Fintech firm One 97 Communications, the parent firm of Paytm, had lost over half of its investor wealth just this year. In 2022 YTD, the stock has fallen around 55 percent.
However, as compared to its IPO price of ₹2,150, the stock has crashed 72 percent. The stock, till date, has never hit its IPO price post its listing.
Despite the poor performance, domestic brokerage house Dolat Analysis & Research Themes (DART) sees the stock delivering multibagger returns in the next 1 year. The brokerage maintained its 'buy' call on the stock with a target price of ₹1,400, indicating a potential upside of 132 percent.
"Improving Revenue growth, scaling up the lending business, rising contribution profitability, and aspiration to achieve break-even for adjusted EBITDA (by Q2FY24) all suggest bettering financial performance," said the report.
In the September quarter (Q2FY23), Paytm impressed its investors with continued strong performance. The company posted a 76 percent YoY growth in revenue to ₹1,914 crore in the quarter under review from ₹1,086.4 crore in the September 2021 quarter.
Meanwhile, the company's losses were reduced by 11 percent on a sequential basis. The company's contribution profit surged 224 percent YoY to ₹843 crore.
The company's revenue from the financial services business was up 293 percent to ₹349 crore on a YoY basis and now accounts for 18 percent of total revenue, compared to 8 percent in September 2021 quarter.
The company also announced that in its rapidly growing lending business, it had disbursed 3.4 million loans in October, registering a YoY growth of 161 percent. For October, the total merchant GMV processed through Paytm aggregated to ₹1.18 lakh crore (USD 14 billion), marking a YoY growth of 42 percent.
"Strong Q2 with robust growth as well as cost optimization clearly indicates Paytm’s ability and intent to achieve Cash-EBIDTA Breakeven ahead of its guided timeline of H1FY24, thus making a strong case for re-rating, as the financials play out on the guided path," said the brokerage post the Q2 results.
It further noted that to drive the robust growth Paytm has consistently invested in talent for both Customers (Tech talent) as well as for merchant boarding (field force) initiatives. Employee cost (Ex-ESOP) is up 56 percent YoY in Q2 but the growth would tone down hereon as the New device merchant onboarding run rate would remain stable at 1mn device/quarter, it added.
Estimates
Also, financial services business contribution is expected to grow from 18 percent in Q2FY23 to nearly 30 percent in FY25E which in turn would drive robust growth and profitability, predicted the brokerage.
Given healthy growth performance in Q2FY23, and strong leading indicators across businesses, the brokerage largely retained our growth estimates for FY22-FY25 which implies a 42 percent CAGR traction.
"Also accounting for improved confidence in its break-even commentary target we have captured the same with improved OPM margins by 45bps/7bps for FY23/FY24E respectively. These estimates implies the company would achieve EBIDTA break even by Q1FY24 and PAT breakeven by FY25E," it estimated.
What to expect Next Quarter
The brokerage expects 8.6 percent QoQ growth in rupee Revenue driven by traction across verticals and EBIT Margin is seen improving by 559 bps QoQ driven by operating leverage and cost, said Dolat.
Gross Merchandises value (GMV)
Paytm’s GMV traction is consistently improving: GMV for the quarter stood at ₹3.1 lakh crore up 62 percent YoY. Revenues for the companies were up 76 percent on YoY basis led by monthly transacting user (MTU) growth of 39 percent and ARPU growth of 26 percent, said DART.
"Consistent increase in MTU, increased use case especially high GMV cases in Financial Services is driving robust growth in GMV. For the first time in the last many years the GMV growth lagged growth in the revenue growth, indicating a clear focus on a better-optimized business stream," stated the brokerage.
Valuation
Given the huge customer base (350mn) and robust tech platform, the brokerage believes Paytm can compound its revenues by 14x over the next decade and would turn highly profitable and positive on cash generation starting FY25E and thus believe DCF valuation is an ideal tool to value real long term potential of the business.
"The growth momentum is factored in two stage projections wherein over FY22-FY30E we expect revenue CAGR of 33 percent and in second stage revenue CAGR of 16 percent over FY30-FY40E. We expect it to turn PAT break even in FY25E and reach steady state EBIT Margin of 21 percent over FY30-FY40E," it forecasted.
Paytm has also received a thumbs-up from other major brokerages like JP Morgan, Morgan Stanley, Goldman Sachs, and CITI.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
