Paytm Among BofA Securities’ Top Picks In Asia Pacific For Q1 2024

One97 Communications Ltd., the parent company of Paytm, has secured a spot in BofA Securities’ list of top 10 short-term recommendations in the Asia Pacific region for the first quarter of 2024.

The brokerage said that these companies have the most significant market and business-related catalysts in the upcoming quarter. The list comprises eight ‘buy-rated’ stocks and two ‘underperform’ recommendations.

BofA reiterated its ‘buy’ rating on One97 Communication with a price objective of INR 1,165.

This comes almost a month after Paytm decided to scale down its BNPL business following the Reserve Bank of India’s (RBI) decision to tighten norms for lenders disbursing unsecured loans. Following the central bank’s move, BofA had said that some adverse impact of the measures was expected on Paytm.

However, in its latest research note, BofA said, “We believe the recent change in strategy from low ticket, low margin to high ticket, high margin loans is directionally positive and doesn’t change the structure of Paytm’s margins improving on back of revenue mix shift towards high margin Soundbox and lending revenues.”

The brokerage also believes that Paytm’s recalibration of the postpaid loans business is a step in the right direction as it would help control risks. Besides, it would also help it focus on the high-take-rate, higher ticket size loan segment. 

However, BofA sees regulatory headwinds and potential material stake sale by Paytm’s pre-IPO holders as the key risks to the stock.

Amid a tumultuous period for new-age tech stocks, the market capitalisation of Paytm plummeted to a mere $4 Bn by the close of 2022, sharply down from $13 Bn at the time of its initial listing.

In 2023, Paytm’s shares surged over 80%, driving up its market capitalisation beyond $7 Bn, thanks to improved financials and a strong loan disbursement business. However, the stock lost the momentum following Paytm’s decision to scale down its postpaid loan vertical. By December 2023, its market capitalisation declined back to around $4 Bn.

However, brokerage Bernstein does not expect the scaling down of postpaid loan vertical to have any major immediate impact. In a recent research note, Bernstein said that the key metrics to track from here on for Paytm would be its asset quality performance, its journey to the breakeven point, and regulatory developments.

“A stable asset quality in the BNPL portfolio, as the portfolio is cut down by 40-50% would provide a solid proof of the asset quality of the underlying portfolio,” said the brokerage. “A significant deterioration would bring back questions on the quality of Paytm’s borrowers.”

Besides, given the immediate impact of the BNPL slowdown is likely to be minimal, Bernstein expects Paytm to turn profitable this calendar year.

The brokerage is also of the opinion that as regulatory risks remain the biggest risks for Paytm, any development that has more favourable regulatory outcomes would be a major catalyst for the stock.

Bernstein holds its ‘outperform’ rating on Paytm and a price target of INR 950.

Last month, Paytm fired hundreds of employees citing the increasing usage of artificial intelligence-led automation.

Paytm reported a 49% year-on-year (YoY) decline in consolidated net loss to INR 291.7 Cr in the September quarter (Q2) of the financial year 2023-24 (FY24), helped by an increase in merchant subscription revenue, steady GMV growth, and rise in loan disbursements.

Shares of Paytm ended Friday’s session 2.5% higher at INR 685 on the BSE.

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