Macquarie Sees 36% Downside For Paytm, Morgan Stanley Predicts 47% Upside

Macquarie Research cut its target price for One97 Communications Ltd. shares as it sees “tough times ahead” for the parent of the digital payments platform Paytm.

To gain scale and size, fintechs need to go beyond distribution and lend, for which they need licences. With the Reserve Bank of India recently raising issues with Paytm Payments Bank and Chinese ownership being more than 25%, the probability of Paytm getting a small finance banking licence is “significantly lower now, thereby impeding its ability to lend”, the financial services provider—the first to assign a bearish rating to Paytm ahead of its debut on the bourses—said in a March 16 report.

“Given this, and competition from other fintechs in the payments space, we remain skeptical about Paytm's longer-term ability to generate free cash flow,” said the research house that had accurately predicted Paytm's slide after listing.

The RBI's regulations on digital payments and ‘buy-now-pay-later', and stricter KYC and compliance norms will all be adverse developments for fintech companies in general, potentially bringing down unit economics and/or growth, Macquarie said. “We see these as additional headwinds for Paytm, which could cloud its path towards profitability.”

Macquarie cut its target price for Paytm's parent by about 36% to Rs 450 apiece as it reduced price-to-sales growth multiple from 0.35x to 0.2x, effectively valuing Paytm at 4.5x December 2023E sales versus the earlier 7x sales. It maintained ‘underperform' rating on the stock.

The financial services provider has also advised investors to avoid ‘bottom fishing'—investing with the idea of ‘buying the dip'.

The challenge in valuing fintechs or new-age companies in general is negative earnings and free cash flow, the report said. “Multiples are based on sales numbers—the level of subjectivity here can be very high. Hence, multiples for such companies can correct very sharply.”

“Risks to our recommendation include monetisation of UPI and receipt of a banking licence,” it said.

But not all brokerages are as pessimistic.

Morgan Stanley, in a March 16 report, said its interaction with the management suggested improving business conditions.

The company continues to gain market across payment verticals and there has been a steady improvement in contribution margins. Contribution profit is defined as revenue from operations less variable costs.

The company is also nearing the end of investment cycle, which should help faster Ebitda break-even, Morgan Stanley said.

The management, it said, has clarified that the RBI's recent restrictions are on account of IT and KYC related issues and not due to data access or localisation concerns.

Morgan Stanley has a price target of Rs 935 on the stock.

Shares of Paytm were trading 2.63% down at Rs 617.4 apiece as of 10:41 a.m. on Thursday. The stock has slumped 72% since its listing in November 2021. Of the nine analysts tracking One97 Communications, four have a ‘buy' rating, two suggest a ‘hold' and three recommend a ‘sell', according to Bloomberg data.