Macquarie Upgrades Paytm To 'Outperform', Shares Surge

Shares of One97 Communications Ltd. surged after Macquarie, the brokerage that had accurately predicted Paytm’s flop listing, upgraded the stock by two notches from 'underperform' to 'outperform'.

Paytm "has positively surprised on the distribution of financial services revenue by a wide margin and has also managed to control overall expenses and charges", Macquarie analysts wrote in a Feb. 8 note.

The brokerage also raised its target price on the stock from Rs 450 to Rs 800, implying a potential upside of over 36%.

Macquarie had initiated coverage on the Noida-based fintech hours before its debut in November 2021 and set a target price that implied a potential downside of more than 40%. The stock fell as much as 27.5% on its debut.

"At the time of listing, profit and free cash flow were not even a part of management’s discussion," Macquarie said in the latest note. "However, we see a very visible change in the approach of management to delivering profit, evidenced, we believe, by the core Ebitda profitability that was reported recently."

The Vijay Shekhar Sharma-led company on Feb. 3 said it achieved operating profitability before ESOP ahead of target of the September 2023 quarter. It pegged the operating profit before ESOPs at Rs 31 crore.

Paytm's distribution business was the point of a key change in Macquarie's outlook toward the company. "Paytm has been disbursing loans at a significant speed over the past eight quarters. The company does not carry any balance sheet risk, as these loans are held on the balance sheets of partner NBFCs and banks," it said.

It added that since the penetration of post-paid loans and personal loans is just 4% and 0.8% of monthly transacting users, respectively, the "leeway is significant for Paytm to sustain robust growth for the foreseeable future".

Macquarie, however, said the risks continued to remain. "Many buy now, pay later models have failed across the world, including in India. Although Paytm does not carry any balance sheet risk on the loans originated, it carries significant business and reputational risk. A few months of bad performance could result in lenders withdrawing their credit lines, significantly affecting Paytm's ability to grow," it said.

It also pointed to 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."

Shares of the company gained as much as 18.6%, or Rs 698 apiece, before closing 14.6% higher on Wednesday.

Of the 12 analysts tracking the company, nine maintain a 'buy,' three suggest a 'hold,' and none recommends a 'sell', according to Bloomberg data. The return potential of the stock implies an upside of 48.6%.