications’ (Paytm) strong revenue growth and focus on profitability received thumbs up from analysts, but aspects such as a decline in commerce revenue and modest improvement in contribution margins disappointed Dalal Street investors. Net-net, Paytm’s Q2 results were a mixed bag, said analysts. Paytm on Monday reported a consolidated narrowing of net loss at Rs 571 crore for the September quarter compared with Rs 644 crore in the June quarter. It reported a net loss of Rs 472.90 crore in the year-ago quarter. Revenues for the quarter jumped 76 per cent year-on-year (YoY) and 14 per cent sequentially to Rs 1,914 crore. The Vijay Shekhar Sharma-led listed company said it would post operating profit by September 2023.

Management’s Bocus on Profitability Hailed

JM Financial gave thumbs up to the Paytm’s management focus on profitability. “We like the management’s approach to improve efficiencies and focus on profitability and expect Ebitda breakeven by FY26E. Paytm has corrected 70 per cent since its IPO while its operating metrics are gradually improving (net payment margin, ramp up of financial services),” it said post Paytm’s earnings call.


Financial Services on a Firm Footing

On the revenues front, traction for financial services business was particularly strong, said YES Securities. “Total revenue from financial services and others stood at Rs 349 crore, up 293 per cent YoY, driven by loans disbursed, whose value was Rs 7,313 crore in Q2, up 482 per cent YoY,” the brokerage firm wrote. The analysts at YES however, cautioned saying, “We remain concerned on the downside risks to the take-rates in financial services business though management remains optimistic in this regard.”

Commerce Revenue a Worry

What disappointed analysts was a decline in commerce revenue. “Commerce revenue declined 10 per cent QoQ as it was a seasonally weak quarter for entertainment ticketing business,” ICICI Securities said. The entertainment business was weak due to weak movie and events business, YES Securities added.


Contribution margin capped

ICICI Securities pointed out that despite a ‘revenue beat’ the contribution margin improvement got restricted to 44.1 per cent in September quarter against 43.2 per cent and 24 per cent in June and year-ago quarter, respectively. This can be attributed to direct expenses such as promotional cashbacks and incentives cashbacks which grew 34 per cent and 15 per cent sequentially, it said.

What analysts say

Post Q2 results, ICICI maintained a ‘Buy’ rating on the stock with an unchanged target price of Rs1,285 based on customer lifetime value methodology. YES Securities has a ‘Neutral’ rating on the stock, even as it has revised upward its target price for the stock to Rs 700. JM Financial, has a ‘Sell’ rating on Paytm. It has a target of Rs 600 on the stock. “While we see limited fundamental downsides to valuation incrementally, the near-term event of lock-in expiry of pre-IPO shares (entire pre-IPO shareholding which is over 85 per cent of current shares outstanding) will lead to price volatility,” it concluded.