Attractive monetization, flat indirect costs: How Paytm strengthened its path to operating profitability in Q2FY23

India’s leading digital payments and financial services company Paytm maintained its guidance on operating profitability after posting strong growth in its Q2FY23 financial results. The company said attractive monetization opportunities and indirect cost moderation are two key factors that are driving its strong revenue growth each quarter.

In the second quarter, the company said it has seen strong monetization across its core payments and loan distribution business. Paytm, which has pioneered the QR and mobile payments revolution in India, highlighted that its payment services revenue grew by 56% YoY in Q2FY23, while net payments margin (payments revenues plus other operating revenues, less payment processing cost) has grown by over 400% YoY.

“Our net payments margin stood at Rs 443 crore, increasing 15% QoQ and was up 428% YoY. This was driven by improved monetization and continued improvements in payment processing charges,” said the company.

This highlights that the company’s payments business is seeing greater monetization, supported by a) Continued platform expansion across MTU, merchant base, subscription merchants and GMV, b) Continued growth in subscription (and MDR) revenues from our offline merchants, led by ramp-up of our devices business and c) Higher GMV from online merchants in our payment gateway business.

Paytm’s loan distribution business in partnership with top financial institutions also witnessed robust monetization this quarter, primarily driven by sourcing and collection revenues. Stronger monetization across products like Paytm Postpaid, Personal Loans and Merchant Loans have had a significant impact on financial services, which accounted for 18% of total revenue generated in Q2FY23. While Paytm’s loan distribution business has scaled significantly in the past few quarters, the company said the low penetration level for each product provides a “huge growth opportunity at attractive profitability”. The company added that it will continue to seek growth and upsell opportunities to further strengthen monetisation.

Along with stronger monetization across key businesses in Q2FY23, Paytm has also been able to limit its indirect costs, which remained flat. The company’s indirect costs in the second quarter stood at Rs 1,010 crore, compared to Rs 1,001 crore in previous quarter. Indirect expenses in Q2FY23 was at 53% of revenues, down from 60% in Q1 FY 2023 and 63% in Q2 FY 2022. At the same time, Paytm’s contribution profits grew 224% YoY to Rs 843 crore, giving the company significant operating leverage.

As a result of continued focus on improving monetization capabilities, widening contribution margin as well as significant operating leverage, Paytm’s EBITDA before ESOP cost stood at (₹166) Cr, improving 61% YoY. More importantly, the company has been able to drive a Rs 201 crore improvement in EBITDA Before ESOP cost in the past two quarters and remains confident of turning profitable by the quarter ending September 2023.