Paytm stock volatile as brokerages mixed on results

One97 Communication (Paytm)

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Brokerage firm Macquarie Research in its note said it remained "underperform" on the stock and cut its target price to Rs 700, down 22% from the current rate.

Paytm reported a loss of Rs 780 crore in the quarter due to large costs of Rs 390 crore on ESOPs (employee stock options) granted before IPO. These costs will be recurring annual expenses of Rs 1,600 crore. The brokerage firm says that elevated ESOP expenses had not been factored into its estimates previously.

"We don’t believe that investors need to look at Ebitda ex ESOPs. Since ESOPs are integral for startups and there is dilution to minority shareholders when ESOPs are exercised, Ebitda including ESOP costs should be looked at. The issue with Paytm is that the ESOPs have been issued at a very nominal exercise price favouring the employees and the costs are being borne indirectly by the minority shareholders here," Macquarie Research said. It increased its FY22-26E loss estimates by 39-101% to factor in high recurring ESOP costs.

Brokerage firm Goldman Sachs upgraded the stock to buy and increased its target price to Rs 1,460, up 53% from its current rate.

"We believe Paytm’s strong topline growth of 89% YoY in 3QFY22 (11% ahead of GSe) will help allay investor concerns around declining payments take rate in recent years. In addition, Paytm continues to gain market share across both Unified Payments Interface (UPI) and non-UPI, and its lending business is seeing robust traction (+201% YoY revenue growth in 3Q)," Goldman Sachs said. It has increased topline estimates by 7-10% and expects growth momentum to sustain. The brokerage firm forecast 89% YoY revenue growth in the fourth quarter of FY22, with 35% FY22E-25E revenue compound annual growth rate.

"We expect Paytm’s increase in scale to result in an improving margin trend, with the company reaching adjusted Ebitda breakeven by FY25E. We also note that Paytm has a strong balance sheet ($1.4 billion cash as of December 2021), and see limited likelihood of the company needing to raise capital again ($210 million annual cash burn)," Goldman Sachs added.

Loan distribution business is still subscale for Paytm, with the company distributing only 39,000 merchant loans and 60,000 personal loans in the quarter. Ninety eight percent of loans by volume are BNPL (buy now pay later) where ticket sizes are less than Rs 3,000. Analysts remained sceptical of the scalability of this vertical in a pure-distribution model.