Macquarie Downgrades Paytm To ‘Neutral’, Cites Competitive Risks

Macquarie has downgraded Paytm to ‘neutral’ rating from ‘outperform’, citing competitive and regulatory risks.

The brokerage said the stock’s outperformance period is over and it believes that Paytm’s lending business volume can be volatile in the long run.

It must be noted that Paytm has surged 60% year to date in 2023, reversing last year’s massive decline of 60%. This surge came on the back of positive financial numbers of the company. It achieved EBITDA break even, sans ESOP costs, in Q3 FY23, ahead of the Street estimates. 

Besides, Paytm’s lending business has also been witnessing significant growth, further strengthening the market’s confidence in the fintech giant.

As per a Bloomberg report on Tuesday (June 27), Macquarie said, “Though Paytm does not carry any balance sheet risk on the loans originated, we think it carries significant business and reputation risk.”

“A few months of bad performance could result in lenders withdrawing their credit lines, significantly affecting its ability to grow,” it said.

The development comes months after Macquarie gave a double upgrade to Paytm. It changed the rating on the company to ‘outperform’ from ‘underperform’, expressing confidence in the fintech giant’s ability to control overall expenses and charges.

However, Macquarie had earlier also highlighted the risks associated with regulations and competition for Paytm.

Reiterating this, Macquarie said Jio Financial Services is the primary competition risk for Paytm. New announcements related to the financial services arm in the upcoming AGM of Reliance could be a negative trigger for the Vijay Shekhar Sharma-led company.

Macquarie maintained its price target (PT) of INR 800 on Paytm, which implies a downside of over 6% to the stock’s last close on Tuesday. Its shares ended today’s session at INR 852.8, up 1.7% on the BSE.

The brokerage is also of the opinion that Ant Financial’s decision to further sell its stake in Paytm could be an overhang.

Reports have been doing rounds since earlier this year that Alibaba-backed Ant Financial and SoftBank are looking to sell their stakes in the startup. In fact, SoftBank has already sold Paytm shares in several tranches and is expected to offload the stake further. 

Ant Financial held a 24.94% stake in Paytm at the end of March quarter of 2023. Meanwhile, Alibaba.Com Singapore E-Commerce Private Limited exited Paytm in February this year.

Is the Market Equally Bearish?

Despite the regulatory and competitive risks, a majority of the brokerages are bullish on Paytm’s growth trajectory.

Of the 12 analysts covering the stock, at least 10 have a ‘buy’ or higher rating on Paytm with an average PT of INR 988.55.

Recently, BofA Securities said that despite growing competition from the likes of BhartaPe and PhonePe, Paytm can effectively monetise its payments vertical through Soundbox. It said Paytm will continue to reap the benefits of being the first mover in the space, at least for the next one to two years.

In a recent research note on the Indian new-age tech stocks, Morgan Stanley also gave a thumbs up to Paytm. “Companies that have demonstrated strong growth along with profitability improvement since pre-Covid levels are PB Fintech, One97 and Zomato. We expect these three names to figure ahead of others on this balancing act over FY23-27 also,” it said.

However, the brokerage has PB Fintech, Nykaa, and Zomato as its top picks among the Indian new-age players for the second half of FY24. It has an ‘equal-weight’ rating for Paytm.

Earlier, after Paytm’s positive Q4 FY23 results, Goldman Sachs said it expected Paytm to become the “most profitable company” within its India internet coverage from FY25.

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