Despite Looming Lock-In Expiry, Brokerages Raise Price Targets On Paytm Post Q2 Results

At least four brokerages, including BofA Global Research, J.P. Morgan, and Citigroup, have raised their price targets (PTs) for fintech giant Paytm after the announcement of its Q2 FY23 results. Most of the brokerages are bullish about the business and see the stock’s current price as a good entry point. 

Earlier this week, Paytm reported a 21% year-on-year (YoY) increase in its net loss to INR 571 Cr in Q2 FY23. However, loss declined 11% sequentially from INR 645 Cr reported. Paytm’s EBITDA loss during the quarter, excluding ESOP costs, narrowed 61% YoY to INR 166 Cr.

Despite the impending lock-in expiry for Paytm’s pre-IPO investors, J.P. Morgan raised its PT for the stock to INR 1,100 from INR 1,000 earlier, implying an upside of about 71% to its last close. The brokerage, which has an ‘overweight’ rating on the stock, expects Paytm to witness strong revenue growth across business segments driven by device monetisation in payments, financial services cross selling, ticketing recovery, and rising ad monetisation.

“We see revenues growing at a >44% CAGR over FY22-26, to ~$2.7 Bn, and CMs (contribution margins) rising to 48% by FY26,” it said, adding that the Q2 results are supportive of the fact that the business would achieve its adjusted EBITDA breakeven ahead of its own estimates.

During a post-earnings call, Paytm reiterated that it expects to achieve adjusted EBITDA breakeven by September 2023, adding that it is currently ahead of its estimates. 

Despite having a ‘neutral’ rating on the stock, BofA Global Research raised its price objective for Paytm to INR 730 from INR 700, implying an upside of over 13% to its last close as the brokerage remains optimistic on Paytm’s fundamentals.

However, it pointed out a higher competitive environment and regulatory uncertainties around digital lending and the fintech sector as a few risks that could slow down Paytm’s path to monetisation and delay achieving EBITDA breakeven.

Paytm’s lock-in period is set to expire on November 18, which is expected to lead to some sell-off. While the price volatility has already hurt Paytm significantly, analysts expect the stock to come under pressure after the end of the lock-in period. 

Indian brokerage JM Financial, which has a ‘sell’ rating on the stock, pointed out that the lock-in expiry can hit the stock. “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,” it added. 

It raised its PT for Paytm to INR 600 from INR 525 earlier, but it still implies a downside of about 7% to Paytm’s last close. 

JM Financial said while it likes Paytm’s approach for improving efficiencies and its focus on profitability, it expects the startup to achieve EBITDA breakeven by FY26.

“…we remain concerned on the downside risks to the take-rates in financial services business though management remains optimistic in this regard,” it added.

Shares of Paytm closed 1.3% lower at INR 643.45 on the BSE on Wednesday.

Meanwhile, with a ‘buy’ rating and a PT of INR 1,100, Goldman Sachs also acknowledged that the lock-in expiry might represent an overhang on Paytm stock.

However, despite the near-term headwind, the brokerage expects Paytm to deliver 40%-50% revenue growth for the next few quarters and continue its transition from a former payments-only business to one with a strong financial services portfolio, aiding profitability.

“We see the current share price as offering a compelling entry point into India’s largest and amongst the fastest-growing fintech platforms,” said the brokerage, adding that it expects Paytm to turn profitable at an adjusted EBITDA level by mid-FY24.

Citigroup also believes that Paytm can achieve its adjusted EBITDA breakeven target. Maintaining a ‘buy’ rating on the stock, the brokerage raised its PT to INR 1,055 from INR 998 earlier, implying an upside of around 64%.

Shares of Paytm have fallen over 51% in 2022 so far.

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