After better-than-expected December quarter earnings results, domestic brokerage house Dolat Capital expects fintech firm One 97 Communications (Paytm) to give multi-bagger returns in the next 1 year.
In the quarter ended December 2022 (Q3FY23), the firm trimmed its net loss by almost half (50 percent) and also beat its own guidance turning EBITDA-positive in Q3FY23. The management had predicted achieving breakeven in the Q2FY24, which happened in the December quarter only (excluding ESOP pay-outs).
The company reported a net loss of ₹392 crore for the third quarter of the current financial year, as against a net loss of ₹778.4 crore for the same period a year ago, down nearly 50 percent YoY.
Post the Q3 earnings, the brokerage has maintained its buy call on the stock with a target price of ₹1,250, implying a potential upside of 124 percent.
"With robust growth, the company is benefiting significantly from Platform-led operating leverage, thus improving its profitability well ahead of its guided timeline of H1FY24. With the next focus on turning free cash flow (FCF) positive (ideally Q4 itself) Paytm has a strong case for a major re-rating," said Dolat.
The company's revenue jumped 41 percent YoY in the quarter under review to ₹2,062 crore, aided by a rise in merchant subscriptions to payment devices and loan disbursals. Its EBITDA before ESOP cost stood at ₹31 crore with the EBITDA (before ESOP) margin at 2 percent of revenues.
Its operating profit also rose to ₹424 crore from the year-ago period due to sustained improvement in contribution profit and strong operating leverage.
“UPI incentive will be a one-off and we will explicitly call it out as a one-off. ₹130 crore that we are quoting is for three quarters. The fourth quarter number will be topped on top of it. Because we are calling it a one-time item, we are not calling it free cash flow generative. We would rather say free cash flow generative when we are consistently sure of it,” Vijay Shekhar Sharma, founder and CEO of the company, said.
The average Monthly Transacting Users (MTU) on Paytm grew to 8.5 crores in December 2022 from 6.4 crores in December 2021.
"Paytm reported Q3 Revenues at ₹2,060 cr, up 42 percent on a YoY basis led by MTU growth of 32 percent and ARPU growth of 6 percent. Growth continued to be led by Financial Services at 256 percent YoY (28 percent QoQ), and seasonally strong Commerce business, up 37 percent YoY (48 percent QoQ). The payment business was impacted by the shift of the festive season, up 16 percent YoY. Adj. EBIDTA entered the green territory, 3 quarters ahead of guidance, and stood at ₹31 crore. EBITDA Margin (ex-ESOP) rose to +2 percent of Revenue from -9 percent in Q2FY23," the brokerage noted.
Achieving positive, FCF would be the next milestone for Paytm. Although the timeline is not committed, but as per the brokerage, it will be achievable by H1FY24 itself.
Given healthy growth performance in Q3FY23, and strong leading indicators across businesses (Loan growth, Devices subscription, MTU, etc.), Dolat largely retain it growth estimates for FY22-FY25 that implies 42 percent CAGR traction but given its relentless focus on optimisation, it has captured the same with improved operating margin margins by 250-300 bps for FY23-FY25E. These estimates imply the company would achieve EBIT/PAT break even by H2FY25, forecasted the brokerage.
In the next quarter (Q4FY23), Dolat expects a 14 percent QoQ growth in rupee Revenue driven by traction across verticals and also one time gain from ‘The UPI Incentive of about ₹170 crore. It also sees EBIT Margin improving by 694 bps QoQ driven by operating leverage and large incremental marginal revenue from UPI incentive.
Valuation and outlook
Given the huge customer base (35 crores) and robust tech platform, Dolat believes Paytm can compound its revenues by 10x 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 FY23-FY30E it expects a revenue CAGR of 33 percent and in second stage revenue CAGR of 15 percent over FY30-FY40E. It also sees PAT breaking even in FY25E and reaching a steady state EBIT Margin of 14 percent over FY30-FY40E. We have factored in the Cost of Capital of 11.2 percent and Terminal growth rate of 2 percent (beyond FY40e) in our DCF assumptions, noted Dolat.
"Improving Revenue growth, scaling up the lending business (6x on YoY basis), rising contribution profitability (44 percent in YTD basis – up 1500 bps on YoY basis), and aspiration to achieve break-even for adjusted EBITDA (by Q2FY24) all suggest bettering financial performance," said the brokerage.
It maintains a Buy rating on the stock with a target of ₹1,250 (implies 5x on FY25E EV/Sales). It noted that the target price has been lowered from ₹1400 to align with increased Cost-of-equity and the renewed need for Capex related to upfront investments in Devices hardware.
Stock price trend
Since reporting its Q3 earnings on February 6, the stock has surged over 27 percent in just 2 sessions. In February so far, the stock is up 15 percent after a flat January.
The stock shed 60 percent in 2022, and in the past 1 year, it has declined over 41 percent.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.