Context:
The Cabinet has approved ₹1,500 crore incentives for FY25 to promote low-value Unified Payments Interface (UPI) transactions. This announcement has disappointed investors in One97 Communications Ltd (Paytm’s parent company).
- In FY24, total incentives for the UPI industry were ₹3,268 crore, nearly 80% higher than the previous year.
- With this drastic cut, expectations for FY25 were not met.
Impact on Paytm’s Earnings
Paytm’s share of incentives is currently unconfirmed, but concerns suggest a sharp decline.
- In FY24, Paytm earned ₹288 crore under the scheme, accounted for in Q4FY24.
- Following RBI’s action against Paytm Payments Bank in January 2024 and the government’s reduced allocation, Paytm’s UPI income could fall by around ₹150 crore for FY25.
- For perspective, Paytm reported an adjusted EBITDA loss of ₹772 crore (before ESOP) in 9MFY25.
Shifting Focus Beyond UPI Incentives
While this reduction is sentimentally negative, Paytm’s growth strategy is not reliant on UPI incentives alone.
- The company aims to build relationships with merchants and UPI users to cross-sell financial products like loan distribution, insurance, and stockbroking.
- In Q3FY25, revenue from financial services (₹502 crore) surpassed net payment margin (₹489 crore) for the first time.
- There was a 33% sequential growth in financial services income, indicating robust momentum.
Strong Growth in Loan Distribution
- Paytm has expanded its loan distribution partnerships with banks like HDFC Bank and ICICI Bank.
- This growth is fueled by offering Default Loss Guarantee (DLG), where Paytm guarantees compensation for loan defaults up to a certain percentage.
- Offering DLG can yield higher commissions, but also increases risk exposure for Paytm.
- Key metrics:
- Take rate (commission on disbursed loans) rose from 7.1% in Q2FY25 to 9% in Q3FY25.
- DLG-backed Assets Under Management (AUM) jumped from ₹1,651 crore to ₹4,244 crore, indicating elevated risk levels.
Cash Reserves and Risk Management
- Paytm’s strong cash position of ₹12,850 crore (as of Q3FY25) allows it to offer more competitive DLG terms.
- However, risk exposure could become problematic if loan defaults rise due to macroeconomic conditions or borrower-specific issues.
What Investors Should Monitor
- Going forward, loan distribution growth will be the key monitorable metric.
- UPI incentives are likely to become insignificant contributors to EBITDA in the future.
- While Paytm’s strategic cost management supports long-term profitability, its valuation remains expensive:
- Price-to-Earnings (P/E) ratio: 43x
- EV/EBITDA multiple: 36x (based on Bloomberg’s FY27 consensus estimates)
Focus Shifts from UPI Incentives to Financial Services
The reduction in UPI incentives is a short-term setback, but Paytm’s long-term growth hinges on financial services and loan distribution.
Investors should track AUM under DLG, default rates, and commission growth as these will drive the company’s future profitability.
