The 80% increase in the target price comes days after Paytm reported a positive Ebitda (Earnings Before Interest, Taxes, Depreciation, and Amortisation) before ESOP costs of Rs 31 crore for the October-December quarter, alongside narrowing its losses for the quarter to Rs 392 crore from Rs 778.5 crore in the year-ago period.
A target price is an estimate of the future price of a stock usually given out by brokerage firms based on earnings forecasts and assumed valuation multiples.
ETtech looks at why Macquarie flipped its Paytm view and raised the stock price target
What has Macquarie said in its latest note?
The brokerage firm said that since its last target price cut, Paytm has “positively surprised” on the distribution of financial services revenue by a wide margin and managed to control overall expenses and charges.
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“At the time of listing, profit and free cash flow were not even a part of management’s discussion. However, we see a very visible change in the approach of management to deliver profit, evidenced, we believe, by the core Ebitda profitability. We raise our FY23–26E (estimated) revenue estimates by 33–51% and our target price by ~80% to Rs 800. We double upgrade the shares to Outperform from Underperform,” the research report noted. What are the risks involved for Paytm according to the report?
Macquarie said that although Paytm does not have a balance sheet risk on the loans originated, it does carry significant business and reputational risk and that a few months of bad performance could result in lenders withdrawing their credit lines, thus affecting the firm’s ability to grow.
“There are also risks related to competition as well as regulatory issues, with Paytm seemingly facing regulatory ire for lapses on its part. We also believe a lot more needs to be done on corporate governance by getting an independent non-executive chairman, more independent members on the board, etc,” the report read.
How has Paytm stock performed since its listing?
After an early surge in the stock price following the initial public offering in 2021, the scrip has underperformed when compared with benchmark indices. Since the day of Paytm’s listing, the Sensex has grown about 1% while the firm’s stock has fallen over 60%.
The performance of Paytm’s stock has mirrored that of other new-age companies such as Zomato, Nykaa, Delhivery, and PB Fintech — which have fallen at least 40% — since their market listings during the IPO bull run of 2021.
Since their respective listings, Zomato has plummeted 58%, Nykaa 63%, Delhivery 40% and PB Fintech 64% as of Wednesday noon.
What is the rationale behind Macquarie raising its target for Paytm scrip?
Macquarie has noted the continued reduction in losses, increase in loan disbursals, and Ebitda profitability as key catalysts behind the stock target price revision.
It said that the performance of post-paid (95%+ by volume), as well as personal loans, is robust, and the company has seen several repeat purchases or transactions over the past 12 months.
“Because penetration of post-paid loans and personal loans is just 4% and 0.8% of MTU (monthly transacting users), respectively, the leeway is significant for Paytm to sustain robust growth for the foreseeable future,” it said.
What had Macquarie said in the past?
Last year, Macquarie slashed the stock target price to Rs 450 — close to about 80% downside from its listing price of Rs 2,150.
“Since November 18 [listing date], Paytm’s stock price has fallen 40% against Sensex’s flat performance. We believe our revenue projection, particularly on the distribution side, is at risk and hence we pare down our revenue CAGR from 26% to 23% for FY21-26. We are roughly cutting revenue estimates for FY21-26E on an average by 10% every year due to lower distribution and commerce/cloud revenues offset partially by higher payment revenues,” the brokerage had said in January last year.
It also pointed out the high-level exits at the firm as a reason behind its downgrade. “Senior executives have been resigning from Paytm, which is a cause of concern and could impact business in our view if the current rate of attrition continues,” it said.
How has Paytm been performing?
Paytm parent One 97 Communications recorded a 42% increase in revenue from operations to Rs 2,062 crore in the December quarter. The increase in operating revenue was mainly fuelled by a surge in loan disbursals.
The company said its net payment margin grew to Rs 459 crore, up 120% year-on-year on the back of improved profitability in the payments business.
Paytm also reported a positive Ebitda before ESOP cost of Rs 31 crore, three quarters ahead of its guidance. This metric was negative Rs 393 crore in the December quarter last year.
“I wrote to you on April 6, 2022, and set a target for Ebitda before ESOP cost breakeven by the September 2023 quarter. I am very happy to share that our company has achieved this milestone of Ebitda before ESOP cost profitability in the December 2022 quarter itself,” Paytm founder and CEO Vijay Shekhar Sharma wrote in a letter to the shareholders.