Can Paytm go the distance?
After years of losing money, Paytm has turned things around in the past two years. A disappointing IPO on the eve of a long-overdue slowdown in inflated tech stocks and valuations was a wake-up call for the company to focus on profitability instead of growth in myriad verticals. In the June quarter, India’s most prominent fintech showed some promising signs, especially in terms of loan growth, but it also faces rising competition and lacks a banking license that would allow it to lend directly to customers.
Let’s start with the good news. Paytm’s operating profit expanded for the fourth consecutive quarter in the July to September period, while revenue rose 32% to 25.2 billion rupees (US$301 million) from 19.1 billion rupees a year earlier. Operating profit, which Paytm defines as core profit before cost of employee stock-owing plans, reached 1.5 billion rupees, a significant improvement from a loss of 1.66 billion rupees in July-September 2022.
Additionally, revenue at Paytm’s core payment business increased 28% while financial services revenue, which includes its loans business, rose 64%. Loans distributed more than doubled in value to 162.1 billion rupees.
Despite the solid performance, investors did not seem thrilled and Paytm’s share price fell about 3% after the fiscal Q2 results were announced. Between October 23 and 28, the stock fell another 7% to roughly 901 rupees.
What gives? Well, first of all, let’s not forget that Paytm still lost money in the July-September period. The company has not posted a net profit since it went public in November 2021 and though its net loss narrowed to 2.9 billion rupees from 5.7 billion rupees in the third quarter of FY2022, investors may be getting impatient and want to see Paytm make the jump from the red to the black.
Analysts at investment banks are more sanguine. Bank of America Securities said in a note to clients that slower loan growth was aligned with its expectations since Paytm has been keen to focus on portfolio quality more than rapid growth, while Goldman Sachs predicts that the Indian fintech will become net income positive in the 2025 fiscal year. Goldman also noted that resolution of outstanding regulatory issues and/or inclusion of a bank as a lending partner could act as catalysts for Paytm’s swing to profitability.
That’s the rub. Paytm has long had its eye on a small finance bank (SFB) license that would allow it to lend directly to small businesses and been eligible to apply for one since the spring of 2022 when its payments bank celebrated five years of operation. However, it was later reported by Indian media that the Reserve Bank of India (RBI) requires an IT audit of its payments bank before that process can go forward. It is anyone’s guess when that audit will be complete – and whether other regulatory travails will emerge in the meantime.
Meanwhile, Paytm faces rising competition across its different business lines. Jio Financial Services and GooglePay both recently launched credit services in a bid to grab a piece of the fast growing Indian digital lending market, while Jio, PhonePe and BharatPe are vying with Paytm in the payment devices business.
We reckon that India still has a lot of low-hanging fruit in these different markets, and even with competition intensifying, if Paytm stays focused on its core competencies – eschewing the urge to build a super app – it will reach profitability before long.
