Paytm share price has been an underperformer since listing on the stock exchanges last year. Among other factors, investors have voiced concern about the company’s lack of profitability. However, the wind seems to be turning now as Dolat Capital says the path to profitability has been clearer for Paytm. “We largely subscribe to the management confidence on achieving Adjusted EBIDTA breakeven by H1FY24. Our confidence is stemming from multiple aspects in the business that indicate that would add to profit pools in the near future,” the brokerage firm said in a report. Analysts have pinned a target price of Rs 1400 per share on Paytm (One 97 Communications), implying a 90% upside from today’s levels.
Path to profitability clearer
Dolat Capital’s confidence in Paytm’s business prospects stems from various factors, including platform leverage. “Paytm has a significant advantage of being a true platform with no real-world marginal cost attached to most of its business use cases and thus can scale up with significant leverage,” analysts said. Paytm has reduced its operating losses by Rs 580 million from Q2FY22 to Q4FY22. Further, analysts noted that the company is also going to accrue a strong incentive-based revenue stream on its Personal/Merchant loan portfolio in FY23 that would add ~Rs0.5 billion straight to Operating Profits.
Analysts noted that Paytm could better see monetization even on UPI-based payments with the introduction of platform fees on consumer payments. “…. various initiatives, such as introduction of platform fees on utility payments, scaleled improvement in Payment Processing Charges (1300bps savings in FY22) and overall operating leverage, will ensure a timely path to profitability by H1FY24, and eventual creation of large profit pools,” Dolar Capital said.
Contribution Margin improves
Paytm’s contribution margin showed an improvement of 383bps on-quarter basis to 35% with a Contribution Profit of Rs 5.4 billion in the January-March quarter. “This improvement was driven by margin improvement in Payments and growth in high-margin offerings such as lending and cloud service,” Dolat Capital said. Further factors such as reduction of Processing Charge Cost and Better leveraging of the platform via optimization of transaction routing have led to better performance.
Paytm’s ESOP cost have also gone down by 7%. “Paytm shared going forward, present employee base is sufficient for FY2023, company remains at adequate capacity. Growth rate in employee cost is expected to moderate over time, along with indirect expenses,” the report said.
Target price and valuations
Analysts said that they believe Paytm can compound its revenues by 17x over a decade and would turn highly profitable and positive on cash generation by FY25E and thus believe DCF valuation is an ideal tool to value the real long-term potential of the business. With a target price of Rs 1400 per share, the stock is valued at 8.8x/6.3x on FY24/FY25E EV/Sales.