Paytm Earnings Review: Brokerages remain mixed even as loss narrows; Citi sees 58% upside

Even after fintech firm Paytm posted March quarter (Q4FY23) results above Street estimates, brokerages remain mixed on the stock. While Citi and Macquarie have bullish calls on the stock with expected upsides of around 11 percent and 58 percent, respectively; YES Securities is neutral on the stock and sees only 4 percent upside.

In Q4FY23, the company’s consolidated net loss narrowed to ₹168 crore from ₹761 crore in the year-ago period, and ₹392 crore a quarter ago. Meanwhile, its consolidated revenue from operations surged by nearly 52 percent YoY to ₹2,335 crore. The rise in revenue was driven by a rise in gross merchandise value (GMV), higher subscription revenues, as well as loan growth.

GMV for the quarter under review jumped 40 percent YoY to ₹3.62 lakh crore, whereas merchant subscriptions more than doubled. The average monthly transacting users (MTU) for Q4 also grew by 27 percent YoY to 9 crore.

Stock price trend

Shares of Paytm have fallen 66 percent from its IPO price of ₹2,150. While the stock continues to trade far below its issue price, some recovery has been witnessed in the stock, especially in the last 6 months.

Since hitting its all-time low of ₹439.60, in November 2022, the stock has been on the rise. It has surged 65 percent since November last year to currently trade around ₹723.

In the last 1 year as well, the stock is up 27 percent, meanwhile, in 2023 YTD, the stock has advanced over 36 percent, giving positive returns in 4 of the 5 months of the current calendar year so far.

It has jumped 12.5 percent in May so far after a 2.6 percent rise in April, a 6.6 percent gain in March and a 12.5 percent surge in February. However, it was flat but in the red in January.

What did brokerages say?

Citi: The brokerage has a ‘buy’ call on the stock with a target price of ₹1,144, indicating an upside of 58 percent from the current market price of ₹723 (as on March 9, 2023).

"We think Paytm has several existing and emerging levers to drive long-term platform stickiness (BNPL, Devices, etc.) and improve overall profitability (Financial Services) in the business. Paytm's key edge is its first-mover advantage on both sides of the payments ecosystem (90mn MTUs and 7mn merchant devices) which gives it a solid customer acquisition engine for new services – commerce, financial or payments. The stock has declined materially from its IPO price of ₹2,150/share, partly in line with the fintech sector de-rating YTD, compounded by concerns on profitability in the core payments business (overstated in our view) and regulatory headwinds in India (moderate risk in our view). At CMP, we think valuations are attractive and are pricing in most of the downside risks," it explained.

It also has a bull and bear case scenario target for Paytm. In the bull case, the brokerage has a target of ₹1,319 for the stock, indicating a potential upside of 82 percent. In the bull scenario, the brokerage assumes lending revenue at 25 percent, higher than anticipated owing to better traction for postpaid as well as a re-rating of the entire business given the trajectory of breakeven is faster than expected.

Meanwhile, in the bear case, the brokerage has a target of ₹594, indicating a downside of 18 percent. In this scenario, the brokerage assumes lending revenue growth stalling and payments margins declining on the competition. It also assumes an overall de-rating amid concerns regarding the declining platform strength.

Macquarie: The brokerage has an 'outperform' call on the stock with a target price of ₹800, indicating an upside of around 11 percent.

"PayTM reported EBITDA before ESOP costs at ₹230 crore vs our expectation of ₹160 crore largely because of higher UPI incentive fees. We had expected UPI fees of ₹130 crore to be recorded in Q4FY23 whereas the company recorded ₹182 crore which resulted in a beat in our EBITDA estimates," noted the brokerage. While the brokerage has retained ‘outperform’, it still believes that are many risks in the business.

As per the brokerage, many BNPL (buy now pay later) models have failed across the world including India and though Paytm does not carry any balance sheet risk on the loans originated, it carries significant business and reputation risk, it said. A few months of bad performance could result in lenders withdrawing their credit lines, significantly affecting its ability to grow, further observed Macquarie.

Meanwhile, there are also risks related to competition as well as regulatory issues as Paytm frequently seems to be facing regulatory ire for lapses on its part, it said, adding that it also believes a lot more needs to be done on corporate governance by getting an independent non-executive chairman, more independent members on the board, etc.

YES Securities: The brokerage remained 'neutral' on the stock with a target price of ₹750, indicating an upside of just around 4 percent. Greater profitability needs to be driven by operating leverage and not rising contribution margin, said the brokerage.

"Excluding the UPI incentive attributable to 9M, the contribution margin would be 52 percent. The contribution margin for Q3 was 51 percent which does not contain the UPI incentive, implying flattish margin evolution. Revenue in 4Q was contained at ₹130 crore worth of UPI incentive that is attributable to 9MFY23. Management stated that going forward, one can expect some improvement in contribution margin but it will not be as sharp as before. There is room for the adjusted EBITDA margin, however, to continue to move up for several years, driven by operating leverage," explained YES Securities.