Paytm Shares Volatile After Q4 Results Even As Goldman Sachs Sees 86% Upside
According to Goldman Sachs, Paytm’s lending business has been scaling up well, while maintaining good credit metrics.
Goldman Sachs reiterated its ‘buy’ call on One97 Communications Ltd. as risk-reward for Paytm is skewed to the upside, and it remains well-positioned to capture share of digital payments in India.
Paytm’s fourth-quarter results “exhibited another quarter of strong and improving monetisation of the payments vertical, while growth momentum for financial services and cloud businesses remain robust”, the investment bank said in a May 22 report. “All this while cash burn has been improving, and the company reiterated its guidance of adjusted Ebitda breakeven by September 2023, which we see as a key catalyst for the stock.”
That even as the Vijay Shekhar Sharma-led company’s net loss widened from Rs 444.4 crore a year ago to Rs 762.5 crore in the quarter ended March.
Key Highlights (Consolidated, YoY)
Revenue from operations rose 89% to Rs 1,541 crore.
Operating loss before ESOPs narrowed by Rs 52 crore to Rs 368 crore.
Value of loans disbursed rose 417% to Rs 3,553 crore.
According to Goldman Sachs, Paytm’s lending business has been scaling up well, while maintaining good credit metrics, which should further help allay investor concerns. “Overall, we raise our top line estimates by 3-4% and expect growth momentum to sustain. We forecast 90% YoY revenue growth for Paytm in Q1 FY23, with 38% FY22-25E revenue CAGR.”
The financial services provider has set a target price of Rs 1,070 on the stock, up from Rs 1,060, implying an 86% potential upside. Paytm, it said, trades at 3.7x FY23E EV/sales, about 25% discount to global fintech peers. But its revenue growth, at 38% FY22-25E CAGR, is higher than global peers at 28%. “Our analysis suggests that Paytm’s current share price is implying a multiple of 2.1x for its payments business, materially lower than its peer group.”
The current share price, Goldman Sachs said, offers a “compelling entry point” into India’s largest, and among the fastest growing, fintech platforms. “We expect Paytm’s increase in scale and mix of non-payments revenue to result in an improving margin trend.”
Still, investors prefer staying on the sidelines on Paytm as regulatory concerns remain top of mind, in addition to skepticism about its ability to be profitable in the foreseeable future, Goldman Sachs said. “Our analysis suggests the stock is now pricing in significant regulatory, competition as well as execution headwinds, which we view as unwarranted.”
Key Catalysts
Continued market share gains in digital payments.
Removal of regulatory overhang on merchant discount rate and potential benefit from potential interchange on wallets.
Faster-than-expected scale up of the lending business, resulting in improving profit profile.
Approvals for a small finance bank licence.
Key Risks
Increase in competitive intensity, regulatory changes, slower-than-expected adoption of digital payments.
Potential disruption in partnerships, slower-than-expected scale-up of commerce, cloud and financial service revenue.
Sub-optimal capital allocation and lock-up expiry.
Not all are optimistic on Paytm though. Macquarie—the first to assign a bearish rating to the payments platform ahead of its debut on the bourses—sees “tough times ahead”. It has a target price of Rs 450 apiece, with an ‘underperform’ rating, for Paytm’s parent.
In its note reviewing Paytm's Q4 earnings, Macquarie said that Ebitda breakeven is "still elusive especially after considering competitive risks from UPI’s wallet challenger (UPI Lite) and regulatory risks". "Financial services business is still sub-scale and core business model uncertainties remain," it said.
Shares of Paytm fell as much as 4.08% in early trade on Monday. Thereafter, the stock gained as much as 9.7% to Rs 631.5 apiece, before closing 7.6% higher.
The stock has lost close to 75% since its listing in November.
Of the eight analysts tracking the company, three each suggest a ‘buy’ and a ‘sell’ and two recommend a ‘hold’, according to Bloomberg data. The average of the 12-month consensus price target implies an upside of 53.8%.