Shares of One97 Communications, the parent company of Paytm, will be in focus on Thursday after global brokerage Nomura initiated coverage with a Buy rating and a target price of Rs 2,250, implying an upside of 31% from current levels.
Nomura analysts say Paytm is riding India’s digital payments highway and see robust growth levers in the coming quarters. Nomura expects the company's EBITDA to grow at a CAGR of 96% over FY26-29F. The stock currently trades at around 26x FY29F EV/EBITDA. Key risks to the brokerage's outlook include a deterioration in asset quality in the lending business and intensifying competition.
1.) Payments, merchant lending key drivers – Paytm's core payments business provides a recurring revenue stream, supported by India's expanding digital payments infrastructure. Nomura expects the business's gross merchandise value (GMV) to grow at a CAGR of 25% over FY25-29F. Rising credit penetration through credit cards, RuPay credit cards on UPI and credit lines on UPI is expected to lift the net payment margin from 4.03 basis points in FY26 to 5.26 basis points, excluding MDR, by FY29F. Together, these factors are projected to drive a 25% CAGR in payment processing revenue over FY26-29F.
This is complemented by Paytm's position in merchant lending, where significant growth potential remains. Merchant lending penetration currently stands at just 8% of its 15.7 million subscription merchant base. Nomura estimates that this could increase to 11% by FY29F, indicating considerable headroom for expansion.
2.) Transition to a leaner cost base – Indirect cost optimisation is expected to be a key driver of Paytm's margin improvement, with total indirect costs projected to decline from around 50% of revenue in FY26 to 34.1% by FY29F, as revenue growth outpaces cost growth.
Employee costs are expected to see the steepest reduction, falling from 30.7% to around 19.8% of revenue, driven by AI-led efficiencies in field sales, merchant acquisition and commercial negotiations. Technology costs are also projected to decline from 7.6% to 5.9% of revenue as the business benefits from economies of scale.
Marketing costs, however, are expected to remain elevated at around 3% of revenue through FY29F, reflecting the company's strategy of reinvesting in its brand. Overall, Nomura expects improvements across employee, technology and other expenses, with AI emerging as the biggest structural driver of cost efficiencies.
3.) MDR, newest growth prospect – Nomura sees three additional levers shaping Paytm's growth trajectory. First, the potential introduction of UPI merchant discount rate (MDR) revenue could provide an incremental boost, with around 20% of Paytm's GMV expected to be eligible for MDR at approximately 8 basis points, given its exposure to smaller merchants and exempted categories.
This could generate additional revenue of Rs 5 billion in FY28F and Rs 6.2 billion in FY29F. Second, the company is selectively expanding internationally by leveraging its India-tested payments technology and distribution model through asset-light, partner-operated licensing arrangements and select directly operated ventures, although a meaningful earnings contribution is expected only from FY30F. Third, the company has launched Pi, its proprietary enterprise AI product for banks and insurers.
India is among the world's three largest fintech ecosystems. The domestic fintech market, valued at $51 billion, is projected to more than double to $109 billion by 2031E, implying a CAGR of 16%.
Digital payments are expected to expand nearly three-fold over the same horizon, reaching an estimated $10.2 trillion by FY30E, according to the Indian Payments Handbook 2025-2030. The Unified Payments Interface (UPI) is expected to remain the backbone of this growth, accounting for close to 90% of transaction volumes, with Paytm being a major player.
Disclaimer: This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Veer Sharma and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.
