Brokerage house Macquarie Capital Securities (India) Pvt Ltd has ‘double’ upgraded Paytm's parent One97 Communications Ltd's stock to 'outperform' from 'underperform' following the company's robust third quarter earnings. The brokerage has also raised the target price by 78% to ₹800.
The fintech company achieved its operating profitability three quarters ahead of guidance, and reported earnings before interest, taxes, depreciation, and amortisation (EBITDA) before employee stock ownership plan (ESOP) cost at ₹31 crore.
The company in an exchange filing said that in Q3 FY23, contribution profit at ₹1,048 crore represented a growth of 131% on year and 24% on quarter. Contribution margin improved to 51% from 31% a year ago.
According to Macquarie Capital, the fintech giant has positively outperformed expectations on the distribution of financial services revenue by a wide margin and has also managed to keep the overall expenses and charges in control.
The brokerage said that at the time of listing, profit and free cash flow were not even a part of the management’s discussion. But it feels that the most recent core EBIDTA profitability report demonstrated a very noticeable shift in the management's strategy for generating profit.
According to channel checks of the brokerage house with some of the biggest lenders/partners of Paytm, the performance of post-paid as well as personal loans have continued to be quite strong, and the company has now seen several repeat purchases/transactions over the past 12 months, which assures Macquarie of the quality of these loans.
"Because penetration of post-paid loans and personal loans is just 4% and 0.8% of monthly transacting users (MTU), respectively, the leeway is significant for Paytm to sustain robust growth for the foreseeable future," added the brokerage.
Even though the fintech company does not carry any balance sheet risk on the loans originated, the brokerage believes that it carries significant business and reputational risk.
"Many buy now pay later (BNPL) models have failed across the world, including in India. A few months of bad performance could result in lenders withdrawing their credit lines, significantly affecting Paytm’s ability to grow," said the brokerage.
Further the brokerage in its report said that the company needs to do a lot on corporate governance front by getting an independent non-executive chairman, more independent members on the board, etc.
Since the listing of Paytm in November 2021, the stock has fallen around 70%.
Shares of One97 Communications Ltd closed Wednesday's session 15% higher at ₹677.60 apiece.
11 analysts polled by MintGenie on an average have a ‘buy’ call on the stock.