Pros and Cons of Investing in Paytm

India's fintech sector has witnessed explosive growth, with digital payments becoming an integral part of daily life.

Paytm, a leading digital payments platform, has been at the forefront of this revolution. However, the company's journey has not been without its challenges.

Paytm share price faced a turbulent period following its initial public offering (IPO), with the stock price struggling to gain traction.

However, the turnaround in the stock price has been spectacular. From Rs 320 levels back in May 2024, the stock is up about 2.5 times in just 6 months.

While the stock is nowhere near its life high of around Rs 1,800, the recent surge has provided some relief to shareholders.

But what about the future? Will the stock go up or down?

In this editorial, we will examine the pros and cons of investing in the stock of Paytm.

Pros

#1 Payment Aggregator License

In August 2024, Paytm received approval from the Finance Ministry to invest in its payment services business. This approval allows Paytm to resubmit its application for a payment aggregator license.

In January 2024, Paytm was ordered to wind down its payments bank due to serious regulatory lapses. Ever since then the company has been under scrutiny by the RBI and financial investigative agencies.

Hence, this approval was a significant in the right direction for the company.

With this approval, Paytm can now move forward with its plans to regain the license, providing a clear path for its payment services business. The company's ability to continue offering online payment aggregation services to existing partners further strengthens its market position.

The company has learnt its lesson and has implemented a strict compliance first policy across the organisation. At the company's annual general meeting, CEO, Vijay Shekhar Sharma, announced the company would apply for the license to the RBI in due course.

Investors view this as a positive signal that Paytm is resolving regulatory issues and stabilising its operations. The resubmission of the application, when it happens, could pave the way for future growth in digital payments, which is likely boosting investor sentiment.

#2 Cost Optimisation Moves

Paytm sold its entertainment ticketing business to Zomato for Rs 20.5 billion (bn). The company's strategy is to focus more on its core payments and financial services distribution.

The transaction strengthened Paytm's balance sheet due to the cash inflow. It also showcases the company's success in building and scaling businesses like movie ticketing, which generated Rs 3 bn in revenue and Rs 0.3 bn in adjusted EBITDA in FY24.

The deal will allow Paytm to sharpen its focus on expanding its core financial services, such as insurance, equity broking, and wealth distribution.

Paytm has also focused on reactivating dormant customers and reigning in operating costs. The company has received NPCI's approval for adding new UPI users. It's following a disciplined approach in terms of acquisition costs this time around.

#3 First Signs of Improving Financials

Paytm's parent One 97 Communications reported a profit of Rs 9.3 bn in the quarter ended September 2024. This was an improvement from the Rs 2.9 bn loss a year back.

The improvement was on the back of gains made from sale of its entertainment ticketing business to Zomato. Net of the expectational gains from the sale of ticketing business, Paytm would have reported a net loss of Rs 495 crore.

Paytm's revenue from operations increased 10.5% to Rs 16.59 bn on a sequential basis but was down 34% YoY. The market took the numbers as the first sign that the company was getting back on its feet.

The operating metrics showed decent improvement. The company's average revenue per user grew 21.5% on a sequential basis.

Thus, some green shoots of recovery were visible.

Cons

#1 A Long Road to Recovery

The company is still very much on the recovery path. It's not out of the woods. It has a long road to profitability ahead.

Even in the last quarter, the company's loss would have widened on an annual basis if the sale of the event ticketing business to Zomato was excluded.

The company has implemented a cost-saving strategy aimed at reducing employee costs by Rs 4-5 bn annually. This process began in the last quarter. It will take some time before this effort delivers significant cost savings.

Also, the company has only recently begun onboarding new UPI customers. The company has made a good decision to go easy on the marketing to keep a lid on customer acquisition costs. This is expected to boost profitability down the line. But it's still early days.

The company is also focused on cross-selling products such as lending, insurance, and wealth management through an expanded distribution model and by creating deeper partnerships with lenders and insurers.

This effort will help boost margins but it will take some time, at least a few quarters to deliver results.

#2 Regulatory Hurdles

The company is still not out of the woods as far as its troubles with the authorities are concerned.

It still has to apply and then receive its payments aggregator license. Only then will it be able to resume business as usual with large clients.

Then there is the payments bank. At the moment, the management is unsure when it will get the go ahead from the RBI to restart it. The payments bank and along with it, Paytm wallet, remains frozen.

While the company has taken massive steps to fully comply with regulations, it remains to be seen how it completes the task.

There is no doubt that Paytm has immense potential in the long term. But that is also its problem. The company needs to survive to get to the long term.

Equitymaster's co-head of research, Tanushree Banerjee, like to say, 'To finish first, you must first finish'.

This is particularly true in the case of Paytm. The company, ever since its founding, has never been profitable. The management will have to demonstrate a clear path to profitability and stay clear of any regulatory issues before it can regain investors' confidence.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...