Jefferies Initiates A ‘BUY’ Rating On Paytm Stock As It Sees Upside Potential Of Over 37%

In another shot in the arm for the Paytm stock, brokerage firm Jefferies has initiated coverage on the fintech juggernaut with a BUY rating and a price target (PT) of INR 1,300, representing an upside potential of over 37%. 

Citing the fintech major’s credit business and the monetisation potential of its large ecosystem, Jefferies said that Paytm was well slated to enter the global list of large profitable fintechs in the next four quarters.

“… Continued momentum in credit originations (4x FY23-26E) and margin expansion in payments (300bps) will upfront profitability ahead of market expectation. In four quarters,  Paytm will enter the global list of large profitable fintechs and valuations are yet to reflect its changed profile. Initiate at Buy with a PT of INR 1,300,” said Jefferies. 

The brokerage firm also estimated that the fintech company was poised for sustainable profitable growth and, despite being profitable, would enjoy growth in excess of 30% and double-digit EBITDA margins. Jefferies added that the company was available at a discount valuation of 40% compared to a group of large fintechs globally.

Jefferies also noted that the company has accelerated the monetisation of its large user and merchant base via its credit offerings. It added that growth across all verticals, operational metrics, increased revenues and rising gross margins have put the company on the path to profitability. 

The brokerage also expects the growth momentum to continue, led largely by financial services and merchant subscription revenues (on the back of merchant device deployment). 

“Contribution profits will outpace revenues as margins improve by 300 bps to around 57%, led by a) rising share of financial services in revenue mix, and b) better core payments margins as a share of credit-linked spends in non-UPI GMV increases,” Jefferies added. 

Meanwhile, the firm also flagged regulatory issues, supply pressure from private equity (PE) selling and deterioration of asset quality (which may impact credit business growth) as major risk factors for the company going forward.

This comes barely a week after Goldman Sachs reiterated a BUY rating on the Paytm stock and increased its price target to INR 1,250 from INR 1,200 earlier, up 31% from the stock’s current levels. 

“We see upside to both Paytm earnings and multiples…, as we expect continued momentum in lending and payments, with strong operating leverage in the business model… We reiterate a Buy on Paytm with a 30% potential upside,” added Goldman Sachs.

The positive sentiment from the two brokerages is in line with the overall positive market sentiment towards the fintech major. After a major drubbing last year, the company’s shares have bounced back strongly, growing 78.52% on a year-to-date (YTD) basis. 

Paytm has broken 52-week highs multiple times in the past few weeks on the back of rising merchant subscriptions, the strong performance of Paytm’s lending vertical and a change in investor sentiment towards the stock. 

Overall, Paytm’s consolidated net loss declined 44.5% YoY to INR 358.4 Cr in Q1 FY24 while operating revenue zoomed 39% YoY to INR 2,342 Cr. In terms of operational metrics, Paytm disbursed 1.28 Cr worth INR 14,845 Cr in the quarter ended June 2023. 

The stock of One97 Communications, Paytm’s parent company, closed 0.65% higher at INR 948.05 on the BSE on Wednesday (October 18).

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