Paytm shares rise 3% after Emkay upgrade to 'Add', doubles target price

Paytm shares in focus: Shares of Paytm, owned and operated by One97 Communications, were in demand on Tuesday, September 24, 2024 as the scrip rallied up to 3.30 per cent to hit an intraday high of Rs 673.05 per share. 

The surge in the Paytm stock was fueled by domestic brokerage Emkay’s upgrade to ‘Add’ from ‘Reduce.’ Notably, the brokerage raised the target price by 2 times or 100 per cent to Rs 750 per share, from Rs 375 earlier.

Analysts at Emkay said easing regulatory stance shall pave the way for approvals from the National Payment Corporation of India (NPCI)/Reserve Bank of India (RBI) to onboard new users/online merchants which should drive the business turnaround. Additionally, Paytm’s cost optimisation measures should put the company on the early path to profitability. 

"We upgrade Paytm to ‘Add’, revising up our discount cash flow (DCF)-based target price (TP) to Rs 750 per share (earlier Rs 375), implying 3.6x/3x FY6E/27E EV/operating revenue,” Emkay analysts said in a note. 

Factors behind the upgrade in rating:

Easing regulatory overhang and merchant franchise protection

According to analysts at Emkay, Paytm is well-positioned for a business recovery due to the easing of regulatory pressures and the protection of its substantial merchant base, which currently stands at approximately 41 million. 

The company has successfully transitioned its user base of 78 million (down from 100 million in Q1FY25) to new partner banks. This shift is expected to facilitate the long-awaited NPCI approval for onboarding new users, the brokerage said.

The recent Foreign Investment Promotion Board (FIPB) approval is also expected to pave the way for securing the long-awaited Payment Aggregator licence from the RBI, further safeguarding its online merchant operations. While the postpaid loan distribution segment remains sluggish, analysts believe, the merchant lending business is showing positive trends and is expected to be a key growth driver until new products, such as mortgage and gold loans, gain traction.

Once regulatory and partner concerns ease, the postpaid loan business may also pick up speed. Given the improved business outlook, analysts have revised the projections for payment gross gross merchandise value (GMV) and operational revenue compound annual growth rate (CAGR) to 31 per cent and 22 per cent for FY25-28, respectively, up from 25 per cent and 18 per cent.

Cost optimisation driving positive operating Ebitda by Q4FY25

Paytm is undertaking a major cost optimisation initiative, with plans for extensive restructuring in FY25. This includes voluntary and involuntary staff attrition and reduced marketing expenditures, as most of the payment transactions now shift to UPI. The company anticipates staff cost savings of Rs 400-500 crore, which, combined with reduced costs in its loan distribution business (notably lower collection costs due to its transition to a distribution-only model), should alleviate overall Ebitda pressure. Thus, analysts expect operating expenses (excluding depreciation and ESOP) to decrease by 15 per cent Y-o-Y in FY25.

This, along with growing traction in its broking business and interest income from the sale of entertainment assets, analysts believe, positions Paytm to achieve positive operating Ebitda (excluding ESOP and UPI incentives) by Q4FY25. 

Furthermore, enhanced revenue growth from its revitalised payment and lending operations, continuous cost optimisation (with opex as a percentage of revenue expected to decline from over 100 per cent to 95-89 per cent in FY26-28), and decreasing ESOP costs will further support the company in reaching PAT positivity by FY27, earlier than our previous FY28 estimate.

At 10:57 AM, shares of Paytm were trading 1.61 per cent higher at Rs 662 per share. In comparison, BSE Sensex was trading almost flat at 84,944.31 levels.