Risk-reward favourable for Paytm; may rise more than 100% in 1 yr: Analysts

Shares of Paytm surged 8 per cent to Rs 535.45 apiece in the intra-day trade on Friday, before settling at Rs 537, up 7 per cent

With shares of Paytm down over 70 per cent from its issue price, analysts believe the stock is turning favourable from risk-reward perspective. Moreover, with the management's focus on profitability, and the target of turning free cashflow (FCF) positive in 12-18 months, analysts are confident that the company will end cash burn in the next 4-6 quarters.
 

ICICI Securities, for instance, has a 'Buy' rating on the stock, with a target price of Rs 1,285. It says more-than-expected operating profitability (Ebitda before ESOP cost) via consistent margin improvement, along with clarifications around regulatory developments with no onerous outcome, provide comfort.

"At its analysts' meet, Paytm projected ESOP cost outlook for next 5 years, declining from a cost base of Rs 14,700 crore in FY23 (estimated) to Rs 1,400 crore in FY27 (estimated), assuming cost for ESOPs granted till date. A downward trending cost line item (although non-cash), and its expected path is welcome on understanding reported profitability," wrote analysts at Dolat Capital in their report. The brokerage, too, has a 'Buy' rating with a one-year target of Rs 1,400.
 

Ebitda is earnings before interest, tax, depreciation, and amortisation. while ESOP is employee stock option plan.
 

Paytm's Ebitda (before ESOP) reduced to -9 per cent in the September quarter of financial year 2022-23 (Q2FY23) from -39 per cent in Q2FY22. This gives visibility around the company turning Ebitda-positive (before ESOP cost) ahead of the guided timeline of Q2FY24, analysts said. 

On the bourses, shares of Paytm surged 8 per cent to Rs 543.45 apiece in the intra-day trade on Friday, before settling at Rs 537, up 7 per cent. In comparison, the S&P BSE Sensex index slipped 0.66 per cent.

 

JM Financial, meanwhile, has upgraded the stock to 'Buy' from 'Sell' on the back of gradual improvement in operating metrics.

"On our valuation metric of FY30E Ebitda discounted back to FY24E, Paytm is currently trading at 14x EV/ EBITDA, which is in-line with average valuation of global peers. We upgrade Paytm to 'Buy' with an unchanged target of Rs 600. The upside risks could increase if momentum in revenue continues along with cost moderation," they said.

During the company's analyst meet, Paytm said it has two revenue streams -- Payment processing (Paytm makes 3-4 basis points on UPI and 15-18 bp on other instruments) and Subscription revenues (Paytm charges Rs100 per month per active device such as Soundbox).

Within the Lending vertical, Paytm makes a blended 2.5-3.5 per cent take rate (commission fee) on lending. The company also makes 0.5-1.5 per cent on collections on current disbursements (higher on a lagged basis), which is received 12-14 months later for personal loans (PL) and merchant loans, and 3 months for BNPL (buy now-pay later).

Moreover, 50 per cent of PL business is coming from Postpaid/BNPL customers. The company expects its margins (sourcing and collections) from overall lending business to trend up with scale. That apart, with 30 per cent of the company’s BNPL customers having credit cards, it expects to double its unique borrower base from the current 7 million in 12 months’ time.

Analysts believe Paytm’s payments ecosystem - with presence across merchants and customers - acts as a customer acquisition, engagement and retention engine, giving multiple customer journeys, and monetisation opportunities.

"Given large number of use cases, huge customer base (350 million), and robust tech platform, the company can compound its revenues by 14x over next decade, and would turn profitable and positive on cash generation starting FY25," Dolat Capital said.
 

It added that improving revenue growth (85 per cent on trailing twelve month basis), scaling up lending business (6x on YoY basis), rising contribution profitability (up 1500bps on YoY basis), and aspiration to achieve break-even for adjusted Ebitda, all suggest bettering financial performance. It maintains 'Buy' rating with a target of Rs 1,400.

Meanwhile, CLSA has a target of Rs 650, seeking comfort from the company's net cash balance of more than $1 billion, which equates to more than 25 per cent of its current market cap.

Morgan Stanley has an 'equal-weight' rating on the stock with a target of Rs 695 on the back of regulatory uncertainties, especially with respect to re-application for payment aggregator licence.

That said, asset quality in the loan distribution business, migration of BNPL customers to credit cards in the medium term, price wars in the Soundbox segment, higher-than-expected competitive intensity in payment and/or reduction in payment charges, weak execution in financial service, and negative impact from changes to digital payment charges remain some of the key risks for Paytm, analysts cautioned.