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CLSA initiates coverage on Paytm with 'Sell' rating, bearish on SBI Card too

The brokerage house, in its July 27 report, said Paytm was well-placed to capture the digital payments trends, but “even after assuming a 19%GMV CAGR till FY40 and core PAT margins improving to 7 basis points versus negative 10 bps in FY22,” it arrives at a target price of Rs 500 for the stock.

July 28, 2022 / 05:10 PM IST
 
 
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CLSA India has initiated coverage on One 97 Communications (Paytm) with a 'SELL' rating citing its high-cost structure and inadequate revenue potential in its core payments business to cover that cost.

The brokerage house, in its July 27 report, said Paytm was well-placed to capture the digital payments trends, being both on the issuing and acquiring sides, but “even after assuming a 19% gross merchandise value (GMV) compound annual growth rate (CAGR) till FY40 and core PAT margins improving to 7 basis points (bps) versus negative 10 bps in FY22,” it arrives at a target price of Rs 500 for the stock.

The stock settled at Rs 715.65 on July 28. Compared to this price, CLSA is building in a potential downside of 30 percent.

Paytm stock has tumbled by two third ever since it was listed on the bourses as it has failed to exhibit a viable profitability plan. Though its business is doing relatively better, the company has never posted a profit.

CLSA said Paytm’s net take rate in the payments business improved from negative 30 bps in FY19 to 8 bps of GMV in FY22, driven by charging customers on certain transactions that were free earlier, lower processing costs due to higher volumes, and alternate merchant monetisation via devices.

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“With the scale-up of its merchant devices, Paytm should reach a net take rate of 11-14 bps in the medium term. Promotions and cashbacks have lowered from 32 bps of GMV in FY20 to 4 bps in FY22 but are unlikely to reduce much. Post-promotional costs, payments will likely be only a 9-10 bps net contribution margin business,” said Piran Engineer of CLSA.

Even excluding employee stock options, Paytm will likely incur a fixed cost of Rs 4,400 crore in FY23, CLSA said, adding that its estimate of contribution profit in payments is Rs 1,000 crore, which means payments can offset only 22% of fixed cost and the onus of breakeven lies on cross-selling.

In its latest business update, Paytm said its lending business scaled to 8.5 million total loan disbursals during the quarter ended June 2022, registering a YoY growth of 492 percent. This aggregates to a total loan value of Rs 5,554 crore ($703 million) during the quarter, translating into YoY growth of 779%.

“We expect breakeven in FY25 versus management’s guidance of Ebitda breakeven by Q2FY24,” said Engineer. “Paytm has been monetising its platform by enabling ticket booking, advertising and BNPL, personal loans, and merchant loans as a distributor. While it has scaled up well, the sustenance of this business is contingent on asset quality outcomes.”

SBI CARD - SELL

CLSA India has also initiated coverage on SBI Cards & Payment Services with a 'SELL' rating. It said the company has a good business model but there are challenges ahead.

“With rising competitive intensity, we expect growth to be slower than pre-Covid-19 levels. Margins will likely remain meaningfully below pre-pandemic levels too,” the brokerage house said. “While RoE is healthy at about 25 percent and the business model is stable, the stock offers little upside. We initiate coverage with a SELL rating and Rs 830 target.”

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own, not those of the website or its management. Moneycontrol.com advises users to check with certified experts before making any investment decisions.
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first published: Jul 28, 2022 05:07 pm
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