Paytm share price has tanked 45% so far in 2022, underperforming benchmark Nifty 50 which has advanced 1% YTD. Despite the stock eroding investors’ wealth, global brokerage Citi remains bullish on the stock, and has given Paytm shares a buy rating. Paytm shares were trading at Rs 727.40 today on NSE, down 1% from previous close. Though the stock has advanced over 7% in the past six months, it has fallen more than 45% in 2022 so far. Citi has set a target price of Rs 998 for the stock, meaning a 35% upside from Tuesday’s closing price of Rs 735 on NSE. The brokerage cited growth prospects in device penetration, merchant payment GMV share, and lending upsell opportunities among the reasons for its positive outlook on the stock.
Paytm stock rating: Buy
Target price: Rs 998, Upside 35%
“We value Paytm on SoTP basis, assigning different multiples to the three key verticals. We value the Payments business on an EV/GP basis at 15x FY24E (at par with global payment companies on EV/GP basis; EV/S: 3x) resulting in Rs 429 per share. We value the Financials Services business on EV/S at 15x (we expect higher profitability in the financial services vertical and in-line with global fintech offering similar services; multiple at 50% premium to global peers ) – Rs 353 per share. We value the commerce and cloud vertical at 3x EV/S at the lower end of global e-commerce valuations – Rs 80 per share. Overall, this approach (+ net cash and investments) yields a TP of Rs 998 per share,” the brokerage said in its report.
Citi, which hosted the Paytm management last week at its Global Tech and GEMs conferences, shared three key takeaways from the meet including chances of a likely cap on PPI Merchant Discount Rates (both wallet and prepaid cards) in line with RBI’s August discussion paper. The management calls growth in monthly transacting users (MTUs), device rollouts and lending distribution through upselling among key focus areas.
Talking about key growth areas for the company, analysts at Citi said that Paytm has an overall device penetration of 15% (45 lakh) of its current merchant base of 3 crore – device rollouts unlock rental revenues, merchant payment GMV share, and lending (distribution) upsell opportunities. Paytm continued to see growth in wallet MTUs, in addition to UPI MTUs. Overall, key growth drivers are under-served/financial inclusion markets across consumers (New-to-credit, eligible-for-credit) and merchants (QR-merchants), it added.
Key risks to upside target
According to analysts at Citi, Paytm stock is High Risk based upon their quantitative model. “But its healthy net cash position and likely declining cash burn going forward does not support a High Risk rating,” they said. Key downside risks that could cause Paytm shares to trade below Citi’s target price include: competition as PhonePe and Google Pay have gained market share ahead of Paytm on UPI payments (P2P). In addition to rival platforms, such as PhonePe, several merchant payments players like Razorpay, Pine Labs, etc., have built vertical specific platforms and command a head start, especially with the mid-market and large enterprise customers.
Monetization and profitability also remain key risks as UPI is the fastest growing digital payment instrument and is zero-MDR for all participants. Lending via distribution may not scale or front-end take-rate may substantially decline at higher scale which may cause the stock to underperform. Lastly, RBI may introduce new MDR related regulations across digital payment products, and more regulator-driven interoperability may further reduce the relative data advantage of big platforms like Paytm. Incremental BNPL regulations may also affect Paytm shares, according to the analysts.
Apart from Macquarie, most foreign brokerages including Goldman Sachs, JP Morgan, and others continue to remain bullish and back Paytm’s journey towards profitability. All of these brokerages have maintained a ‘Buy’ rating on the Paytm stock.
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