Paytm is performing much better than PayU, Citi bets to BUY

“Paytm has gained market share in digital payments vs PayU, although the growth appears comparable on MDR-generating TPV basis at 59% YoY for PayU vs c52% YoY (Paytm) for Jan-Jun’22. In the BNPL segment, Paytm is seeing faster growth in active customer base vs PayU’s Lazypay. Lazypay’s reported loss-rate has increased CYTD to 3.1% (+30bps vs CY21) – something to watch out, for the broader BNPL space in India (Paytm has reported stable asset performance across its lending partners’ portfolio with loss-rates at 1.1-1.3% for the postpaid BNPL product). We note that Paytm’s business in lending space is distribution (no b/s exposure) and therefore its revenue/cost-structure are commissions-based. Paytm is trading at 5x FY24E EV/Contribution Profits (4x EV/Gross Profits). We acknowledge overhang risks from further selling by existing pre-IPO shareholders and that fintech is a competitive space but at these valuations, those risks are overdone,” said Citi in a note.

The Citi report said that while Lazypay reported a loss rate at ~ 3.1% YTD (cal. yr 2022), an increase of 30 bps versus 2021, Paytm has reported stable asset performance across its lending partners’ portfolio with loss-rates at 1.1-1.3% for the postpaid BNPL product. At the conclusion of the second quarter of FY 2023, there were over 15 million online and offline merchants who accepted Paytm Postpaid, with over 6 million subscribers. In Q2FY23, there were 220% more Postpaid Loans disbursed than the previous quarter while their value climbed by 449% YoY and 20% QoQ to ₹4,050 Cr. Additionally, Paytm’s financial services revenue for the 1H was US$55 million (+400% YoY), compared to LazyPay’s US$41 million (+438% YoY).

Prosus, the parent company of PayU, added regarding the Indian payments industry that “In India, our largest payments market, TPV grew 59% to US$28bn, and revenue increased 48% to US$183m, following increased digitalisation in ecommerce, financial services and bill payments, and a rebound in post pandemic travel “

The research analysts of Citi said further in a note that “We value Paytm on SoTP basis, assigning different multiples to the three key verticals. We value the Payments business on an EV/GP basis at 13.5x Sep’24E (at par with global payment companies on EV/GP basis; EV/S: 4x) resulting in Rs466/sh (Rs429/sh earlier). We value the Financials Services business on EV/S at 12x (we expect higher profitability in the financial services vertical and in-line with global fintech offering similar services; multiple at 20% premium to global peers ) – Rs375/sh (Rs353/sh earlier). We value the commerce and cloud vertical at 3x EV/S at the lower end of global e-commerce valuations – Rs81/sh. Overall, this approach (+ net cash and investments) yields a TP of Rs1,055/sh. This stock is High Risk based upon our quantitative model, but its healthy net cash position and likely declining cash burn going forward do not support a High Risk rating.”

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