Merchant Focus And International Expansion Will Drive Future Success Through Increased Transaction Volumes And Monetization

Key Takeaways

• Expansion to the merchant side and international markets aims to boost revenue, transaction volumes, and profitability through improved monetization and robust SME credit demand.
  
• Strategies like Dynamic Loss Guarantee, UPI monetization, and enhanced financial products are expected to enhance take rates, payment margins, and growth.
  
• Decline in UPI market share and dependency on key merchants could pressure revenue growth amidst competitive and operational challenges in international expansion.

Catalysts

Provides payment, commerce and cloud, and financial services to consumers and merchants in India.

• The shift in focus to the merchant side is seen as a long-term, stable business model, with strong demand for SME credit in multiple geographies, expected to drive growth through increased transaction volumes and improved monetization from merchant acquiring. This could positively impact revenue and earnings.
  
• The potential increase in RuPay on UPI transactions offers an additional monetization stream, with Paytm earning MDR on these transactions. As this segment grows, it could enhance payment margins and contribute to better net margins.
  
• The introduction of Dynamic Loss Guarantee (DLG) on merchant loans is anticipated to provide higher take rates and increased collection efficiencies. This could bolster net margins and lead to better profitability in the financial services segment.
  
• International expansion plans in the Middle East and Southeast Asia focus on merchant ecosystems, leveraging the technology developed in India to address payment and credit solutions. This initiative is expected to broaden Paytm's revenue base and support long-term growth.
  
• The initiatives to increase merchant and consumer acquisitions, cultivation of authenticated financial products, and fostering of organic growth through product improvements are strategies aiming to drive overall revenue growth and improve net margins by strengthening the customer base and engagement.

One97 Communications Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming One97 Communications's revenue will grow by 24.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -9.2% today to 14.8% in 3 years time.
• Analysts expect earnings to reach ₹20.7 billion (and earnings per share of ₹25.9) by about January 2028, up from ₹-6.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 48.9x on those 2028 earnings, up from -77.1x today. This future PE is greater than the current PE for the IN Diversified Financial industry at 25.2x.
• Analysts expect the number of shares outstanding to grow by 7.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.35%, as per the Simply Wall St company report.

One97 Communications Future Earnings Per Share Growth

Risks

• The decline in overall UPI market share, despite growth in GMV, could indicate potential competitive pressures and challenges in consumer adoption, impacting revenue growth.
  
• The focus on DLG (Default Loss Guarantee) models, while beneficial for partnerships, implies a higher upfront cost, which could pressure net margins until offset by future collection revenues.
  
• The company's international expansion plans, though promising, require significant lead time and could involve compliance, operational, and cultural challenges, affecting earnings if not executed well.
  
• The introduction of DLGs might lead to fluctuations in contribution margins due to the upfront costs associated with the guarantees, impacting bottom-line earnings.
  
• Dependency on a limited percentage of merchants and personal loans for financial services revenue, with limited penetration, suggests revenue vulnerability to changes in lending partner relationships or market conditions.

Valuation

• The analysts have a consensus price target of ₹870.82 for One97 Communications based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1260.0, and the most bearish reporting a price target of just ₹350.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹140.0 billion, earnings will come to ₹20.7 billion, and it would be trading on a PE ratio of 48.9x, assuming you use a discount rate of 13.4%.
• Given the current share price of ₹808.65, the analyst's price target of ₹870.82 is 7.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.