Domestic brokerage firm Motilal Oswal Financial Services on Monday reiterated its ‘Buy’ rating on Paytm, and upgraded its price target to Rs 1,050 a share as compared with Rs 848 currently. Motilal also said that after reporting adjusted Ebitda breakeven in 3QFY23, Paytm is on track to report Ebitda breakeven in 2HFY25.
Ebitda stands for earnings before interest, tax, depreciation and amortisation.
In its report on Monday, July 3, the domestic brokerage firm said Paytm’s stock has delivered healthy returns of 34 per cent, as per its prediction in April 2023. It said the constant improvement in contribution margin and operating leverage will continue to drive Paytm’s operating profitability. The firm has projected the company’s GMV (gross merchandise value) and disbursement to increase by 4-21 per cent.
Paytm’s lending business has demonstrated robust traction in loan disbursals with the total number of loans disbursed surging 4.6x YoY in FY23 (4.4x in FY22). Business momentum remains robust with GMV growing 35 per cent YoY to Rs 2.65 lakh crore during April-May 2023 (55 per cent YoY growth in FY23), according to the report.
Motilal Oswal said the company maintains quarterly merchant addition run-rate of over 1 million with the total number of devices deployed surging to 7.5 million in May 2023 (118 per cent YoY growth). The sustained growth in the deployment of devices will enable robust transaction volumes and drive healthy growth in merchant and consumer loans.
Merchant loans also improved in May 2023, due to a technology system upgrade for one of the leading partners.
“We believe that after reporting adjusted Ebitda breakeven in 3QFY23, almost a year ahead of its guidance, Paytm is on track to report Ebitda breakeven in 2HFY25. We raise our FY25E GMV and disbursement estimates by 5 per cent and 21 per cent, respectively, and estimate the mix of financial revenue to increase to 32 per cent by FY25 from 19 per cent in FY23. We estimate adjusted Ebitda, Ebitda, and contribution margin of 13 per cent, 5.9 per cent, and 56 per cent, respectively, by FY25,” the firm added.
Motilal Oswal also said the company maintains a quarterly merchant addition run-rate of 10 lakh-plus with the total number of devices deployed surging to 75 lakh in May (118 per cent YoY growth). The sustained growth in the deployment of devices will enable robust transaction volumes and drive healthy growth in merchant and consumer loans.
“The profitability of Paytm’s core payment business is further enhanced by its financial services division, which benefits from inherently higher contribution margin. The mix of financial services revenue has increased to 19 per cent in FY23 from only 4 per cent in FY19. With faster growth in GMV, merchant acquisition and cross sell rate, we estimate Paytm’s financial revenue to record 75 per cent CAGR (compound annual growth rate) over FY23-25 with the mix reaching 32 per cent by FY25,” Motilal Oswal Securities said.
On the cost front, Paytm has seen moderation in payment processing charges, marketing activities, and promotional expenses over the recent years. Direct expenses have moderated to 51 per cent of revenue in FY23 from 162 per cent in FY19.
Similarly, indirect expenses have moderated to 51 per cent of revenue from 69 per cent in FY19. While Paytm will continue to invest in growth and merchant base expansion, the improvement in operating leverage will nevertheless aid profitability, it added.
On June 29, BofA Securities also suggested a price target of Rs 1,020 on the Paytm stock.
Shares of Paytm owner One97 Communications on Monday were trading lower by 2.19 per cent to Rs 849.05 apiece on the BSE at 14:08 pm.
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