While analysing market opportunity for soundboxes, Bank of America Securities has raised the target price for One97 Communication, which operates Paytm, in view of the first-mover advantage the payment aggregator enjoys.
Buoyed by the vast opportunities offered by this high-margin segment, BofA has raised its target price for One97 Communication by around 19 percent to Rs 1,050.
The revision reflects a bullish upside potential of over 21 percent from Thursday's closing price. It is also worth noting that BoFA had previously upgraded Paytm to 'buy' after baking in the opportunities offered by Soundbox.
"Paytm was the first company in India which started deploying soundboxes at scale and in process created a new market," BoFA highlighted in its report.
Estimating a decent business size of 4-4.5 lakh merchants for soundbox in India, BoFA sees the segment as an opportunity to change the revenue mix and aid profitability for Paytm. "We estimate Paytm could add another 1.5 lakh devices in the next 2-3 years," the global broking firm said.
"As Paytm charges Rs 100 per month for Soundbox, the visibility on subscription revenue is high. We expect EBIT (earnings before interest and taxes) margins to be around 40 percent in steady state and expect payback on these boxes in 12-14 months (expense per box is Rs 1,250)."
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The brokerage foresees strong growth for the soundbox segment in the next 2-3 years due to limited competition. In addition, the firm also believes that there is a room for surprise on the consolidated EBITDA (earnings before interest, taxes, and amortisation) margin front for Paytm as its Soundbox business gains more traction.
"Given the rising contribution from high-margin businesses and cost-control initiatives, we expect Paytm's margin improvement to happen at faster clip than expected earlier," the firm stated. BoFA also sees a favourable risk-reward scenario for Paytm at its current valuations.
Riding on the positive sentiment for new-age tech stocks, Paytm shares rebounded over 60 percent year-to-date, though it still remains well below its IPO price of Rs 2,150.
The evolving sentiment for the company can also been seen in the changing brokerage calls for the payments aggregator. Almost half of all brokerages covering the company now expect the stock to cross the Rs 1,000 mark within the next 12 months.
On top of that, even 11 of the 13 brokerages that cover Paytm, now have a 'buy' call for the scrip.
At 12.57pm, shares of Paytm were trading 1.74 percent lower at Rs 850.40 on the National Stock Exchange.
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