Motilal Oswal Bullish On Paytm’s Lending Business, Hikes Price Target To INR 1,050

Motilal Oswal has raised its price target (PT) on fintech giant Paytm to INR 1,050 from INR 865 earlier on the back of the significant rally in the stock since the end of April and strong growth in its lending business.

The current PT implies an upside of almost 21% to the stock’s last close on Friday.

“We note that from an annualised Q1 FY23 run-rate of INR 222 Bn value of loans, the company has reached an annualised run-rate of about INR 600 Bn in Apr-May’23, and the same is tracking higher than our estimates,” the brokerage said. 

It also noted that Paytm’s merchant loan disbursements improved in May this year after a drag in April, backing its bullish stance on the company.

It is pertinent to note that a technology system upgrade undertaken by one of Paytm’s loan partners affected its disbursals in April but it regained momentum in May. The startup disbursed 44 Lakh loans in May versus 41 Lakh In April. The value of loans disbursed also increased over 33% month-on-month (MoM) to INR 5,502 Cr ($666 Mn) in May.

In fact, Paytm disbursed 85 Lakh loans worth INR 9,618 Cr ($1.2 Bn) in the first two months of Q1 FY24, registering a 54% and 169% year-on-year (YoY) jump, respectively. Paytm’s total merchant gross merchandise value (GMV) also saw a 35% YoY rise in April-May at INR 2.65 Lakh Cr ($32.1 Bn).

Based on these improvements in key metrics, Motilal Oswal also raised its FY25 GMV and disbursement estimates by 5% and 21%, respectively. It estimates the mix of financial revenue to increase to 32% by FY25 from 19% in FY23. 

The brokerage reiterated that Paytm is on track to report EBITDA breakeven in H2 FY25 and maintained its ‘buy’ rating on the stock.

“Paytm has seen moderation in payment processing charges, marketing activities, and promotional expenses over the recent years. Hence, direct expenses have moderated to about 51% of revenue in FY23 from 162% in FY19. Similarly, indirect expenses have moderated… While Paytm will continue to invest in growth and merchant base expansion, the improvement in operating leverage will nevertheless aid profitability,” said Motilal Oswal.

The brokerage’s bullish commentary comes days after Macquarie downgraded Paytm to ‘neutral’ rating from ‘outperform’, saying the startup’s lending business volume could be volatile in the long run. Macquaries also cited other regulatory and competitive risks, primarily from Jio Financial Services, as the reason behind the rating cut.

In fact, now PhonePe has also forayed into the merchant lending space, which can pose further competitive risks to Paytm.

Meanwhile, Motilal Oswal forecasts Paytm’s loan disbursements to register a CAGR of 80% over FY23-25, reaching INR 1.1 Tn (INR 110,000 Cr) in FY25.

“Paytm is looking to add more lending partners in FY24, which will help absorb the flow that it is capable of originating via its platform,” the brokerage said.

However, the Indian brokerage also noted supply overhang from some of the large shareholders and evolving regulatory environment as the key risks to its thesis on Paytm.

After gaining over 3% last week, Paytm shares fell on Monday (July 3). The shares were trading 2.19% lower at INR 849 on the BSE at 02:30 PM IST.

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