CLSA has upgraded its outlook on the stock of payment services company Paytm from 'sell' to 'buy', as per a report released by the foreign brokerage firm on November 28.
The recent price correction makes risk-reward "favourable", CLSA said, adding that the company has more than $1 billion cash on the balance sheet.
"While our interactions with several investors over the past four months suggests some discomfort or uncertainty on scaling up the lending business, we think that the stock warrants a look now," it said.
The brokerage is of the view that Paytm's cash burn should end in "another 4-6 quarters". The net take-rate "has improved by 13 bps", but fixed cost absorption remains key, it added.
After analysing the above factors, CLSA said it has decided to "upgrade (Paytm) to buy from sell with a TP (take profit) of Rs 650".
The key near-term risk, however, remains the continued selling by pre-IPO investors, it noted.
Over the past two weeks, Paytm’s share price has corrected 25-30 percent on the back of selling by a large shareholder, the report pointed out.
Shares of One 97 Communications, which runs Paytm, slumped to an all-time low last week, and crashed to of Rs 476.65 at the BSE on November 22.
The lock-in period for pre-IPO investors ended on November 15. Since then, a number of institutional investors have begun reducing their stake. SVF India Holdings (Cayman) offloaded 2.93 crore shares in Paytm at an average price of Rs 555.67 per share, which are worth Rs 1,630.89 crore. SVF, as of September 2022, held 11.32 crore shares or 17.45 percent stake in Paytm.
According to CLSA, Paytm's valuation is "comfortable", but it can take further measures to improve investor confidence.
"We derive comfort from nearly a third of market cap being attributable to cash on the balance sheet (Rs 92 billion). Paytm’s current market cap of US $3.5bn was last seen in 2016. Having said that, we feel there are a few disclosures that can be enhanced," it said.
"Firstly, while Paytm gives broad data on lending, it should disclose segment-wise lending revenue and delinquency details every quarter, just like NBFCs do. Breakup of revenue from payment services to customers and merchants is welcome."
The report added that loan and credit card distribution would be the "revenue growth drivers" for the company.
In lending, the revenue potential in five years could be over Rs 30 billion, "provided that there are no asset-quality hiccups", CLSA said.
"Further, we forecast ‘cloud’ revenue to double to Rs14bn over FY22-25 driven by increasing advertising revenue coupled with higher credit card sourcing income," it added.
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