The continuous downward trend in One 97 Communications (Paytm) since its listing seems to have come to end.
The stock has been muted in the last 1 year, down 3 percent. However, it has massively outperformed its new-age peers in this period. In comparison, FSN ECommerce Ventures (Nykaa) and Zomato have shed 45 percent and 32 percent, respectively, in the last 1 year.
The stock is positive in 2023 YTD, up around 6 percent after an over 12 percent jump in February on the back of better-than-expected December quarter (Q3FY23) results. However, it has shed 6 percent in March so far. It was flat in January.
However, it is important to note that even though its downfall has been arrested in the last 1 year, it is still down over 73 percent from its IPO price of ₹2,150 and 70 percent lower than its all-time high of ₹1961, hit on November 18, 2021.
Most experts were cautious on the stock till last year on the back of its weak performance as well as higher-than-expected losses in the earlier quarters.
Recently, many brokerages have turned positive on the stock on strong December quarter earnings.
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. The management had predicted achieving breakeven in the Q2FY24.
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.
A number of brokerages upgraded the stock post its December quarter numbers. Many brokerages also see the stock giving substantial returns going ahead.
One such brokerage is Citi Research, which sees the Paytm stock moving over ₹1,000 in the next 1 year. The global brokerage firm has a ‘buy’ call on the stock with a target price of ₹1,061, implying a potential upside of over 83 percent from its current market price (CMP) of ₹578, as on March 17, 2023, on the back of attractive valuation and risks priced-in.
"We think Paytm has several existing and emerging levers to drive long-term platform stickiness (BNPL, Devices, etc.) and improve overall profitability (Financial Services) in the business. Paytm's key edge is its first-mover advantage on both sides of the payments ecosystem which gives it a solid customer acquisition engine for new services – commerce, financial, or payments. The stock has declined materially from its IPO price of ₹2,150/sh, partly in line with the fintech sector de-rating YTD, compounded by concerns on profitability in the core payments business (overstated in our view) and regulatory headwinds in India (moderate risk in our view). At CMP, we think valuations are attractive and are pricing in most of the downside risks," said the brokerage.
The brokerage values Paytm on the sum-of-the-parts valuation (SOTP) basis, assigning different multiples to the three key verticals.
"We value the Payments business on an EV/GP basis at 13.5x Sep'24E (at par with global payment companies on EV/GP basis; EV/S: 4x) resulting in ₹454/share. We value the Financials Services business on EV/S at 12x (we expect higher profitability in the financial services vertical and in-line with global fintech offering similar services; multiple at 20 percent premium to global peers) – ₹388/share. We value the commerce and cloud vertical at 3x EV/S at the lower end of global e-commerce valuations – ₹85/share. Overall, this approach (+ net cash and investments) yields a target price of ₹1,061/share," explained Citi.
However, the brokerage cautioned that Paytm is a 'High Risk' stock based upon the quantitative model though its healthy net cash position and likely declining cash burn going forward do not support a High-Risk rating.
Key downside risks that could cause Paytm shares to trade below Citi's target price include:
(1) Competition: Digital Payments is super competitive. PhonePe and Google Pay have gained market share ahead of Paytm on UPI payments (P2P). In addition to rival platforms, such as PhonePe, several merchant payments players like Razorpay, Pine Labs, etc., have built vertical-specific platforms and command a head start, especially with the mid-market and large enterprise customers, noted Citi.
(2) Monetization and Profitability: UPI is the fastest growing digital payment instrument and is zero-MDR (merchant discount rates) for all participants, said Citi.
(3) Financial Services: Lending via distribution may not scale or front-end take-rate may substantially decline at a higher scale, it further stated.
(4) Regulatory: RBI may introduce new MDR-related regulations across digital payment products, and more regulator-driven interoperability may further reduce the relative data advantage of big platforms like Paytm. Incremental BNPL (buy now pay later) regulations may also affect Paytm shares, added Citi.
Recently, brokerage house Dolat Capital maintained its ‘buy’ call on the stock with a target price of ₹1,250, implying a potential upside of 116 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.
Global brokerage house Macquarie also ‘double’ upgraded the stock to 'outperform' from 'underperform' following the company's robust third-quarter earnings. The brokerage has also raised the target price by 78 percent to ₹800. The TP implies a potential upside of 38 percent.
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.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.