Paytm’s share price traded over 3% higher on Tuesday as global brokerage firm UBS started coverage on the stock. Paytm shares gained as much as 3.73% to ₹742.20 apiece on the BSE.
UBS expects One 97 Communications, the parent company of fintech giant Paytm, to break even on EBITDA in FY25 and reach a 20% EBITDA margin by FY28. It sees this as a key re-rating trigger, as seen with other new-age companies like Zomato, where investors value profit growth more than pure growth.
The foreign brokerage initiated its coverage on Paytm with a ‘Buy’ rating and a target price of ₹900 per share, implying an increase of 25.8% from Monday’s closing price.
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Paytm’s omni-channel payments business has earned it a 25% industry-leading Gross Merchandise Value (GMV). Its large top-of-the-funnel payments business boosted monetization across commercial devices and loans.
“We believe that regulatory issues have passed for payments and expect Paytm to benefit from a 24% CAGR in the payments player share in FY23-28E. Beyond payments, Paytm’s lending grew 7 times in FY22-24E, with lending partners rising to nine in FY24 from four in FY22,” UBS said.
UBS also likes Paytm’s merchant loan (ML) as its proprietary merchant data and daily settlement indicate early delinquency. Hence, it forecasts an overall revenue CAGR (Compound Annual Growth Rate) of 21% for the company in FY24-28.
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Further, it expects Paytm EBITDA margin to gradually reach 20% by FY28.
“Paytm’s profitability improved, with the contribution margin improving to ~55% of revenue in FY24 and EBITDA (ex-ESOP costs) turning positive. This was helped by a slowdown in payment processing fee growth (improving payment margin) and costs related to marketing (combined 50% of costs),” UBS said.
The brokerage house expects the company to break even in EBITDA in FY25, helped by operating leverage and declining ESOP costs. It believes that the market is overestimating the marketing cost requirements of the business, as most of Paytm’s customer acquisitions have been done. UBS’s FY26-28 EBITDA estimates are 8-14% above consensus.
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Moreover, UBS believes Paytm shares are trading at a discount to their global peers. Paytm shares trade at 18x FY26E EV/EBITDA and FY26E 2.2x EV/net sales, at material discounts to global payment and Indian online peers.
“We value Paytm’s core business on DCF (13.7% COE; 20% trailing EBITDA margin, similar to those of global payment incumbents; long-term growth in line with consumption growth). We view EBITDA equity and EBITDA growth thereafter as a key re- valuation,” UBS said.
Shares of Paytm have grown over 22% in the past month, while the stock has grown over 34% in a year.
At 11:15 am, Paytm shares were trading 3.61% higher at ₹741.30 apiece on the BSE.
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Disclaimer: The opinions and recommendations made above are those of individual analysts or trading companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 16 Jan 2024, 11:18 IST