Paytm: Foreign brokerages divided on road ahead for the stock

While those at Goldman Sachs have upgraded the stock to buy with a target price of Rs 1,460, analysts at Macquarie maintain an underperform rating with a 12-month target price of Rs 700 on the counter

Foreign brokerages remain divided on the road ahead for Paytm’s stock and the performance of the company in the backdrop of recently announced results for the quarter ended December 2021 (Q3-FY22).

While Goldman Sachs has upgraded Paytm to ‘buy’ with a target price of Rs 1,460 – up around 56 per cent from the current levels (Rs 1,600 earlier) citing a favourable risk-reward following the December 2021 (Q3FY21) results, those at Macquarie have cut the target price to Rs 700 – down around 25 per cent from here.

The Vijay Shekhar Sharma-controlled fintech major Paytm reported 89 per cent year-on-year (YoY) jump in revenue to Rs 1,456 crore in Q3FY21. The net loss, however, widened 45 per cent to Rs 778 crore during the period under review. READ ABOUT IT HERE

“We believe Paytm’s strong topline growth in 3QFY22 (11 per cent of ahead of their estimates) will help allay investor concerns around declining payments take rate in recent years. In addition, Paytm continues to gain market share across both UPI and non-UPI, and its lending business is seeing robust traction (over 201 per cent YoY revenue growth in 3Q). We now see risk-reward skewed to the upside. Upgrade rating to buy from neutral,” wrote analysts at Goldman Sachs in a post results note.

 

Shares of One97 Communications, the parent company of digital payments major Paytm, have dropped 56 per cent from the IPO price of Rs 2,150 to Rs 944 levels in trade on Monday. The stock debuted on the exchanges on November 18, 2021.

Goldman Sachs raised their topline estimates by 7-10 per cent for the company. Paytm, they said, operates across multiple target area markets (TAMs), most of which they believe are expected to grow at over 20 per cent CAGR over the next 5 years.

 

“We expect the growth momentum to sustain; forecast 89 per cent YoY revenue growth in 4Q-FY22, with 35 per cent FY22E-25E revenue CAGR. We expect Paytm’s increase in scale to result in an improving margin trend, with the company reaching adjusted EBITDA breakeven by FY25E. Paytm has a strong balance sheet ($1.4 billion cash as of December 2021), and see limited likelihood of the company needing to raise capital again ($210 million annual cash burn),” their report said.

Those at Macquarie, however, differ and have set the 12-month price target for the stock at Rs 700 – down around 26 per cent from the current levels and maintain an underperform rating on the counter.

 

A large part of the dent in Paytm's Q3-FY22 profit, according to Macquarie, was on account of the large ESOP grants by the company ahead of its IPO, which they believe will be a recurring cost to the company to the tune of Rs 1,600 crore.

“PayTM had issued around 28 million ESOPs just before its IPO. These ESOP grants are deep in-the-money (exercise price of Rs 9 vs IPO price of Rs 2,150). Hence, ESOP costs are elevated for PayTM, and this will be a recurring annual expense of around Rs 1600 crore going forward. Interestingly, around 76 per cent of the ESOPs granted before IPO were to the founder-CEO, Vijay Shekhar Sharma. Elevated ESOP expenses were not factored into our estimates previously. We increase our FY22-26E loss estimates by 39-101 per cent to factor in high recurring ESOP costs,” wrote Suresh Ganapathy, associate director at Macquarie in a co-authored note with Param Subramanian.