Paytm Gets Double Upgrade From Macquarie; Shares Jump 15%

Shares of Paytm jumped 15% to INR 677.6 on the BSE on Wednesday (February 8), rising for the third straight session on the back of a positive market sentiment after it reported better-than-expected Q3 FY23 results.

The startup achieving adjusted EBITDA profitability in Q3 FY23, three quarters before its estimates, has changed the sentiment around the stock. Brokerage Macquarie became the latest brokerage to be bullish on Paytm, double upgrading the stock to ‘outperform’ from the previous ‘underperform’ rating.

It also increased its price target (PT) on Paytm to INR 800 from INR 450, implying an upside of 18% to the stock’s last close. 

It must be noted that a few months back Macquarie had said that Jio Financial Services’ entry as a separate entity in the public market could pose a threat to other fintech business models, including Paytm’s. The commentary had an adverse impact on the already-battered Paytm stock for a few weeks. 

During its earlier PT cut on Paytm in January 2022, the brokerage also highlighted a few challenges that the fintech startup could face, including the Reserve Bank of India’s (RBI’s) charges on digital payments, its application for insurance broking being rejected, and leadership exodus.

However, in the latest research report published today, Macquarie noted that Paytm has “positively surprised” on the distribution of financial services revenue by a wide margin. The brokerage is now also positive on the startup’s ability to control overall expenses and charges.

“At the time of listing, profit and free cash flow were not even a part of management’s discussion. However, we see a very visible change in approach of management to deliver profit, evidenced, we believe, by the core EBIDTA profitability that was reported recently,” Macquarie analysts said.

Paytm reported its Q3 results on Friday, announcing that it achieved its adjusted EBITDA profitability goal in the quarter. The startup saw about a 50% year-on-year (YoY) decline in its net loss to INR 392.1 Cr, with an over 41% YoY increase in operating revenue to INR 2,062 Cr during the quarter.

Besides, Paytm also released its operating performance report for January 2023 today. The startup said it disbursed 3.9 Mn loans worth INR 3,928 Cr ($480 Mn) during the month, registering a 103% and 327% YoY surge, respectively.

Macquarie said that the performance of post-paid as well as personal loans continues to be robust, and Paytm has now seen several repeat purchases/transactions over the past 12 months, which assures about the quality of these loans.

However, the brokerage continues to see several risks associated with regulatory and competition issues. Though the company does not carry any balance sheet risk on the loans originated, it carries significant business and reputational risk, the brokerage said. 

“A few months of bad performance could result in lenders withdrawing their credit lines, significantly affecting Paytm’s ability to grow,” said Macquarie. “We also believe a lot more needs to be done on corporate governance by getting an independent non-executive chairman, more independent members on the board.”

Following Paytm’s upbeat results, at least three other brokerages – Goldman Sachs, Citigroup, and CLSA – raised their PTs on Paytm earlier this week.