Paytm To Be EBITDA Positive In March 2023, Two Quarters Before Its Target: Goldman Sachs

Brokerage Goldman Sachs expects fintech giant Paytm to achieve adjusted EBITDA profitability in the March 2023 quarter, two quarters ahead of the company’s estimate of September 2023.

In a research report, the brokerage cited the Indian government’s approval of UPI reimbursement for FY23 for the change in its estimate about Paytm achieving operational profitability. 

Last week, the Centre approved an INR 2,600 Cr scheme to reimburse acquiring banks to promote usage of Rupay debit cards and low-value BHIM-UPI person-to-merchant (P2M) transactions.

Goldman Sachs said that this translates to about 8 basis points (bps) increase in the take rate for the overall industry, and it expects Paytm Payments bank to be one of the key beneficiaries of this incentive due to its highest UPI beneficiary bank market share of about 22%.

Moreover, as Paytm Payments Bank shares a part of this incentive with the parent entity Paytm, the latter’s share of UPI incentives in FY23 is expected to be INR 100 Cr-200 Cr (1%-2% of Paytm’s overall annual revenues), which would be reflected in the company’s March quarter results, the brokerage said.

Maintaining a ‘buy’ rating on Paytm, Goldman Sachs increased its price target (PT) on the startup to INR 1,120 from 1,100 earlier, which implies an upside of almost 113% to the stock’s last close on Tuesday (January 17).

“Paytm’s valuation multiples are at a discount to global/India peer group, for a growth outlook that is better or in-line with peer group. Our refreshed analysis suggests Paytm’s current share price is already pricing in multiple headwinds, with the stock trading close to its bear-case implied value,” the research note said.

The brokerage also said that Paytm’s risk-reward ratio is skewed to the upside. Besides, Paytm’s better-than-expected scale of high-margin lending portfolio is expected to be another catalyst to achieve profitability, it added.

“Paytm’s MTU (monthly transacting users), loan disbursals and devices deployed continue to surprise us positively,” it said.

In an upbeat operating performance update, Paytm recently said that It disbursed 3.7 Mn loans worth INR 3,666 Cr in December 2022. The fintech startup said that it was its best-ever month in terms of both metrics ever. Paytm’s loan disbursals also increased 2.37X year-on-year to 10.5 Mn in Q3 FY23.

Considering these growth factors, Goldman Sachs expects Paytm to report a strong Q3 FY23 with revenue growth of 45% year-on-year (YoY) and further decline in adjusted EBITDA loss.

However, shares of Paytm, after sharply rising for the last two weeks, have started declining again. Today, the shares fell almost 5% to INR 526.65 on the BSE.

However, Paytm wasn’t the only tech startup to see a decline today as most new-age tech stocks, including Zomato, Nykaa, Delhivery, and PB Fintech, slipped significantly. Most of these stocks have been under pressure since last year as large sell-offs have led to huge corrections in their share prices. 

Avinash Gorakshakar, head of research at Profitmart Securities, told Inc42 that most of the listed startups are expected to face negative market sentiments till they achieve their profitability targets and start generating cash flow.

“Because of the easy money which these companies have got from the PE funds, initially everybody thought that it is very easy to get a valuation, but if the data point numbers don’t come in terms of revenue, operating profit, ROE, these companies will continue to be very volatile unless we see some hard cash flow being generated,” Gorakshakar said, adding that valuations of most of these tech stocks are still expensive.

Gorakshakar also said that while a few positive news gave some momentum to Paytm shares for a few sessions, the market is ultimately looking at the company’s September 2023 outlook of becoming EBITDA positive. 

The popular brand can expect to get positive re-ratings from brokerages if it can achieve its operational profitability target, he added.

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