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Paytm will have to cut costs to move to operating profit — or EBITDA positive, which means profit before interest and taxes. Revenue growth is not a problem for the digital payments major, which has been spending heavily towards employee costs. It might have to improve on its contribution margin — or sales minus variable costs per unit.

For the year ended March 2022, Paytm reported a contribution profit of Rs 1,498.1 crore and revenue of Rs 4,974.2 crore — translating to a contribution margin of 30.1 percent. Simply put, contribution margin gauges the profitability of a business in terms of sales per unit.

Its indirect expenses — including marketing and employee costs — increased 39.5 percent to Rs 416 crore for the year.

According to JPMorgan, moderation in indirect expense is key for Paytm to achieve its guidance of achieving break-even by the quarter ending September 2023. Assuming a 42 percent contribution margin by then, the implied indirect expense growth will need to be at 34 percent over six quarters, according to the brokerage.

Paytm has sharply increased its employee costs led by hiring in field force, but its indirect cost should begin to moderate from the September quarter given that most of the rollout is done, JPMorgan said.

Paytm has the unique ability to drive monetisation and profits across

several segments at lower customer acquisition cost (CAC) compared with its peers, said JPMorgan. "We expect Paytm to see strong revenue growth across all its business segments thanks to device monetisation in payments, financial services cross-selling, ticketing recovery and rising ad monetisation," it said.

Paytm shares rose by Rs 2.8 or 0.5 percent to close at Rs 617.4 apiece on BSE, despite broad-based weakness on Dalal Street. The stock has moved within a wide range of Rs 511-1,961 over the past more than six months since its listing in November 2021.

A reduction in adjusted operating loss with better cost controls will be a key fundamental driver for the Paytm stock, according to the brokerage.

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First Published:Jun 7, 2022 2:38 PM IST