Morgan Stanley calls Paytm Q2 a 'strong quarter' driven by margin expansion, profitability, and AI efficiencies

New Delhi [India] November 11 : Brokerage firm Morgan Stanley has described Paytm's second quarter of FY26 as "another strong quarter," highlighting higher payment processing margins, steady lending revenue growth, strong contribution profits, and continued cost discipline as key drivers behind the company's significant improvement in profitability.

The brokerage noted that EBITDA rose to Rs 1.4 billion from Rs 0.7 billion last quarter (was negative Rs 4 billion a year ago), reflecting robust operational improvement.

The report said "revenue growth was strong (+24 per cent YoY), and could gain further traction as consumer unsecured lending rebounds." It also pointed to an "improving payment GMV mix towards cards (on UPI) as well as EMI-backed payments (which have higher margins)" and emphasized that "payment processing costs continue to move lower."

According to Morgan Stanley, financial services revenues rose 63 per cent YoY and 9 per cent QoQ, still led by merchant loans. The brokerage expects consumer lending to improve as Paytm's postpaid product gains traction. Contribution profit margin remained strong at 59 per cent from 60 per cent last quarter (was 54 per cent in Q2FY25), led by shift towards higher-margin revenues and lower DLG costs.

Morgan Stanley highlighted that "indirect costs (ex-ESOPs) were well controlled (-2 per cent QoQ, -5 per cent YoY), while ESOP costs moved sharply lower and drove overall indirect cost decline of 18 per cent YoY." Profitability also strengthened further with "PAT of Rs 2.1 billion (adjusted for one-time impairment) from Rs 1.2 billion last quarter.

The report stated that management expects continued operating efficiencies and higher revenues led by AI initiatives. "The company has embedded AI across its product stack from infrastructure and underwriting to merchant-facing features, with proprietary GenAI models developed in-house. These innovations are expected to enhance operational efficiency, improve credit insights, and unlock scalable monetization opportunities across its financial services and merchant ecosystem," it added.

Morgan Stanley underscored that Paytm's payments revenue grew 25 per cent YoY, supported by a mix shift to cards/EMI, while merchant subscriptions (including devices) rose to 13.7 million from 13 million last quarter. The brokerage also cited management commentary on "strong traction in merchant acquisition (online and offline)" with "significant scale-up expected over the next few quarters."

The report noted Paytm's strategic focus on efficiency and technology, stating that "indirect costs continue to decline, with investment focused on consumer growth and software, while trimming non-sales marketing and other indirect expenses." Morgan Stanley also highlighted "strong growth in Soundbox and payment devices," adding that "refurbishment efforts are helping reduce capex and extend device life."

In its financial outlook, Morgan Stanley projects continued improvement with EBITDA expected to rise from Rs 6.7 billion in FY26 to Rs 25.2 billion in FY28, and return on equity expanding from 5.5 per cent in FY26 to 15.7 per cent in FY28.

The firm reiterated its positive industry view of "Attractive" for India Financials and described Paytm as a "strong two-sided digital payments platform" that has "built a strong customer acquisition engine via payments and is now expanding into financial services digitally at low incremental costs."

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