Analysts expect Paytm shares to more-than-double from here on. Here's why

While investors have preferred to stay on the sidelines on Paytm stock, Goldman Sachs believes the risk-reward for Paytm are skewed to the upside

Despite a widened loss in March quarter of fiscal 2021-22 (Q4FY22), analysts expect fintech major Paytm's share price to more-than-double from here on riding on improving margins, and expectations of becoming a adjusted-EBITDA breakeven company by the end of fiscal 2023-24 (FY24). Ebitda is earnings before interest, taxes, depreciation, and amortisation.

Analysts have the highest target of Rs 1,400 per share on the stock, implying an upside of 126 per cent. On the downside, however, the shares may fall up to 27.4 per cent to Rs 450.

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On the bourses, shares of One97 Communications-owned Paytm bounced back over 14 per cent from the day's low, to hit a high of Rs 631 per share, on the BSE on Monday. The shares, eventually, ended at Rs 620, up 7.7 per cent, as against a 0.07 per cent dip in the benchmark Sensex index.

While regulatory concerns, and doubts over Paytm's ability to turn profitable have kept investors on the sidelines, Goldman Sachs believes the risk-reward for Paytm are skewed to the upside.

"Paytm trades at 3.7x FY23E EV/Sales, a 25 per cent discount to global fintech peers. However, Paytm's revenue growth, at 38 per cent FY22-25E CAGR, is higher vs global peers at 28 per cent. Thus, Paytm's current share price is implying a multiple of 2.1x for its payments business, materially lower than its peer group," it said in a report dated May 22

The brokerage has retained a 'Buy' rating on Paytm and has raised its FY23E-25 revenue estimates by up to 4 per cent, and Ebitda by up to 12 per cent.

In Q4FY22, Paytm reported a net loss of Rs 763 crore, compared with a loss of Rs 444 crore a year earlier. Its revenue, however, jumped 89 per cent to Rs 154.1 crore. It reported cash Ebitda of -Rs 370 crore relative to -Rs 400 crore in Q3, translating into adjusted Ebitda margin of -24 per cent vs -27 per cent in Q3. Paytm has reiterated its guidance of adjusted Ebitda breakeven by September 2023.

Gross cash balance for Paytm as of March, 2022 stood at $1.2 billion, and Goldman Sachs expects it to turn profitable at adjusted Ebitda level by the end of FY24.

Q4 review and road ahead

The March quarter saw improved penetration for lending products and uptick in lending business led by the company's 'Buy Now Pay Later' (BNPL) product; enhanced contribution/adjusted-EBITDA (before ESOP) margins due to increased net payment rate, rising contribution of financial services revenue and contained marketing expenses; and sustained momentum in monthly transacting user (MTU) growth and deployment of offline devices.  

Individually, Paytm disbursed 6.5 million loans, up 48 per cent QoQ and 371 per cent YoY, worth Rs 3,550 crore. Within this, disbursements in BNPL / personal loan / merchant loan segments grew 83 per cent / 56 per cent / 19 per cent QoQ.

"This provides upsell opportunities in personal loans and credit cards, as already being witnessed with over 40 per cent of Paytm-branded credit cards are being issued to existing Postpaid users, and 50 per cent of postpaid customers are being offered personal loans," highlighted ICICI Securities.

Given this, ICICI Securities estimates that 18-19 million consumers (15 per cent of MTUs) and 1.2 million merchants will avail financing products through the Paytm platform by FY26. "We forecast financial services revenue to grow at a CAGR of 58 per cent over FY22-FY26, comprising 19 per cent of operating revenue (from less than 5 per cent/10 per cent in FY21/FY22),"  it added.

That apart, the monthly transacting user base of Paytm is likely to double over FY22-FY26 to 117 million. "We forecast the company's merchant gross merchandise value (GMV) to grow at 35 per cent CAGR over FY22-FY26 to reach Rs 28 trillion by FY26," ICICI Securities said.  MTU increased 10 per cent QoQ and 41 per cent YoY to 70.9 million in Q4.

That said, Macquarie believes as the Financial Services business remains sub-scale, and core business model uncertain, Paytm's profitability is still an uphill task. The brokerage has a 'Underperform' rating.