BofA Securities upgraded the rating on Paytm to ‘buy’ from neutral and raised its price target to INR 885 from INR 780 earlier
BofA said that the risk-reward on the stock is turning more positive and it believes Paytm is well-positioned to continue to dominate the SME merchant landscape
However, BofA also downgraded PB Fintech to 'underperform' from ‘buy’ rating, following which the stock fell 2.5% to INR 627.3 on Thursday
Shares of paytm
surged 6.24% on Thursday (June 8) to end the day at INR 772.35 on the BSE after BofA Securities upgraded its rating on the stock to ‘buy’ from ‘neutral’ earlier.
The Vijay Shekhar Sharma-led company’s shares jumped as much as 8% to INR 785.5 during the early trading hours. While the overall sentiment on the stock has been improving since March, today’s jump came on the back of BofA’s upgrade.
BofA, in its latest note on Paytm, said that the risk-reward on the stock is turning more positive. The international brokerage sees Paytm well-positioned to continue to dominate the SME merchant landscape where the subscription model via Soundbox is improving merchant stickiness.
“We see Paytm’s margins improving on the back of revenue mix shiſt towards high margin Soundbox and lending revenues,” the analysts at the brokerage said.
It must be noted that during the Q4 and FY23 result announcement last month, Paytm said that 68 Lakh merchants had opted for subscriptions to its payment devices such as Soundbox and point of sale (POS) as of March 31, 2023. This number was up 134% year-on-year (YoY).
Meanwhile, the number of merchants registered on the platform also increased 25% YoY to 3.35 Cr at the end of FY23.
Recently, Paytm disclosed that by the end of May, 75 lakh merchants were paying subscriptions for its payment devices.
BofA expects Paytm’s momentum in BNPL/merchant lending to continue, though at a slower pace, which will lead to a growth in revenue at a CAGR of 34% during FY23-FY26.
BofA is of the opinion that with Soundbox business and BNPL/merchant lending, Paytm is in a ‘sweet spot’ with limited competition.
Besides, in the last six months, the competitive intensity for Paytm has declined further with most fintech players struggling due to funding winter, stricter RBI norms, and declining discounts, the brokerage noted.
It estimates Paytm’s adjusted EBITDA margin to improve to 8% by FY26 from -2% in FY23, with chances being the company exceeding these expectations.
It is pertinent to note that Paytm’s adjusted EBITDA margin in the year ended March 2022 stood at -31%.
Besides, Paytm achieved adjusted EBITDA profitability in the December quarter of FY23 and reported an adjusted EBITDA margin of 1.5% in that quarter, which improved to 10% in the quarter ended March 31, 2023.
Helped by growth across business verticals, Paytm also reported a 78% narrowed loss at INR 167.5 Cr in Q4 FY23 and a 51% YoY surge in operating revenue to INR 2,334.5 Cr.
“We note that the payment momentum is also steady on the back of continued digitisation. We estimate consumer/merchant payments to grow at a 22% CAGR from FY23 to FY25,” said BofA. “In the listed space, we consider Paytm as one of the beneficiaries (of) UPI uptake and potential ONDC traction.”
BofA has raised its price target on Paytm to INR 885 from INR 780 earlier, which implies an upside of 14.6% to the stock’s last close.
Good Times For New-Age Tech Stocks
Paytm was one of the worst-performing stocks in 2022, falling over 60% due to market downturn. Other new-age tech stocks like Zomato, Nykaa, and PB Fintech also had a bad last year. However, many of these stocks have seen significant recovery in 2023 so far.
Shares of Zomato have rallied significantly in the last few sessions, reaching its IPO price band level of INR 72-INR 76 after over a year. On Thursday, shares of Zomato ended 1.7% higher at INR 75.8 on the BSE.
Analysts are of the opinion that Paytm reaching adjusted EBITDA profitability ahead of its target and Zomato following the same path, reporting adjusted EBITDA profitability in Q4 FY23, has improved the overall sentiment on new-age tech stocks.
An analyst told Inc42 that Zomato is expected to continue its momentum and could reach INR 90-INR 100 level in the near term.
Zomato listed on the BSE in 2021 at INR 115 apiece.
On the other hand, though growth seems to be a concern for Nykaa, its shares have also gained significantly over the last few sessions and ended today’s session at INR 135.6, up 0.7%, on the BSE.
Meanwhile, speaking on Paytm, Manish Shah, an independent analyst said, “Price emerges out of a prolonged consolidation between INR 740-INR 700. This consolidation is a contraction of volatility and the price is now breaking out of a symmetrical triangle pattern… Price seems to be gathering momentum and it is getting ready for a rally. On the upside, price shows a potential to move higher to INR 900-INR 910 over the next couple of weeks.”
However, BofA also downgraded PB Fintech today to ‘underperform’ from ‘buy’ rating and has a price target of INR 600 on it, which implies a downside of 4.5% to the stock’s last close on the BSE. The stock, which saw strong momentum in three straight sessions earlier this week, fell 2.5% today, closing the session at INR 627.3.
BofA opined that while PB Fintech is a good company, its path to INR 1,000 Cr profitability is largely priced in.
