Paytm block sales: Despite post lock-in selling pressure, analysts positive on stock

Even though Paytm stock has been on a downward journey for a while now – losing 35 percent of its value since mid-August – most analysts and fund managers said people should not read too much into the Softbank offloading shares.

The Japanese investment bank, which famously instituted a $100 billion Vision Fund to invest in startups across the world, has been hit by a flurry of bad news. Despite early successes, many of its investments have gone bad, including WeWork and the latest being cryptocurrency exchange FTX. The company has suffered some big losses, according to its disclosures.

Softbank invested in Paytm in various rounds through different funds including SAIF and SVF Panther. The average cost of acquisition for each of the investments has been different as well.

SAIF III Mauritius Company acquired shares at Rs 15.4 apiece, SAIF Partners India IV bought them at Rs 305.6, while SVF Panther at Rs 1,820 apiece. Hence, returns generated from the share sale are dependent on which fund sold shares.

Also read: New-age tech companies divert their focus from growth to profitability

Usually, any large supply by shareholders of a company leads to a depression in price. However, a key highlight is also that BofA Securities, which managed the share sale, was able to find reputed buyers for the same shares, which gives some hope.

“Any selling of the magnitude that Softbank has planned naturally exerts downward pressure on a stock,” said Shivaji Thapliyal, Head of Research and Lead Analyst, Yes Securities. “However, we regard institutional selling as a non-fundamental reason for weakness in a stock and we do not lend too much importance to it.”

In recent months, the stock has also been under pressure due to selling in technology stocks across the world, which is also rubbing off negatively.

A head of research at a boutique broker said Paytm has the potential to rise if sentiments around the tech and IT space change next year. However, in the short term, the stock is going to be under pressure, he added.

Clarity on the business model

The big issue analysts and fund managers have highlighted is Paytm's inability to come clean on its business model. In the past, many, including those at Macquarie, have criticised CEO Vijay Shekhar Sharma for failing to say satisfactorily how the company is going to earn money.

However, there are winds of change. After the company announced its September quarter numbers, analysts noted that Sharma and his team articulated their vision a bit more clearly.

The company’s performance during the quarter was also impressive and there were signs of the company becoming profitable in the next few years. The company aims to be Ebitda break-even by September 2023.

“Paytm is growing at the fastest pace among new-age companies like Nykaa, Zomato and PB Fintech. It is the first time you are seeing signs of profitability. Earlier, we were not sure how Paytm earns money. Now, it is clearer,” said Amit Jeswani, Founder & CIO at Stallion Asset, which manages a midcap fund for rich investors.

Also read: The biggest losers of Nykaa bonus issue are IPO retail investors

The lending business of the company, where Jeswani believes the largest possibility of pivoting is, is growing rapidly. Simply put, Paytm is now acting as an agent between financiers and customers availing merchant and personal loans. For every loan, the company takes a small cut. Thus, the more the volume of loans, the more it earns.

As of October 2022, its loan distribution business disbursed loans at an annualised run rate of Rs 37,000 crore. The value of loans disbursed grew 387 percent YoY to Rs 3,056 crore ($407 million), while the number of loans disbursed grew 161 percent YoY to 3.4 million loans in October 2022.

The company also sells payment devices to merchants who pay a monthly subscription fee to Paytm. The company claimed it has 5.1 million devices active across India. Paytm has also started charging platform fees for a number of transactions including mobile recharge.

“Payments remains their bread-and-butter business and loan distribution is both a high-margin and high-growth business for them. Commerce and cloud are also doing okay. Overall contribution margin has been improving and we do see Paytm turning profitable at some point. The question is whether it is time to buy or not,” said Thapliyal.

The stock traded down Rs 9 percent at Rs 549 on BSE on November 17, nearly a fourth of the IPO issue price. The valuation of the company also slipped to around Rs 35,000 crore.

“If the company becomes adjusted Ebitda positive (which excludes recurring ESOP costs), then Paytm with valuation at Rs 35,000 crore is a steal,” Jeswani added, who clarifies that he currently does not hold it in his portfolio.

However, some disagree. Suresh Ganapathy of Macquarie Capital Securities believes that the company’s performance should not be looked at excluding ESOP costs as they are issued at a very nominal exercise price favouring the employees and that the costs are being borne indirectly by the minority shareholders. This has been a key factor for him being bearish on the stock ever since listing.

Buy or sell?

Analysts are divided on the stock despite a fall in prices.

Sumeet Kariwala, Equity Analyst at Morgan Stanley, is "equal weight" on Paytm with a target price of Rs 785. He said the company has reported strong growth in payments and financial services revenue along with improved Ebitda margins, which are positives.

Yes Securities also has a "neutral" rating on Paytm, “which implies a recommendation to not buy”. “We think that the key monitorable for the stock is the environment in which the company operates, which entails the evolution of UPI in the retail digital payments landscape and the evolution of the regulatory view with regard to the MDR fees or take rate that a wallet instrument can charge,” Thapliyal said.

Others are largely bullish and see up to 100 percent potential upside from current levels.

Citi Research raised its target price on the stock to Rs 1,055. The brokerage highlighted that Paytm appears to be on the track to deliver on its stated guidance of adjusted Ebitda breakeven by September 2023.

JP Morgan is also "overweight" as it sees good reasons for the business to break even. It has a target price of Rs 1,100, up from Rs 1,000 earlier. Goldman Sachs also has the same target price with a ‘buy’ rating.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.