Morgan Stanley initiates overweight rating on Paytm; sets target price at Rs 1875

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Paytm owner One97 Communications Ltd has got its first positive rating from foreign brokerage firm Morgan Stanley after a weak debut on the stock exchanges and downgrades from many analysts.

Morgan Stanley has initiated overweight rating on the digital payment start-up and set a target price of Rs 1875 a share, up 44% from its Tuesday’s close with valuing the firm around $17 billion.

“Through its digital payment platform, we believe PAYTM has built a strong customer acquisition engine, which has achieved significant scale - both with consumers and merchants. India has a distinctive tech architecture and is significantly under-penetrated in financial services - PAYTM is well placed to leverage this via bank/NBFC partnerships, and is rapidly cross-selling financial services/ commerce at low incremental costs”, the brokerage firm said in a note to its investors.

“Paytm does not take credit risk and we believe the bank-fintech collaborative approach is synergistic, scalable and inline with regulatory guidelines. As financial services ramp up, we expect revenues and profitability to grow strongly over the next five years”, the brokerage firm added.

Brokerage firm Goldman Sachs also initiated neutral rating on the stock and set its target price of Rs 1630, implying 24% upside from Tuesday’s close.

“We expect most of Paytm's TAMs to grow at 20%+ CAGR over the next 5 years, and view Paytm as well-positioned given its industry-leading scale and engagement. However, we note that competitive intensity across most of Paytm's verticals is quite high, while regulatory landscape across Paytm's businesses is also fast evolving”, Goldman Sachs report said.

Goldman forecasts its gross merchandise value and revenue to grow 6x/5x from fiscal year 2022 levels to reach $641 billion/$3.2 billion by FY30, with an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 30%. Paytm trades at FY23 EV/Sales of 11 times broadly inline with global payment peers 11.8x and at a material premium to global commerce and cloud players at 4x-8x, the brokerages added.

Domestically, the firm got first buy rating from Dolat Capital with a target price of Rs 2500 a share.

Earlier, Macquarie Research and Goldman Sach has given underperform and neutral ratings respectively on the stock. Macquarie Research reduced its target price to ₹1,200 a share, down 40% from its issue price of ₹2,150 calling the company a 'cash guzzler'.

JM Financial also initiated sell rating on 27 November and given target price of Rs 1240 a share.

Both Morgan Stanley and Goldman Sach are the lead managers to the Paytm IPO.

Paytm has lost nearly 38% since listing, eroding over Rs 52516 crore of its market value. At the IPO price, the firm was worth Rs 1.39 trillion.