Shares of One97 Communications Ltd, Paytm's parent company, rose over 4 percent on Monday to ₹482.20 per share, after global brokerage house CLSA initiated a 'buy' rating on the stock with a target price of ₹650.
The stock is up 9 percent from its 52-week low of ₹439.60 hit on November 24.
Paytm shares have slumped over 70 percent since its listing in November last year and fallen over 60 percent in 2022 so far. According to a report by Bloomberg, the company has had the worst first-year share decline among major IPOs over the past ten years, and the agony is only getting worse.
However, CLSA believes that the stock calls for a look now and has upgraded it from a ‘sell’ to ‘buy’.
The brokerage in its report said that price correction makes risk-reward favourable. Due to the selling by a significant shareholder during the previous two weeks, the share price of Paytm has decreased by 25 percent to 30 percent.
At the same time, CLSA also pointed out that the key near-term risk is continued selling by pre-IPO investors.
"While our interactions with several investors over the past four months suggest some discomfort or uncertainty on scaling up the lending business, we think that the stock warrants a look now," said the brokerage in its report.
According to CLSA, the fintech company has more than $1billion cash on the balance sheet and cash burn should end in another 4-6 quarters.
Net take-rate improvements
According to the brokerage study, Paytm's net take-rate increased from zero to 13 bps over the previous two years as a result of lower processing expenses and a bigger percentage of revenue from its Soundbox. The brokerage projects that Soundbox will provide 14 percent of total payments income.
Revenue growth drivers
On the lending front, CLSA believes that the revenue potential in five years could be over ₹30 billion, provided that there are no asset-quality hiccups.
Further, it forecasts ‘cloud’ revenue to double to ₹14 billion over FY22-25 driven by increasing advertising revenue coupled with higher credit card sourcing income.
The brokerage said that Paytm would be earning an upfront fee plus a share of the spending through its credit cards business, which it recently started.
"In the most-recent earnings call, management commented that its aspiration is to issue 1 million cards per year in the next 12-18 months. While it has not disclosed numbers or commercials of the credit card partnerships, we take a dig at the potential revenue possibility," added the brokerage.
What can be done to improve investor confidence?
The brokerage feels that a few disclosures can be enhanced to improve investors confidence. "Firstly, while Paytm gives broad data on lending, it should disclose segment-wise lending revenue and delinquency details every quarter, just like NBFCs do," said CLSA.
According to the brokerage, breakup of revenue from payment services to customers and merchants is welcome.