Paytm Gets A New 'Buy' As Jefferies Sees Two Factors Paying Off

One 97 Communications Ltd., the operator of Paytm, gets a 'buy' rating from Jefferies, citing acclerated monetisation of its large ecosystem and ramp-up of credit business.

Paytm is India's leading consumer payments network and market leader in merchant payments, according to Jefferies. "In the next four quarters, Paytm will turn profitable and be among the few large profitable fintechs globally that enjoy strong growth (>30%), double-digit Ebitda margins and stable profitability," the brokerage said in an Oct. 18 note.

Jefferies has set a target price of Rs 1,300, implying an upside return potential of 38%.

"With just 5% user penetration, loan disbursals have surged 10 times to over $8 billion (August 2023 ARR)," the note said.

The company's payments and revenue increased 2.5 times due to the growth in the merchant subscription business, and margins improved by 20 percentage points. This was driven by favorable industry trends and the management shedding unprofitable lines, the brokerage said.

In two years, the fintech company's revenues have jumped three times, raising gross margins from 13% to 54%. These improvements have set the company on a course towards profitability, Jefferies said.

The research firm expects revenue growth to remain in the fast lane (31% CAGR over FY23-26E), driven by:

• 55% CAGR in financial services revenues, led by four times jump in credit originations, and

• 50% CAGR in merchant subscription revenues, on the back of aggressive deployment of merchant devices (three times network expansion), as Paytm asserts its market leadership.

Contribution profits will outpace revenue, as margins improve by 300 basis points to 57%, led by rising share of financial services in revenue mix and better core payments margins, as share of credit-linked spends in non-UPI GMV increases, the note said.

A strong growth outlook, an improved revenue mix, and operating leverage should drive Ebitda margins (15% by FY26E) on a multiyear expansionary path.

"However, its valuations at 3.6x EV/revenue remain attractive, compared to the 5-6x multiple for this group. Paytm witnesses strong growth and steady margin expansion," Jefferies said.

In two years, Paytm has become the third largest non-bank consumption credit platform (by disbursals) and second largest acquisition platform, with 6 million new credit customer additions in FY23, according to the brokerage.

At system level, Paytm's market share in unsecured retail credit disbursals is now 2.8%, and given the strong outlook, Jefferies expects it to increase to 6% (by FY26E), led by 22% market share in BNPL (versus 12% currently) and 2% in personal loans (versus 1.3% currently).

Paytm is one of the leading payments super-apps, with a two-sided ecosystem consisting of a large base of consumers and merchants, Jefferies said.

Its acquisition engine remains robust, with a doubling of its active consumer base in the last two years to 94 million monthly active users and an 80% expansion of its merchant base to 36 million merchants (the highest in the industry), according to the brokerage.

Paytm has created a wide array of commerce initiatives around customers (ticketing, local mobility, events, etc.) and merchants (Soundbox devices, POS, etc.) that led to increased engagement on the platform, driving 80% growth in GMV/MTU in the same period, Jefferies said.

According to Jefferies, the key risks are:

• Regulatory: Indian regulators, unlike their global peers, have been proactive in laying down a regulatory framework for digital lending. Paytm's lending model is compliant and follows the regulation in letter and spirit with regard to risk underwriting.

• Asset quality: A decline in asset quality can impact growth as lenders slow down.

• Selling pressure from PE stake sales—as the lock-in period for pre-IPO investors ended in November 2022, two major shareholders have cumulatively sold more than $700 million, and 40% of economic ownership still resides with large private players.

Shares of the company fell as much as 1.29%, before paring losses to trade 0.22% higher at 10:06 a.m. That compares to a 0.43% advance in the benchmark NSE Nifty 50. The stock has risen 78.91% year-to-date.

Of the 15 analysts tracking the company, 13 maintain a 'buy' and two suggest a 'hold', according to Bloomberg data. The average of 12-month analyst target prices implies an upside of 12.9%.