Strategic Partnerships Fuel One97’s Financial Turnaround

Company Name: One 97 Communication Ltd | NSE Code: PAYTM | BSE Code: 543396 | 52 Week high/low: 998/440 | CMP: INR 889 | Mcap: INR 56,647 Cr | P/Sales: 7.86x

Company Overview:

One97 Communications is engaged in the business of offering a) payment and financial services, encompassing payment facilitator services, facilitating consumer and merchant lending, wealth management, and related financial solutions. b) Additionally, the company provides commerce and cloud services, serving as an aggregator for digital products, managing ticketing operations, supplying voice and messaging platforms to telecom operators and enterprise customers, among other business activities.

Robust Revenue Growth Fueled by GMV and Merchant Payments:

One97 Communications reported a robust 31.6% YoY revenue increase to Rs. 2,519 crore in Q2FY24, driven by a surge in Gross Merchandise Value (GMV) and a 47.6% YoY jump in payments to merchants. The net payment margin rose by 60.0% YoY to Rs. 707 crore, mainly due to a significant increase in non-UPI payments. The company’s adaptability in a dynamic market is evident despite a slightly lower growth rate compared to the previous quarter.

Thriving Financial Services and Loan Disbursement Business:

One97 Communications reported robust Q2FY24 financials with a 63.6% YoY growth, totaling Rs. 571 crore. The surge was driven by a 44% YoY increase in loan disbursements, reaching 13.2 million, fueled by Paytm’s active user base. The total value of disbursed loans rose by 122% YoY to Rs. 16,211 crore, showcasing the company’s success in diversifying revenue streams and leveraging its user base for sustained growth.

Strong growth in contribution profit leads to margin expansion

The loan distribution business and improved net payment margin drove a significant uptick in Q2FY24 EBITDA before ESOP cost to Rs. 153cr, compared to a loss of Rs. -167cr in Q2FY23. A consistent 69.2% YoY growth in contribution profit led to an adjusted EBITDA margin rise from -8.7% to 6.1%. In the same period, profit attributable to shareholders improved from Rs. -571cr to Rs. -291cr, indicating a positive turnaround in financial performance.

Valuation and key ratio

The company’s stock is trading at 7.84x its sales, reflecting a market valuation of 7,203 Crore INR at the current share price of 889 INR. Additionally, the company is valued at 4.53x its book value, amounting to 196 INR per share. However, financial indicators reveal challenges, with a negative ROE and ROCE at -13.9% and -13.5%, respectively. The interest coverage ratio is a concerning -48.2x, indicating potential solvency issues.

Key concall highlight

➡️In Q2, Tata Capital joined as a lending partner, bringing the total number of NBFCs and banks to nine for credit card and loan distribution.

➡️Q2FY24 witnessed a 19% YoY increase in Average Monthly Transacting Users (MTUs), reaching 9.5 crore. Merchant subscriptions showed robust growth, surging 91% YoY to 9.2 million.

➡️The cash balance strengthened to Rs. 8,754 crore in September, up from Rs. 8,367 crore in June, attributed to improved EBITDA and working capital. The company anticipates adding more partners in the upcoming quarters.

Q2FY24 result update: Consolidated

➡️In Q2FY2, the consolidated revenue witnessed robust growth, surging by 31.6% YoY (+7.6% QoQ) to reach 2,519 Cr. This growth was primarily driven by a strong uptick in merchants’ subscription revenue, increased loan disbursements, and a rise in Gross Merchandise Value (GMV).

➡️The Adjusted EBITDA before ESOP cost exhibited remarkable expansion, soaring by 191.6% YoY (+82.5% QoQ) to 153 Cr, compared to a loss of -167 Cr in Q2FY23. This impressive performance was fueled by consistent growth in contribution profit (+69.2% YoY), resulting in an improved adjusted EBITDA margin of 6.1%, a significant positive shift from -8.7% in Q2FY23.

➡️EBITDA demonstrated a notable YoY increase of 57%, but experienced a QoQ decline of 21.1% to -231 Cr, primarily attributed to higher ESOP costs.

➡️The Operating Profit (EBIT) saw a YoY decrease of 36% (-9% QoQ) to -411 Cr, primarily due to a substantial 72.7% YoY increase in depreciation expenses.

➡️Reported Profit After Tax (PAT) declined by 49% YoY (-18.6% QoQ) to -292 Cr, driven by elevated ESOP costs and depreciation.

Conclusion:

One97 Communications demonstrated robust Q2FY24 performance with a 31.6% YoY revenue increase, driven by strong growth in financial services, merchant payments, and loan disbursements. The company’s adaptability and strategic partnerships, such as with Tata Capital, contributed to positive results, leading to a notable turnaround in financial performance, reflected in improved EBITDA margins and a strengthened cash balance. Despite a QoQ decline in some metrics, One97 Communications remains well-positioned for sustained growth, focusing on expanding its partner network and capitalizing on its active user base.

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