Paytm set to maintain strong contribution margin at 57 per cent by FY27E

New Delhi [India], March 20 : Paytm merchant network expanded by 9 per cent year-on-year (YoY) to 43 million in the third quarter of FY25, with merchants using Paytm's devices increasing by 10 per cent YoY to 11.7 million, according to Motilal Oswal report.
Despite a moderation in its Unified Payments Interface (UPI) market share, Paytm continues to hold a dominant position in the merchant payments business, with 85 per cent of its Gross Merchandise Value (GMV) coming from merchants. The company expects GMV to grow at a 24 per cent compound annual growth rate (CAGR) over FY25-27E.
Paytm is leveraging its expanding merchant network to boost loan distribution through the First Loss Default Guarantee (FLDG) model, partnering with 18 lending institutions.
This initiative is expected to drive loan disbursement growth at a CAGR of 29 per cent from FY25-27E and increase the contribution of the financial services business to 27 per cent of total revenue by FY28E, up from 20 per cent in FY24. This growth is also projected to fuel a 25 per cent CAGR in total revenue over the same period.
The financial services division plays a crucial role in Paytm's revenue diversification strategy, with 15-20 per cent of earnings coming from non-lending activities, such as equity broking and the sale of financial products.
The company has been expanding its network of lending partners, which is expected to exceed pre-regulatory restriction levels, reinforcing its stronghold in the market.
Paytm's focus on cost optimization and efficient capital allocation is expected to drive profitability improvements. A reduction in capital expenditure (capex) and depreciation costs, combined with strict cost management, should enable the company to achieve positive adjusted EBITDA by Q4 FY25E and overall EBITDA breakeven by FY27E. By FY27E, Paytm is projected to return to profitability, with an estimated profit after tax (PAT) of INR 12.1 billion.
Recent media reports suggest that the introduction of a Merchant Discount Rate (MDR) on UPI transactions could provide a significant revenue boost for Paytm. This change could incentivize the company to expand its market share in consumer payments, complementing its robust presence in the merchant segment.
Paytm's contribution margin is expected to improve to ~58 per cent by FY28E, supported by efficient cost management and an increasing share of financial services revenue.
The company forecasts a 25 per cent CAGR in revenue over FY25-28E, while direct costs are expected to rise at a slower 21 per cent CAGR. Key revenue growth drivers include a 33 per cent CAGR in financial services revenue and a 23 per cent CAGR in GMV over FY25-28E. Net payment margins, including subscription fees, are projected to be sustained at 12 basis points (bp) of GMV by FY28E.
Paytm remains focused on scaling its loan distribution business, strengthening partnerships with lenders, and growing its customer base, particularly after securing NPCI approval to onboard new users on UPI.
The company is also expanding into wealth management services, following SEBI approval for Paytm Money to provide investment insights and research services. This could unlock new sources of fee-based income, further diversifying Paytm's revenue streams.
With continued growth in financial services, controlled expenses, and an improving revenue mix, Paytm is positioned to regain profitability by FY27E. The company's strong cash reserves (INR 128.5 billion as of 3QFY25) and limited capital commitments in global markets provide additional financial stability.
However, given the challenging macroeconomic environment, fluctuations in UPI market share, and evolving regulatory landscape, analysts maintain a Neutral rating on Paytm stock, with a revised target price (TP) of INR 870, based on 17.7x Sep'26E EBITDA.