Ahead of Q3FY24 results, UBS gives 'buy' call on Paytm, sees 20% upside

Despite a 16 per cent rally over the past one month, global brokerage UBS anticipates Paytm's shares to rally another 20.5 per cent over the next one year as it expects regulatory landscape to turn favourable for the fintech giant.
 

The brokerage has initiated coverage on the stock with a 'Buy' rating and a target price of Rs 900 as it expects the government and NPCI (National Payments Corporation of India) supporting incentives and a small merchant discount rate (MDR) on UPI P2M transactions.
 

"Paytm's stock has seen to multiple de-ratings as the market perceives regulatory tightening for unsecured loans as a roadblock for its broad monetisation strategy. We, however, view it as only a cyclical downturn, with a limited impact, as it affects only a portion (post-paid loans) of one business vertical," Alok Srivastava of UBS wrote in a co-authored note with Vishal Goyal and Raksha Saraf.
 

On the bourses, shares of Paytm surged 4.8 per cent to Rs 750 per share on the BSE in Tuesday's intraday trade before closing 4.46 per cent higher at Rs 74.35. UBS' target price is 20.48 per cent higher over Tuesday's closing price.

By comparison, the benchmark S&P BSE Sensex ended 0.27 per cent lower at 73,129 levels.
 

'Stock set to re-rate'

Over the medium-term, UBS expects the stock to re-rate once the consolidated Ebitda (earnings before interest, tax, depreciation, and amortisation) by FY25, achieving a 20 per cent Ebitda margin by FY28.
 

"We expect a moderating 21 per cent top-line CAGR in FY24-28, while operating leverage plays out. As a result, we forecast the company breaking even on Ebitda in FY25 and reaching a 20 per cent Ebitda margin by FY28. We view this as a key re-rating trigger," the brokerage said in its report. 
 

At the end of the September quarter, consolidated net loss for the fintech major stood at Rs 290 crore as against loss of Rs 571 crore in Q2FY23. Its revenue from operations, however, increased by 32 per cent year-on-year (Y-o-Y) to Rs 2,519 crore with Ebitda before ESOP at Rs 319 crore compared with Rs 153 crore in Q2FY23.
 

Paytm reported a customer base of 92 million monthly transacting users (MTUs), of which 37.5 million were merchants -- the highest in its peer group. 
 

Most users are small merchants using Paytm's QR code to accept UPI payments. However, nearly 25 per cent of its merchant base now has devices that are primarily soundboxes/mini PoS.
 

According to UBS, the merchant base at the top of the funnel is growing, while three products are getting monetised at the same time. 
 

"Paytm's infrastructure of app (95 million MTUs), PoS machines (0.9 million, 10 per cent share), QR codes (35 million merchants), and payment gateway, has earned it a 25 per cent payment GMV share in India. We expect a 24 per cent fee pool CAGR for payment providers, leading to a 27 per cent net payment revenue CAGR for Paytm in FY24-28," UBS said.
 

Loan biz in early growth stage 

At present, Paytm acts as a loan service provider on originations, and also acts as a collection agent for certain loans. It has three products: post-paid loans – one-month, low-ticket products similar to credit cards; personal loans (PLs); and merchant loans (MLs) for Paytm merchants.
 

"Paytm's share of total PL disbursement in India has been less than 2 per cent , and there is room for growth. In MLs, we expect the company to keep originating from the device merchant universe and to build modest 3.4 per cent penetration of MLs by FY28," the brokerage added.

Near-term outlook and Q3FY24 preview

The Vijay Shekhar Sharma-led company is set to post Q3FY24 results on Friday, January 19. 
 

Analysts at Dolat Capital expect revenue to rise by 10.7 per cent Q-o-Q/35.1 per cent Y-o-Y to Rs 2,786.9 crore, with loss narrowing to Rs 255 crore. 
 

It pegs Ebit loss at Rs 379.7 crore, down from Rs 411.1 crore in Q2FY24 and Rs 454.7 crore in Q3FY23. 
 

"The management's update on Loan business, Merchant business, and Consumer Payment business scale-up would be the key monitorables," it said.
 

"Paytm has seen a sharp correction in the last few months following the company's decision to cut down growth in its BNPL product. A stable asset quality in the BNPL portfolio, as the portfolio is cut down by 40-50 per cent, would provide a solid proof of the asset quality of the underlying portfolio. A significant deterioration would bring back questions on the quality of Paytm’s borrowers," added those at Bernstein with a target price of Rs 950 and an 'Outperform' rating.