Macquarie cuts Paytm target price to Rs 900 citing red flags in business

Flags senior management exits in the firm, its average merchant loan size at sub-Rs 5,000 levels over the past year and regulatory uncertainty in fintech and insurance as concerns for the stock

Brokerage firm Macquarie on Monday published yet another report on One97 Communications, retaining its ‘underperform’ rating but cutting the target price of the stock to Rs 900 apiece. This sparked a 6 per cent decline in the shares of Paytm’s parent company, which ended the day at Rs 1,157.90 on the BSE, even as the Sensex rose 1.1 per cent.

“Post the various business updates and results, we believe our revenue projections, particularly on the distribution side, is at risk and hence we pare down our revenue CAGR (compound annual growth rate) from 26 per cent to 23 per cent for FY21-26E. We are roughly cutting revenue estimates for FY21-26E on an average by 10 per cent every year due to lower distribution and commerce/cloud revenues offset partially by higher payment revenues,” Suresh Ganapathy and Param Subramanian of Macquarie Capital Securities (India) said in the report.

“We cut our earnings (increase our loss projections) by 16-27 per cent for FY22-25E owing to lower revenues and higher employee and software expenses. We cut our TP (target price) sharply by Rs 25 per cent owing to a lower target multiple of 11.5x (Price to Sales ratio) (from 13.5x earlier) and lower sales numbers,” the analysts added.

The analysts also flagged attrition in the company’s senior management, its average merchant loan size at sub-Rs 5,000 levels over the past year and regulatory uncertainty in fintech and insurance spaces as concerns.

With Monday’s slide, Paytm’s market price has declined 46 per cent from its issue price of Rs 2,150. The stock hit a high of Rs 1,961.05 on November 18, but has failed to touch its issue price since listing.

The Reserve Bank of India’s proposed digital payments regulations could cap wallet charges. This business still accounts for 70 per cent of Paytm’s overall gross revenues and, hence, any such regulation could impact revenue significantly. Add to that the recent rejection of Paytm’s foray into insurance by the Insurance Regulatory and Development Authority. “We believe this could impact the company’s prospects of getting a banking license,” the Macquarie analysts noted.

Reacting to the report, Paytm came out with its Q3 (December quarter) operational performance numbers after market hours. The company said the number of loans disbursed through the platform rose 401 per cent year-on-year (YoY) to 4.4 million during the period, while the value of loans increased 365 per cent to Rs 2,180 crore.

GMV (gross merchandise value) processed through the platform during the quarter aggregated to over Rs 2.5 trillion ($33.6 billion), a growth of 123 per cent YoY. The upward trajectory of monthly transacting users (MTUs) continued in Q3 with 64.4 million average MTUs, and a growth of 37 per cent YoY.

In an earlier report, that came close on the heels of Paytm’s listing in November, Macquarie had set the stock’s target price at Rs 1,200 with an ‘underperform’ rating. Since then, the company’s share price has fallen 40 per cent as the market has punished it for a thinly spread business model, scant revenues and an unclear path to profitability. While Paytm valued its IPO at Rs 1.49 trillion ($20 billion), it currently has a market capitalisation of around Rs 76,000 crore ($10.3 billion).

In its first quarterly earnings after listing, the company said its net loss widened 11 per cent to Rs 482 crore in Q2 on a YoY basis, and increased 28 per cent compared with Q1. Revenue from operations grew 64 per cent YoY to Rs 1,090 crore in Q2, while total expenses jumped to nearly Rs 1,600 crore from Rs 1,170 crore a year ago.

Its commerce and cloud services revenue grew by 47 per cent YoY to Rs 244 crore. Revenues from payment and financial services went up by 69 per cent YoY to Rs 843 crore, driven by 52 per cent growth in non-UPI payment volumes (GMV) and growth from financial services.