Paytm shares surge 5% on sustained Q4 growth, brokerages see up to 59% upside

• Paytm operator One97 Communications’ shares surged by over 5% on Monday after the company reported sustained business growth in Q4.
  
• The payments platform reported a sharp contraction in its losses to ₹168 crore in Q4 from ₹761 crore a year ago.
  
• Paytm’s Q4 performance has brokerages bullish on the company’s outlook, who now expect an upside of up to 59% in the company’s stock over the next 12 months.
  

Paytm operator One97 Communications’ shares surged by over 5% on Monday after the company reported sustained business growth for the second consecutive quarter and a sharp reduction in losses to ₹168 crore from ₹761 crore a year ago.

The company’s revenue surged 52% year-on-year (YoY) to ₹2,335 crore in the March quarter, while its gross merchandise value rose 40% to ₹3.62 lakh crore during this period.

Other key business metrics like merchant base and loan disbursements also witnessed strong growth during the fourth quarter – loan disbursements rose 253% YoY to ₹12,554 crore, while the merchant base grew 25% to 33.5 million in Q4.

Paytm managed to beat analyst expectations in terms of the bottom line, largely thanks to the full recognition of UPI incentives of ₹182 crore that it received in Q4.

For FY23, Paytm’s revenue grew 61% to ₹7,990 crore, primarily driven by monetisation of its payment services and improving scale of its lending business. Its net loss narrowed to ₹1,776 crore in FY23 from ₹2,393 crore in FY22.

Strong Q4 has brokerages bullish on the company’s outlook

The payments platform’s Q4 performance has brokerages bullish on the company’s outlook. Markets lapped up the company’s Q4 results, with the stock rising over 5% in mid-market trade on Monday. So far in 2023, Paytm’s shares are up by over 36%.

Brokerage estimates suggest that there is further upside of up to 59% over the next 12 months – with a target price of ₹1,150 per share – as compared to the current market price of ₹722.

“Paytm’s revenue growth profile is in line with its India internet peers, with profitability higher, and valuations that are at the lower end against its peers,” global brokerage Goldman Sachs said.

The brokerage added that it expects Paytm to become the most profitable company in its new-age internet startups universe in FY25.

Citi Research outlined that Paytm’s business model has other tailwinds as well, which will continue to boost its revenue and bottom line going forward.

“Paytm has several growth and profitability tailwinds in our view – digital payments continue to see robust growth and [there is] significant headroom for increase in penetration of lending products to existing consumers,” Citi Research said in a note.

Overall, brokerage recommendations are largely bullish, with only Yes Securities giving the stock a ‘neutral’ rating.


Note: Upside as compared to current market price

BNPL portfolio gets healthier

Paytm’s buy-now-pay-later (BNPL) portfolio has been a concern for investors. After remaining unchanged for five consecutive quarters, Paytm reported an improvement in its expected credit loss (ECL) in its BNPL portfolio to 0.75-1% in Q4 from 1.1-1.3% in Q3.

Another metric that has seen an improvement in Q4 is the bounce rate in Paytm’s BNPL portfolio, which came down to 10.5-12% in Q4 from 11-13% in Q3 in the postpaid segment.

“Sustainability of Paytm’s credit metrics has been a key investor concern, and these results should help build confidence around the scalability of the company’s lending book,” Goldman Sachs said.

Future catalysts for the Paytm stock

Looking beyond the buzzwords, the next set of catalysts for the Paytm stock will be its continued progress towards profitability and clearing regulatory hurdles.

“We see resolution of outstanding regulatory issues (ban on Paytm Payments Bank and online merchant onboarding) as the next set of catalysts for the stock,” Goldman Sachs added.

The recent push for enabling access to credit via UPI (unified payments interface) using RuPay credit cards is also another aspect to watch out for, according to the analysts at Citi Research.

Overall, the broad consensus among brokerages is that Paytm will achieve operating profitability by FY25. While lending partner concentration is one of the key aspects to monitor, the company is working on diluting it with plans to onboard up to 4 more partners in FY24.

SEE ALSO:

Adani group stocks tumble after MSCI tweak, market capitalisation falls by ₹23,000 crore

Britannia’s Q4 net profit rises 47% YoY to ₹559 crore on softer input costs

The skies are clearer for IndiGo stock to surge further as Go First’s troubles mount