A host of analysts attended One 97 Communications’ Analyst Day meet, wherein the management provided insights into the business model across various segments. The Paytm’s management highlighted the large growth opportunity for the payments business in India with a potential of 10 crore merchants and more than 50 crore payment customers and opportunity to cross sell financial services and commerce business offerings to them. Here’s what brokerages that attended the meet said:
CLSA | Target Rs 650
CLSA said in Paytm’s first ever analyst meeting, the company management explained its business model and gave insights on its payments and lending businesses. On profitability, Paytm expects to become free cash flow positive in the next 12-18 months, which is in line with CLSA’s view of cash burn ending in the next 4-6 quarters. The foreign brokerage has maintained ‘Buy’ rating and target price of Rs 650. CLSA said the company has more than $1 billion in net cash (equating to more than 25 per cent of its current market cap).
“We use a long-term discounted earnings model to arrive at our target price. We factor in a risk-free rate of 7.75 per cent, beta of 1.25 times and risk-premium of 5.5 per cent. Our terminal growth rate assumption is 5 per cent. We arrive at a TP of Rs 650,” it said.
Goldman Sachs | Target Rs 1,100
Goldman Sachs said the Paytm provided incremental colour around aspects such as PPBL’s user onboarding ban, Paytm’s lending customer base and partner strategy, impact on device rentals from competition, profitability drivers (tracking ahead of expectation), and clarity around certain other regulatory issues.
The foreign brokerage said it is encouraged by new disclosures made by Paytm, the company’s focus on free cash flow (FCF) and profitability, reducing competition in devices, and focus on aligning business with regulations. That said, timelines around resolution of merchant and consumer onboarding (payment aggregator and payments bank bans, respectively) still remain unclear, it said.
“We incorporate new disclosures into our numbers, leading to limited estimate changes; we remain Buy rated (on Conviction List) on Paytm with an unchanged 12-month price target of Rs 1,100,” it said.
Morgan Stanley | Target Rs 695
Morgan Stanley said the Paytm management sounded confident of strong growth as well adjusted Ebitda break-even target by September 2023. With respect to regulations, the management doesn’t see any significant risk to its payment margins. Per management, the net payment margin should remain broadly steady,even if there is a reduction in interchange/MDR.
On payment profitability, management highlighted two key drivers: Payment processing margins and subscription revenues.
The company noted that payment processing margins are 7-9bps of GMV on a blended basis. UPI GMV take rate is 3-4 bps, which is largely government incentives. On non UPI GMV, the take rate is 15-18bps. The management expects net payment margins to stabilize at 5-7 bps as the mix continues to shift towards UPI. Meanwhile, in case of subscription revenues, the company charges average monthly rental of Rs 100 on active devices.
“The RBI banned new customer onboarding at Paytm Payments Bank & is yet to clarify changes to digital payment charges.
We apply adjusted FY26 EV/sales multiples of 3.5 times base, 2.3 times bear and 3.6 times bull and derive F25e EV, which we discount to December 2024 at a 13.9 per cent WACC. We then add net cash to arrive at price target. Relative valuation based on US payment firms,” it said.
JM Financial | Target Rs 600
JM Financial said while it remained cautious on Paytm’s business model since its initiation given the high cash burn, risk on take rates in financial services business and long road to profitability, its operating metrics are gradually improving with management’s focus on increasing efficiencies and profitability, which in turn should aid Paytm achieve EBITDA breakeven by FY26E.
“Further, Paytm’s stock price has corrected by 77 per cent since its IPO (last year) which has made risk reward favourable for Paytm. On our valuation metric of FY30E Ebitda discounted back to FY24E, Paytm is currently trading at 14x EV/Ebitda which is in line with average valuation of global peers. We upgrade Paytm to BUY with an unchanged TP of Rs 600 with upside risks possible if momentum in revenue continues along with cost moderation,” it said.
ICICI Securities | Target Rs 1,285
ICICI Securities said Paytm reiterated its continued focus on improving profitability and stated that the journey to attain operating profitability via consistent margin improvement has exceeded its expectations in the past few quarters. It further emphasised its target to become an FCF-generating company in the next 12-18 months. The management, it said, enhanced clarity around the company’s business model by providing additional disclosures with respect to net payment take-rate of 7-9bps, average subscription fee (of Rs100 per month per active device), 2.5-3.5 per cent take-rate on loan sourcing and 0.5-1.5 per cent on collections, etc.
“Besides, the management pointed at growth drivers in the various business segments and threw light on how it plans to generate free cashflow (FCF). Lastly, clarifications provided around regulatory developments with no onerous outcome provide further comfort. Maintain BUY with an unchanged target price of Rs1,285 based on customer lifetime value methodology,” the brokerage said.
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