Paytm stock gets 'Reduce' rating from Emkay; analysts see up to 12% downside

In the last six months, Paytm stock has nosedived over 61 percent, massively underperforming benchmark Nifty 50 which gained 12 percent during this period.

Domestic brokerage firm Emkay Global has initiated coverage on Paytm stock with a 'Reduce' rating. Following the recent regulatory salvo, Paytm's share price has corrected around 55 percent and the stock is currently trading nearly 80 percent below its post-IPO peak seen in November 2021.

The decline echoes the expected business/revenue dislocation in the payments/financial services verticals. This was aggravated by high key management personnel (KMP) and lending partner attrition, analysts noted. Emkay believes that Paytm is still in the disruption phase.

The fintech firm's business normalisation and growth re-acceleration is likely to be a long drawn-out process, mainly due to higher operational burn in payments, given the absence of the high-MDR wallet and rising share of low MDR UPI business, said Emkay.

Paytm shares have been under pressure since the Reserve Bank of India on January 31, 2024, imposed major business restrictions on its associate firm Paytm Payments Bank Limited (PPBL), including a bar on accepting fresh deposits and doing credit transactions after February 29.

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It is widely anticipated that when Paytm reports its March quarter results, the earnings will show the negative impact of the regulatory curbs.

In the December quarter, Paytm exhibited strong revenue growth on the back of distributing loans on its platform, which was also a high-margin business. The lending platform's commission contributed around 20 percent to the company's revenue and around 25 percent to its margin.

However, after the RBI ban on PPBL, the company has paused lending activities for more than a month. This is likely to have impacted the company's topline and bottom line more than it predicted in an investor conference call.

Paytm's jeopardised monetization strategy, with a sharp slowdown in financial services revenue amid rising asset quality and partner attrition/business scale-down risks, will hamper its profitability.

"Thus, we expect Paytm to turn EBITDA-positive only in FY28E and net profit-positive not before FY29E. This thus derails the company’s plans of turning PAT-positive in the near future," the brokerage said, adding that regulatory risks remain high, with its payment aggregator license in abeyance.

Also Read | Paytm's market share in bill payments drops by 3 percentage points in 2 months

Paytm is likely to see significant business disruption in FY25E; recuperation would commence thereafter, subject to no business/regulatory hurdles ahead, Emkay said as it put a target price of Rs 300 on the stock, implying, 12 percent downside from the previous close of Rs 343.25 on NSE.

" Our bull-case fair value (FV) is Rs 470 per share and bear-case FV is Rs 140 per share," it added.

At 11:34 am on May 16, Paytm shares were trading 0.8 percent higher at Rs 346.15 apiece on the National Stock Exchange (NSE). In the last six months, the stock has nosedived over 61 percent, massively underperforming benchmark Nifty 50, which gained 12 percent during the same period.

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