Paytm Listing: Macquarie Initiates Coverage With 'Underperform', Target Implies 40% Downside From IPO Price

Macquarie initiates coverage on Paytm with 'underperform' rating, citing "lack of focus and direction".

<div class="paragraphs"><p>A shop advertises the use of the Paytm digital payment system in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)</p></div>
A shop advertises the use of the Paytm digital payment system in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Hours before One97 Communications Ltd. made its trading debut, Macquarie initiated coverage on Paytm's parent with a target price implying a potential downside of more than 40%.

The research firm assigned its lowest 'underperform' rating to the company, citing "lack of focus and direction" in the payments platform's business model, according to a report titled 'Too Many Fingers in Too Many Pies'. The company is a "cash guzzler" and achieving scale with profitability is going to be a big challenge, it said.

"Dabbling in multiple business lines inhibits Paytm from being a category leader in any business except wallets, which are becoming inconsequential with the meteoric rise in UPI payments," Macquarie said. "Competition and regulation will drive down unit economics and/or growth prospects in the medium term."

"Unless Paytm lends, it can’t make significant money by merely being a distributor," the research firm said. "We, therefore, question its ability to achieve scale with profitability."

One97 Communications lists on Thursday after completing its Rs 18,300-crore IPO, the fourth-least subscribed maiden offer of 2021.

'Underperform' is Macquarie's lowest rating, with 'neutral' and 'outperform' being the two levels above it. The brokerage set a target price of Rs 1,200 on Paytm, implying 44% downside from Rs 2,150 apiece, the upper band of the issue price.

Macquarie said competition will drive down unit economics for Paytm. "Most things that Paytm does, every other large ecosystem player like Amazon, Flipkart, Google are doing. The competition is quite evident in the 'buy now, pay later' space and distribution of various financial products," it said.

The research firm does not see Paytm generating positive free cash flow before FY30, despite factoring in an aggressive CAGR increase of about 50% over the next five years in the non-payment revenue, led by distribution business.

"We are also not enthused with the company’s complicated organisation structure, related-party transactions, churn in top management and a thinly staffed board with 75% of members being based out of India," Macquarie said. "Obtaining a small finance bank license could be difficult in our view given that Chinese-controlled firms own more than a 30% stake in Paytm."

The research firm, however, said that the key "game changer" for the Noida-based firm could be the ability to monetise UPI, "which could completely swing the investment case". A 10-basis-point fee on UPI provides a fair value of Rs 2,900-3,300, based on direct cash flow, according to Macquarie.