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India Gazette
02-07-2025
- Business
- India Gazette
Paytm's profitability path mirrors Zomato and PB Fintech, says Motilal Oswal
New Delhi [India], July 2 (ANI): The brokerage firm Motilal Oswal Financial Services has laid out a compelling case for Paytm's transformation into a sustainably profitable new-age tech company. The brokerage sees Paytm advancing steadily toward an inflexion point, driven by disciplined execution, a sharp focus on financial services, and robust growth in core business metrics. Motilal Oswal notes that Paytm's profitability trajectory closely resembles that of other new-age tech firms such as Zomato and PB Fintech. As these companies transitioned to profitability, their stocks saw substantial re-rating -- Zomato delivered 245 per cent returns and PB Fintech 156 per cent over the past two years. While Paytm has lagged in performance so far, the report suggests that with contribution margins projected to cross 55 per cent and adjusted EBITDA turning positive in FY26, the company may be on a similar upward path. Paytm has demonstrated resilience despite facing regulatory headwinds and market volatility in FY24 and early FY25. Its ability to sustain growth in merchant acquisition, lending partnerships, and user engagement has set the foundation for long-term profitability. The brokerage estimates that Paytm could post a profit after tax of Rs 16.2 billion in FY28. One of the key drivers is Paytm's strategic pivot toward financial services, projected to contribute 27 per cent of total revenue by FY28, up from 25 per cent in FY24. Lending is scaling rapidly through the FLDG (First Loss Default Guarantee) model, supported by over 18 partners. Disbursements are expected to grow at a 35 per cent CAGR, while GMV is projected to expand at 23 per cent CAGR from FY25 to the company is benefiting from AI-led cost efficiencies, rationalised marketing spends, and disciplined execution. These efforts are expected to expand contribution margins to 58 per cent by FY28. The report adds that despite the absence of MDR on UPI and a sharp drop in UPI incentives (Rs 2.9 billion in FY24 to Rs 700 million now), Paytm is scaling sustainably through its dual-core strategy of payments and financial services. The company continues to deepen its merchant ecosystem, with 44 million merchants onboarded and 12.4 million devices deployed as of Q4 FY25 -- a 16 per cent year-on-year growth. Enhanced monetisation through subscriptions and merchant lending, especially among high-GMV partners, is further strengthening the revenue model. Motilal Oswal has revised its target price for Paytm to Rs 1,000, valuing the company at 20x FY27E EBITDA. While maintaining a Neutral rating due to regulatory uncertainties and UPI market share dynamics, the brokerage underlines that Paytm's Rs 156 billion cash reserves, improving financial mix, and clear glide path to profitability make it one of the best-positioned new-age platforms for potential re-rating. (ANI)
Economic Times
01-07-2025
- Business
- Economic Times
Motilal Oswal raises Paytm target price to Rs 1,000, sees earnings nearing inflection point
Motilal Oswal Financial Services (MOSL) has maintained a 'Neutral' rating on One 97 Communications, the parent company of Paytm, while raising its target price to Rs 1,000 from Rs 870. The brokerage believes the company's key business metrics remain steady and that earnings are approaching an inflection point. ADVERTISEMENT According to MOSL, Paytm's contribution margin is expected to improve significantly, reaching approximately 58% by FY28. This optimism is driven by expectations of a gradual recovery in payment business revenues, with an estimated overall revenue compound annual growth rate (CAGR) of 22% between FY25 and FY28. The report also highlights Paytm's deepening ecosystem integration, which is likely to strengthen its merchant market share. Gross Merchandise Value (GMV) is projected to grow at a robust 23% CAGR over the same period. On the lending front, MOSL noted that Paytm's FLDG (First Loss Default Guarantee) model will support disbursement growth. The brokerage also expects an uptick in personal loan disbursements in the second half of FY26, suggesting a potential revival in the company's lending revised outlook reflects improved visibility on profitability and Paytm's ongoing efforts to scale its core business while adapting to regulatory changes in the digital payments and lending operator One97 Communications reported a consolidated net loss of Rs 540 crore in Q4FY25, marginally lower than the Rs 550 crore loss in the year-ago period. ADVERTISEMENT Revenue from operations for the March quarter stood at Rs 1,912 crore, down 16% year-on-year from Rs 2,267 crore in the net loss widened from Rs 208 crore in Q3FY25, though revenue improved nearly 5% from Rs 1,828 crore in the previous quarter. ADVERTISEMENT Paytm shares rose as much as 1% to Rs 933.9 during Tuesday's trading session. The stock has gained 16% in the past three months and is up 125% over the last 12 months. However, it has declined 6% on a year-to-date basis. The company's current market capitalisation stands at Rs 59,760 crore. (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times) ADVERTISEMENT (You can now subscribe to our ETMarkets WhatsApp channel)
Mint
01-06-2025
- Business
- Mint
Fintechs in talks with RBI for easier provisioning for default loss guarantee-backed loans
Mumbai: Fintech companies and digital lenders are seeking easier provisioning norms for loan pools backed by their guarantees, even as the central bank has flagged inadequate provisioning for these loans, according to five industry experts. Fintechs believe the provisioning variance is due to the differentiated interpretation of Ind-AS accounting standards, which allow for a 'risk mitigant' like Default Loss Guarantee to be considered while calculating the expected credit loss (ECL) provisions. Unified Fintech Forum and self-regulatory organisation Fintech Association for Consumer Empowerment (FACE), in their representiations to the Reserve Bank of India (RBI), have said that making full provisions against such loans will lead to 'double provisioning', with both the lending service providers (LSPs) like fintechs and regulated entities such as banks and non-bank lenders setting aside buffers for the same loan pool. Read more: RBI poised to cut rates as India eyes a steady takeoff Both the LSP and the regulated entities are provisioning for the same loan pool, thus impacting capital deployment efficiency, said Jatin Handoo, chief executive officer of UFF, formerly Digital Lenders' Association of India. It might also lead to a 'crowding out' effect where lenders will have less amount of money for lending because they have to take out the extra amount and provide for it separately, he said. 'RBI is open to listening to us and has asked us to come up with data-based use cases, and customer-level and market insights." Full provisioning by NBFCs Fintechs offer borrowers loans from multiple banks. These intermediaries usually provide a 'default loss guarantee' (DLG) to cover these loans for encouraging lenders to partner with them. However, in April, the central bank wrote to at least four non-bank lenders with high delinquencies in their DLG-backed loans. The regulator asked them to provide for all loan pools sourced through third-party digital platforms under the expected credit loss (ECL) accounting norms, regardless of whether these are backed by DLG arrangements. A senior industry official explained that if the loss on the loan pool was 7% and 5% was covered under a DLG arrangement, some NBFCs usually had a provision cover of 2-4%, depending on their internal modelling and calculations. Audits by RBI in January-February revealed this provision accounting, following which RBI reinforced that the entire provisioning has to be taken by the NBFC and any recoveries under DLG at the end of the loan tenure may be used to write-back the provisions. 'This is not a policy change, but a call-out for those NBFCs that were not doing enough provisioning. It's a prompt for NBFCs to appropriately provision against credit losses, and treat DLGs and recoveries separately," said Kunal Varma, chief executive officer and founder of digital non-banking finance company Freo. However, he said, this may lead to some NBFCs re-evaluating their First Loss Default Guarantee or FLDG-linked relationships in the short term. RBI's concerns stem from elevated delinquencies in some loan pools sourced by fintechs, leading to higher DLG payouts by them and a hit on the asset quality of a few partner NBFCs. Moreover, there have also been concerns around NBFCs using FLDG arrangements as an alternative to securitisation transactions, bypassing the guidelines of securitisation of loan pools. RBI's perspective seems to be that DLG arrangements were allowed to give capital comfort from a regulatory perspective and encourage 'skin in the game' for fintechs, but not dilute the accountability of underwriting by regulated entities. Point of contention Typically, each fintech—such as Paytm, PhonePe, MobiKwik—ties up with multiple regulated banks or NBFCs to offer multiple loan options to their customers. In turn, lenders can accept DLG arrangements in the form of cash deposits, fixed deposits with a lien marked in their favour, and bank guarantees. DLG arrangements for pools of small-ticket unsecured loans are generally used for consumption and lifestyle lending, emergency healthcare expenses, education finance for skill development or vocational degrees and diplomas, sustainable energy such as installing a solar roof and lending to small businesses and new-to-credit borrowers. Read more: How RBI is shaping the future of lending from Bengaluru's HSR Layout FLDG has been a point of contention since the first digital lending guidelines were issued in August 2022. Worried that these DLG loss absorptions were leading to inaccurate reflection of the credit quality of these borrowers, RBI in June 2023 issued the default loss guarantee framework, capping the value of such arrangements at 5% of the loan pool. It had then specified that regulated entities will be responsible for recognising non-performing assets of individual loans in the portfolio and the consequent provisioning as per current norms, regardless of any DLG cover at the portfolio level. Even then industry representatives had approached RBI seeking clarity on certain aspects of the guidelines such as treatment of NPAs given the differences with the ECL framework, and on the kind of different cohorts and structures that can be explored under the DLG framework. This had prompted RBI to issue an FAQ in November 2023 clarifying some of these aspects. However, these circulars were repealed when the consolidated Digital Lending Guidelines were issued on 8 May 2025, leading to some confusion on how provisioning for these loans may be interpreted. Fintech lenders believe that DLG is a form of credit guarantee or enhancement—the entire purpose of which is to provide capital comfort to the lender and help free up the lender's capital for additional on-lending. 'As per Ind-AS, NBFCs were considering the credit enhancement provided by an FLDG for purposes of computing the ECL on a loan portfolio (given that an FLDG qualifies as a credit enhancement intrinsic to the contractual terms of the arrangement, which is the requirement under Ind-AS 109)," said Shilpa Mankar Ahluwalia, partner, head-fintech, Shardul Amarchand Mangaldas & Co. RBI's 8 May directions, however, suggest that the amount of the DLG cover cannot be adjusted to reduce ECL computation, which could alter the cost-benefit to NBFCs given the zero-provisioning benefit of DLGs, according to experts who believe it could also send 'mixed signals" to market participants, investors and new entrants in the LSP space and may lead to the opinion that fintechs are not to be trusted. Read more: Lenders concerned about education loans as US tightens curbs on student visas Already, DLG rules only allow lien-marked deposits or bank guarantees, which practically removes any performance risk on such guarantees, said Ahluwalia. 'The industry also claims that capping the DLG at 5% had already prompted NBFCs to implement strong credit underwriting and risk tools, and removing the provisioning benefit of DLG cover may increase costs of digital loans and reduce credit access."
