One97 Communications, the parent company of Paytm, has been in focus with major brokerages retaining their bullish recommendations on the firm, despite a 70 percent drop from its issue price. Following 'buy' calls from JPMorgan and Goldman Sachs recently, another global brokerage firm Citi has also retained its positive view on the stock.
Citi Research maintained a 'buy' call on Paytm on the back of the company's steady improvement in payments monetisation and rapid scaling up of financial services. It raised its target price to ₹915 from ₹900 earlier, indicating a potential upside of 48 percent.
Meanwhile, both JPMorgan and Goldman Sachs see over 60 percent upside in the battered stock, which has fallen over 50 percent just in 2022 year-to-date (YTD).
"We are resuming coverage of One 97 Communications (Paytm) following a brief period of internal restriction, and after the company’s Q4FY22 results. We expect growth in fixed opex to meaningfully slow over FY23-24E; driving an adjusted Ebitda breakeven by FY25. At 6x FYE EV/GP, valuations are relatively reasonable compared to its peers," Citi said in its note.
Further, Paytm currently trades at a substantial discount to Zomato Ltd. and FSN E-Commerce Ventures's Nykaa, making its valuations "relatively reasonable, Citi noted.
In a recent business update, Paytm's CEO Vijay Shekhar Sharma has said that the company expects to break even on operating Ebitda (before ESOP cost) by the quarter ending September 2023.
For the March quarter, Paytm's net loss widened to ₹761.4 crore as compared to ₹441.8 crore in the same quarter last year. Revenue from operations, however, zoomed 89 percent YoY to ₹1,540.9 crore in Q4FY22 from ₹815.3 crore in the year-ago period.
The brokerage noted that Paytm reported decent January-March quarter results. Payment gross margins are steadily improving on account of improvement in overall monetization with payment revenues up 80 percent YoY, it noted. Further, it pointed out that the financial services arm of Paytm continues to scale rapidly, with a strong focus on upselling. The post-paid acceptance network is at over 9 million; the customer base above 4 million, it said.
“Overall, improvement in contribution margins (35 percent in Q4; up from 21 percent YoY) have been offset by higher fixed opex (over 50 percent YoY in FY22); resulting in modest improvement in Adj EBITDA,” Citi said, adding that operating leverage should be more visible in FY23E for Paytm.
Citi expects Paytm’s gross profits to grow at 37 percent CAGR between FY22-26E and contribution margins to expand from 30 percent in FY22 to 39 percent in FY26E.
However, key risks to the upside are new the BNPL and Digital Payments regulations, competition in digital lending and sustainable scale-up of financial services, which is critical for profitability.
JPMorgan, in its recent report, stated that it is bullish on the stock on the back of a reduction in adjusted EBITDA loss and better cost controls. It added that improved profit markets set the stage for operating leverage from the second quarter.
Meanwhile, another brokerage Goldman Sachs has also set a target of ₹1,070 on the stock, whereas ICICI Securities has a target price of ₹1,285 for Paytm. However, Macquarie kept its target low at ₹450 as it believes profitability is still an uphill battle and that EBITDA losses may take 12 quarters to break even.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
