Why is Paytm’s stock up 67% this year?

Patience is a virtue, and good things come to those who wait? Or so it seems in the case of Paytm, India’s most prominent fintech, once best known for looking like yet another questionable bet by Masayoshi Son, but now reminding us he knows how to pick winners after all. Paytm stumbled out of the gates of its November 2021 IPO, but since then has gradually improved its core metrics and has had a pretty good 2023. The company’s stock is up 67% this year; it has a booming lending business and may be profitable sooner than expected.

For instance, One97 Communications clocked impressive growth numbers in the financial year that ended in March 2023, posting a 61% YoY revenue growth while reducing losses by 25%, from INR 2,396 Cr in FY22 to INR 1,776 Cr in FY23. It also capped its expense growth to 18% and reached its target for operational profitability.

There is nothing mysterious about Paytm’s turnaround. The company has realized that it will never make a profit if it is focused on being a financial services super app and subsidizing a dozen or more businesses that all have high customer acquisition costs. Rather, it needs to offer a handful of high-margin services like lending to the millions of users in its ecosystem. Gold investing, stock trading, even insurance – we don’t think these products will be Paytm’s bread and butter in the future.

Rather, Paytm will benefit from India’s surging mobile payments, which the brokerage Motilal Oswal predicts will expand fivefold to $3 trillion in transaction volume by 2026, while merchant payments will expand sixfold to $2.7 trillion by that year. The brokerage expects that Paytm’s payment revenue will on an annual basis grow 21% and its loan disbursements 64% from FY23-25.

The biggest headwinds we expect Paytm to face will be regulatory. The RBI has banned Paytm Payments Bank from onboarding new customers since last May. If the ban is not lifted soon, user growth could be adversely affected, especially given the intense competition in India’s digital payments segment. The RBI hit Paytm where it hurts; the payments bank is one of the company’s most successful units. It has been profitable since FY19 and is ranked sixth globally with 333 million users according to Statista.

Further, PPBL is the country’s largest (UPI) merchant-acquiring bank, enjoying 40% of the market share and generating revenue through government incentives, merchant subscriptions and upselling of financial products. Yet regulators could still trip up Paytm by not issuing it a small finance business bank license – the likely key to sustainable growth. Paytm has reportedly held off on applying for that license because it worries that regulators may not approve of its shareholding structure given that Ant Group still owns 25% of its parent company One97. Given the geopolitical tensions between China and India, the RBI might not approve Paytm’s payments bank for the license unless Ant first sells off its stake.

Since Alibaba sold off the last of its shares in Paytm in February, we believe it is probable Ant will exit as well if it is a necessary step for Paytm to get the SFB license.