–       BofA, Citi, JP Morgan increase target price for Paytm

–    Believe Paytm’s strong Q2 with robust growth as well as cost optimization clearly indicates its ability and intent to achieve Cash-EBIDTA Breakeven ahead of its guided timeline of H1FY24

Paytm, India’s leading digital payments and financial services company and the pioneer of QR and mobile payments, continues to register robust growth in its diverse businesses in the second quarter. Bullish on the company’s outlook and EBITDA breakeven by September 2023, the major research firms have reiterated their ‘BUY’ ratings on Paytm. The company beat analyst estimates, and registered a growth of 76% in revenues y-o-y to Rs 1,914 crore.

Top brokerage firms such as JP Morgan, Morgan Stanley, Goldman Sachs, Dolat Analysis & Research Themes, and CITI have extended their confidence in Paytm’s strong performance. On average, analysts from top firms like Goldman Sachs, CITI, JP Morgan, Axis Capital, and ICICI Securities expected the company’s revenue to be Rs 1,836 crore — a growth of 69%.

‘Consistent Improvement in Profitability is a Key Catalyst for the Stock’

Research firm Goldman Sachs has mentioned: “Paytm reported another quarter of narrowing EBITDA at Rs (1.7) bn in 2QFY23, improved by 40% QoQ, with numbers better than our expectations across both topline and EBITDA. We have further raised our estimates for Paytm on the back of results, and we see ‘consistent improvement in profitability as a key catalyst for the stock’, and expect multiples for the stock to re-rate higher as Paytm approaches adjusted EBITDA breakeven by mid-CY23. Any potential market share caps on UPI (currently applicable from Jan ’23), and resolution of ban on Paytm Payment Bank Ltd (PPBL) are other key near term catalysts in our view.”

With Paytm in its conviction list, the firm has kept the target price at Rs 1,100. It has viewed Paytm as one of the most compelling growth stories within internet coverage and has raised the FY24 revenue estimates by 13% since initiation in Dec ’21. It has mentioned Lock-in expiry could be an overhang but fundamental story remains and expect a 40-50% revenue growth for next few quarters.

On delivering a sharp improvement in EBITDA margins, analysts at JP Morgan said:  “The company achieving EBITDA breakeven ahead of the schedule is supportive, and we have raised the target price from Rs 1,000 to Rs 1,100. We have increased Contribution margin assumptions to 44.5% and 46.2% from 43.8% and 44.9% for FY2023 and  FY2024, respectively.” The report has mentioned that it now estimates full year EBITDA profitability in FY2024 (previously FY2025).

Considering the industry view ‘attractive’ for the company, brokerage firm Morgan Stanley has said: “F2Q23 revenues were broadly in line with our estimate. GMV growth was strong, with improving payment spreads. Strong loan disbursement drove continued acceleration in revenue mix toward financial services. Contribution margin improved QoQ, and EBITDA margin was (9)%.”

Brokers	Ratings
Goldman Sachs	Buy
Dolat Analysis & Research Themes	Buy
Citi Research	Buy
JP Morgan	Overweight
Morgan Stanley	Equal-weight
BofA Global Research	Neutral

‘Strong Quarter; to Benefit from Positive Mix Effect from Lending Biz’

Reviewing the results, even Paytm’s strongest critic so far brokerage firm Macquarie Research mentioned that Paytm has recorded a ‘Solid Q2’. The report further added that Paytm’s EBITDA losses (before ESOP cost) narrowed to 9% of revenue in 2QFY23 versus 16% in 1QFY23. “Momentum in the financial services distribution business was healthy in 2Q; though the share of merchant loans remains low. There is no change in the Target Price of Rs 450,” said the report.

Meanwhile, BoFA Securities increased the target price to ₹730. The key highlight of the management is in three focus areas – Platform expansion, revenue growth across all businesses and improving unit economics while generating operating leverage. “We have increased the Target Price from Rs 700 to Rs 730 and maintained Neutral mainly on account of higher revenue and profit estimates. Paytm looks at small and big opportunities to improve profitability of all businesses. It expects to benefit from a positive mix effect from lending business, which would grow faster and has higher margin.”

The firm has increased its total loan disbursement estimates across the three categories – Paytm Postpaid, Personal Loan and Merchant Loan by 23% for FY2023 and 7% for FY24-26. It has also increased the revenue forecasts by 3.7% for FY2023, 2.4% for FY2024, and EBITDA forecasts with +4.8% Adj. EBITDA margin in FY2025 (previously 4.3%).

Raising the Target Price to Rs 1,055 per share from Rs 998 per share earlier, Citi Research has stated: “Solid ‘beat’ on our EBITDA forecasts at Rs (1.7) bn against Rs (2.4) bn; 1Q Rs (2.7) bn driven by sustained improvement in payment net margins, higher share of financial services’ vertical in overall revs (+200bps QoQ), and operating leverage – flat fixed costs QoQ on 14% QoQ growth in overall revenues. Paytm appears on track to deliver on its stated guidance of EBITDA break-even by Sep’23E – with net payment margins and contribution margins sustained near 1HFY23 levels and reined-in fixed costs, the guidance can be achieved, in our view. We raise our estimates; roll forward to Sep’24E (Mar’24E earlier).”

‘EBITDA Loss Margin (ex-ESOP) Trajectory saw High Improvement’

Analysts at Dolat said that robust growth as well as cost optimization clearly indicates Paytm’s ability and intent to achieve Cash-EBIDTA Breakeven ahead of its guided timeline of H1FY24, thus making a strong case for rerating, as the financials play out on guided path. “We maintain our Buy rating with a Target Price of ₹1,400 (implies 6.3x on FY25E EV/Sales). EBITDA Loss Margin (ex-ESOP) trajectory saw high improvement at (9)% from (16)% in Q1FY23,” said the report.

Highlighting the management’s approach to improve efficiencies and focus on profitability, research firm JM Financial said that Paytm’s operating metrics are gradually improving (net payment margin, ramp up of financial services). “We revise our target price to Rs 600, while we see limited fundamental downsides to valuation incrementally, the near-term event of lock-in expiry of pre-IPO shares (entire pre-IPO shareholding which is >85% of current shares outstanding) will lead to price volatility,” said the analysts.