JUNE 7, 2022
Paytm stock has tanked sharply from the IPO price. (Image: REUTERS)
Paytm shares have fallen 71% from their IPO price in around 7 months since listing on the stock exchanges. Despite the sharp correction in stock price, analysts at JP Morgan have reinstated their ‘Outperform’ rating on the scrip. The global brokerage firm had suspended rating for a brief period but prior to that, it had initiated coverage with an ‘overweight’ rating. This week, JP Morgan has reiterated its outlook but has trimmed the target price down to Rs 1,000 from Rs 1,200 apiece earlier. Shares of the fintech company have tanked severely, erasing massive investor wealth. The stock closed at Rs 617.8 per share on Tuesday.
“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,” analysts said in a report. One97 Communications, the parent company of Paytm, was the largest IPO on Dalal Street prior to LIC’s public issue. Paytm has faced the brunt of IPO investors who have lost significant capital in the company since its listing last year.
Paytm is a fintech giant having built sources of monetization across payments, commerce and financial services. However, the company is yet to turn profitable. Paytm has managed to grow its revenue and trim losses but profit still feels at a distance. JP Morgan’s estimates project the company will report a net profit in FY26.
Business picking up
Business, however, is picking up pace. “On both devices (soundbox + POS) and credit card sourcing, Paytm is seeing a sharp uptick in placement and sourcing income. We expect Paytm to sustain a 1 million/quarter new device placement run rate and expect card sourcing volumes velocity to reach 125K/quarter by year-end,” JP Morgan said. The number of devices has been on the rise which has driven a positive contribution to payments profitability. The number of devices has increased to 2.9 million at the end of the January-March quarter, up from 0.8 million a year ago.
Average monthly transacting users have also grown from 50.4 million in the first quarter of the financial year 2021 to 70.9 million in the last quarter.
Further, JP Morgan said that while Paytm does not directly take credit risk on loans syndicated, the losses for the company and the industry at large show contained levels of delinquencies in BNPL and merchant lending loans. “This in turn could start to drive some incentive income Q4 onwards. Our estimates for FS conservatively factor in co achieving Rs 250 billion in loan syndication against April 2022 annualized run rate of ~Rs 200 billion,” analysts wrote.
Target price and valuations
JP Morgan has raised their F23/24 revenue and adjusted EBITDA margin estimates by 1%/5%. “We value Paytm using a DCF valuation baking in rising cost of capital with an 18.5% COE and 20x exit multiple that implies a Rs 1,000 PT. This is supported by a SOTP valuation benchmarking EV/Sales multiples to global peers at 4x/10x/4x/8x for its Payments/Financial,” JP Morgan said.