scorecardresearchWhy JPMorgan sees a 60% upside in Paytm despite a target price cut

Why JPMorgan sees a 60% upside in Paytm despite a target price cut

Updated: 08 Jun 2022, 03:30 PM IST
TL;DR.

The brokerage cut the target price of Paytm to 1,000, down from the earlier target of 1,200. Despite the latest reduction, the new target price indicates an upside of 60 percent in the stock.

The brokerage cut the target price of Paytm to  <span class='webrupee'>₹</span>1,000, down from the earlier target of  <span class='webrupee'>₹</span>1,200. Despite the latest reduction, the new target price indicates an upside of 60 percent in the stock.

The brokerage cut the target price of Paytm to 1,000, down from the earlier target of 1,200. Despite the latest reduction, the new target price indicates an upside of 60 percent in the stock.

Global brokerage firm JPMorgan reinstated its overweight rating on One97 Communications, the parent company of Paytm, but slashed its target price. The brokerage cut the target price of Paytm to 1,000, down from the earlier target of 1,200. Despite the latest reduction, the new target price indicates an upside of 60 percent in the stock.

JPMorgan is bullish on the stock on the back of a reduction in adjusted EBITDA loss and better cost controls. It added that improved profit markets set the stage for operating leverage from the second quarter.

"We believe a sustained improvement in the profit margin contribution at Paytm seen over the last two quarters sets the stage for operating leverage Q2F23 onwards as indirect costs moderate - resulting in a consistent downtrend in Adjusted EBITDA loss and an eventual path to breakeven," said the brokerage.

However, it is important to note that this target price is not even half of the issue price of 2,150. Paytm launched its IPO in November 2021.

Since listing, the stock has continued its decline and has not yet been able to scale its issue price even once. The stock has lost over 49 percent just this year and is currently trading around over 70 percent below its IPO price.

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The brokerage further added that the lending business scale up, an increased contribution from devices and credit card sourcing should result in consistent quarterly improvement in contribution profits which should touch near 40 percent by Q4FY23.

Despite the decline, the brokerage noted that the firm's sales growth and contribution profit are trending in the right direction and added that indirect cost control is key to EBITDA breakeven.

"Indirect cost control is the key to the EBITDA breakeven. The company has sharply increased its employee costs led by hiring in field force and the indirect cost will moderate from Q2FY23 onwards," said JPMorgan.

The brokerage raised its FY23/24 revenue and adjusted EBITDA margin estimates by 1 percent/5 percent and 6pp/7pp respectively on higher estimates of better margin.

For the March quarter, Paytm's net loss widened to 761.4 crore as compared to 441.8 crore in the same quarter last year. Revenue from operations, however, zoomed 89 percent YoY to 1,540.9 crore in Q4FY22 from 815.3 crore in the year-ago period.

The company's average Monthly Transacting Users (MTU), which is the number of unique users with at least one successful payment transaction in a month, rose 41 percent YoY to 7.09 crore, the company said in a statement.

Meanwhile, another brokerage Goldman Sachs has also set a target of 1,070 on the stock, whereas ICICI Securities has a target price of 1,285 for Paytm. However, Macquarie kept its target low at 450 as it believes profitability is still an uphill battle and that EBITDA losses may take 12 quarters to break even.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

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First Published: 08 Jun 2022, 03:30 PM IST