Shares of One 97 Communications (Paytm) jumped to their nine-month high on Friday, extending gains for the third straight session after brokerage firm BofA Securities upgraded the fintech major to ‘Buy’ and raised its target price to ₹885, indicating an upside of 14.5 percent from the current market price of ₹772 (as on June 8).
The stock rose as much as 4.7 percent in intraday deals on Friday to its day's high of ₹809.45. It touched ₹800-mark for the first time since August 2022. Meanwhile, in 3 sessions (including today), the stock has advanced 14 percent.
The stock has advanced over 25 percent in the last one year and over 52 percent just in 2023 YTD, rising in 5 of the 6 months in the current calendar year. The stock has surged nearly 15 percent just in June after a 6.6 percent gain in May. January 2023 was the only month in which, the stock was flat but in the red.
Along with BofA, global brokerage CLSA also retained its ‘Buy’ call with a target of ₹850, indicating a 10 percent upside.
The bullish view of the brokerages comes on the back of strong revenue momentum, operational leverage, as well as, a rise in loan distribution.
In the report, BofA said, "We find Paytm well positioned to continue to dominate the SME merchant landscape where the subscription model via Soundbox is improving merchant stickiness. We expect Paytm's momentum in BNPL/merchant lending to continue, albeit at a slower pace, leading to 34 percent revenue CAGR from FY23-26."
It sees Paytm's margins improving on the back of a revenue mix shift towards high-margin Soundbox & lending revenues. BofA estimates adj EBITDA margins to improve from -2 percent in FY23 to 8 percent by FY26.
BofA also expects Paytm to narrow its post losses per share, from ₹28 in FY23 to ₹19 in FY24 and ₹6.2 in FY25.
The brokerage believes that operational leverage could further surprise both its and consensus estimates. Also, it added that reduced competition in the payments space will also help the fintech firm.
It further added that Paytm is in a "sweet spot" with limited competition, pointing out that in the last six months, the competitive intensity has fallen further with most fintechs struggling due to funding winter, stricter RBI norms, and declining discounts. Thus, it sees limited competition for Paytm in its soundbox business as well as in the BNPL/merchant lending space. In the listed space, BofA considers Paytm as one of the beneficiaries of UPI uptake and potential ONDC traction.
Meanwhile, CLSA stated that Paytm has scaled up its loan distribution from nearly scratch to a quarterly run-rate disbursement level of ₹12,000 crore over the past eight quarters. The share of BNPL (buy now pay later) in total disbursements has been about 55 percent in the past few quarters.
In the report, CLSA explained Paytm’s lending business along with its accounting treatment in the P&L.
"For starters, Paytm is merely a digital sales and collection agent for its lending partners and does not underwrite any loans on its balance sheet. The company has three lending products: BNPL, personal loans and merchant loans. It has tied up with five NBFCs, which carry the loans on their balance sheets. Buy now pay later (BNPL) is a high-volume but low-margin product for Paytm and is a funnel for obtaining personal loan customers. The other two products are low-volume but high margin," it explained.
CLSA further added that as per a credit bureau report, the total small-ticket personal loan AUM in India was only ₹30,000 crore as of September 2022.
In the BNPL space, the brokerage informed that Paytm earns MDR (merchant discount rate) from large merchants (but not from small ones) and passes on the interchange to the lender (similar to the flow in credit cards). Apart from this, the lender charges a processing fee from some customers and also earns late payment penalties as the case may be. The lender then pays Paytm a processing fee for loan origination. On the whole, the lender makes around 200-220bp while Paytm makes 80-90bp. If collections are better than mutually estimated, Paytm gets a collection incentive too (three months post the due date), it stated.
The brokerage informed that the average loan ticket size in personal loans is ₹1,30,000 while that in merchant loans is ₹1,70,000. The flow of fees is more straightforward than in BNPL. In these segments, Paytm earns 4 percent of the disbursed amount upfront from the lender. Collection incentive, if any, accrues three months after loan closure – ie 15-18 months after loan disbursement.
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.