CLSA Upgrades Beaten-Down Paytm Stock To 'Buy'
CLSA says Paytm "warrants a look" after the recent selloff as it has “potential to scale up”.
CLSA upgraded beaten-down Paytm to "buy" from "sell" citing that the stock "warrants a look" after the recent drawdown.
One 97 Communications Ltd., the operator of Paytm, saw its valuation decline in the last two weeks after share prices fell 27% as a lock-up period set in the IPO expired. The selloff also deepened after research firm Macquarie said that Paytm could be at risk from Jio Financial Services.
Given the stock has plunged more than 78% from its IPO price of Rs 2,150, CLSA believes it warrants a look, especially given the “potential to scale up”.
The research house set a target price of Rs 650 on Paytm in its Nov. 28 report, implying a 40% upside from current levels.
"While our interactions with several investors over the past four months suggest some discomfort or uncertainty about scaling up the lending business, we think that the stock warrants a look now," CLSA said.
CLSA said the company has more than $1 billion in cash on its balance sheet, and the cash burn should end in another four to six quarters.
"In lending, we believe the revenue potential in five years could be over Rs 3,000 crore, provided that there are no asset-quality hiccups," the global research house said. "[However] given that digital lending in India is very nascent, it is hard to say whether it will scale up well."
"We forecast cloud revenue to double to Rs 1,400 crore over FY22-25 driven by increasing advertising revenue coupled with higher credit card sourcing income," it said, adding that Paytm's co-branded credit cards with HDFC Bank Ltd. and SBI Cards and Payment Services Ltd. also have "potential to scale up".
Over the past two years, Paytm's net take-rate, or commission, has gone from zero to 13 basis points. This is because it has been able to negotiate lower processing fees and offer its "Soundbox" to 50 lakh merchants. However, further meaningful expansion of take-rates would be difficult given the competition for Soundbox from PhonePe and the increasing share of UPI transactions, which have zero commissions, the research house said.
While raising concerns about Paytm's large fixed cost structure of around Rs 4,600 crore annually, CLSA said, "Paytm needs to somehow curtail fixed costs — a 10% cut in fixed costs could result in a 25% core Ebitda upgrade for FY27."
The other unpredictable near-term risk for Paytm, according to CLSA, is the continued offloading by pre-IPO investors. The pre-IPO lock-in period expired on Nov. 15, leaving a large number of holdings free to be traded for the company.
Paytm's market cap has tanked from Rs 1.15 lakh crore a year ago to below Rs 30,000 crore.
Despite the beating, brokerages such as Citi and Morgan Stanley are also bullish on the stock. Morgan Stanley has a target price of Rs 695, which means that the stock could go up by almost 50%. Citi, on the other hand, has a target price of Rs 1,055, implying a 134% upside potential.
Shares of One 97 Communications Ltd. gained as much as 3.9% to Rs 479.5 apiece on Tuesday. Of the 12 analysts tracking the company, seven maintain 'buy', three suggest 'hold' and two recommend 'sell'. The return potential of the stock implies a upside of 84.3%.
