Paytm Braces for Near-Term EBITDA Impact as Digital Payment Infrastructure Incentive Lapses
One97 Communications, the parent company of fintech giant Paytm, has reported its third consecutive profitable quarter but anticipates a near-term hit to its EBITDA. This follows the expiry of a key government incentive aimed at developing digital payment infrastructure in smaller towns and remote regions.
Immediate Financial Impact and Recovery Strategy
Founder Vijay Shekhar Sharma acknowledged the upcoming challenge during the post-earnings call, stating, "In the very short term, we will take the EBITDA impact," particularly referring to the March quarter. However, he expressed confidence in the company's ability to recover over time through strategic offsets.
Paytm aims to recover at least 30% of the lost incentive revenue by deepening merchant engagement and implementing targeted sales efforts. Sharma emphasized a responsible approach, noting that the remaining impact would be felt in the near term but mitigated through sustained growth initiatives.
Details of the Expired PIDF Incentive
The Payment Infrastructure Development Fund (PIDF) incentive, which contributed a substantial ₹216 crore over the nine months ending December 2025, expired last month and will not be renewed. Operationalized by the Reserve Bank of India in January 2021, PIDF was designed to bridge the digital divide by supporting payment acceptance infrastructure in:
- Tier-3 to tier-6 centres
- Northeastern states
- Union Territories of Jammu and Kashmir and Ladakh
With the withdrawal of PIDF support, Paytm's contribution margin is expected to settle in the mid-50% range, compared to the 57% reported in the December quarter. Chief Financial Officer Madhur Deora highlighted that the extent of the impact would hinge on the scaling up of subscription revenue, warning that reliance on sales revenue could further pressure margins.
Quarterly Performance and Broader Financial Context
In the December quarter, Paytm posted a profit after tax of ₹225 crore, a significant improvement from the loss recorded a year earlier and a profit of ₹21 crore in the preceding September quarter. EBITDA rose sequentially to ₹156 crore from ₹142 crore, with margins holding steady at 7%.
Revenue from operations increased by 20% year-on-year to ₹2,194 crore, with a 6% sequential rise. Contribution profit grew by 30% annually to ₹1,249 crore, though promotional spending increased and PIDF-linked benefits tapered.
Analyst Concerns and Tax Implications
Analysts have flagged a potential medium-term drag from taxation on Paytm's other income. Piran Engineer, Vice-President and Research Analyst at CLSA, pointed out that Paytm currently does not pay tax on interest earned from bank deposits, but this will change starting the next financial year.
"The interest income is around ₹800 crore, which could translate into a tax outflow of roughly ₹200 crore annually," Engineer explained. This could weigh on profits even if core operating performance remains robust, though the company did not comment on this aspect during the earnings call.
Revenue Drivers and Merchant Growth
Payment services revenue grew by 21% year-on-year to ₹1,284 crore, remaining Paytm's largest revenue driver. Net payment revenue increased by 25% annually to ₹613 crore, supported by higher processing margins and growth in merchant subscriptions.
Merchant subscriptions surged to 1.44 crore, marking an increase of 27 lakh year-on-year. Sharma emphasized that growth is now driven by engagement and retention rather than mere user additions, focusing on high-quality users to gain market share.
Financial Services and Product Developments
Revenue from the distribution of financial services rose by 34% year-on-year to ₹672 crore, led by merchant loans and wealth products. The customer base for financial services expanded to 7.1 lakh from 6.5 lakh in the September quarter.
Merchant loan distribution remained resilient, driven by repeat borrowers and an expanding device base, while consumer lending growth stayed subdued. Paytm's buy-now-pay-later product, relaunched as a UPI-linked overdraft under Paytm Postpaid, is scaling steadily, with a customer base reaching six digits within three months and showing stable asset quality.
The company plans to reintroduce its wallet product on a smaller scale for "consumer completeness," though Deora downplayed its strategic significance, noting it might not be as sticky or relevant as other offerings.
Competitive Landscape and Cost Management
With rival PhonePe expected to list soon, Paytm's management pushed back against comparisons focused solely on user share. Sharma asserted, "Our merchant base is a superior merchant base in terms of quality," highlighting that engaged merchants are more likely to pay, which enhances monetization.
Marketing services revenue fell by 11% year-on-year to ₹238 crore but rose by 4% sequentially due to festive travel demand. Indirect expenses declined by 8% annually to ₹1,092 crore, while depreciation and amortization fell by 19% to ₹133 crore, attributed to lower device costs.
Labour Code Impact and Future Outlook
Company executives noted that operating leverage from revenue growth and tighter cost controls helped offset higher consumer acquisition costs and the full impact of the new labour code, implemented in November. Sharma reiterated Paytm's commitment to continuous cost optimization and strategic investments for future growth.
As Paytm navigates the post-PIDF landscape, its ability to deepen merchant relationships and scale subscription revenue will be critical in mitigating the near-term EBITDA impact and sustaining profitability in the competitive fintech sector.
