Despite regulatory challenges, Paytm shares can cross ₹500, believes Motilal Oswal, sees 30% upside

Recent developments have shown promise for Paytm, as it obtained approval from the National Payments Council of India (NPCI) to operate as a third-party app, allowing it to function similarly to competitors like Google Pay and PhonePe. Moreover, Paytm has forged partnerships with Axis Bank, HDFC Bank, SBI, and Yes Bank to facilitate seamless business migration, indicating proactive measures to address operational concerns.

The brokerage has retained its neutral rating on the stock with a target price of ₹530, indicating a 30 percent upside potential.

Read here: Can Paytm’s relief rally continue?

“Paytm has been under regulatory scrutiny for some time, with its subsidiary PPBL receiving multiple regulatory warnings. This has led to the RBI imposing severe business restrictions on PPBL. The restrictions have put the company at risk of losing customers and merchants, disrupting its growth trajectory. Despite this, the business volumes in February show a moderate impact. We anticipate a further decline in UPI transaction volume/value data in Mar’24 as well. We review our numbers and estimate payment processing margin to decline as the mix of high-yielding wallet business declines sharply, while the impact on financial business (loan origination volumes) further suppresses revenue growth and profitability,” MOSL said in its latest report.

After a steep 47 percent decline in February, the stock has recovered some losses and has turned positive for the month of March, up half a percent so far. Meanwhile, it has jumped 20 percent in January 2024.

Read here: How RBI is shaping the credit cards market, explained

The stock is currently trading over 27 percent higher from its 52-week low of ₹318.35, hit on February 16, 2024. Meanwhile, it is still over 59 percent away from its 52-week high of ₹998.30, hit on October 20, 2023.

In the last one year as well, the stock has lost over 34 percent.

Despite the company’s extensive reach, Paytm’s ability to mitigate the business impact will depend largely on the execution capabilities over the coming quarters, noted MOSL. It remains watchful on the ongoing business transition and Paytm’s ability to recover the lost business and resume growth trajectory over FY 25-26. The brokerage estimates Paytm’s FY25E revenue to decline by 24 percent, while contribution profit declines by 30 percent. It also expects the contribution margin to sustain at 51 percent over FY25E (vs 56 percent in FY 24).

Read here: Paytm issues FAQs: What will work after March 15? Here’s what users must know

The brokerage further stated that it will revisit its rating for the firm post its March quarter (Q4FY24) results.

Remain watchful of leakage in the customer, merchant base

Following recent RBI restrictions, Paytm has experienced a notable decline in its Gross Merchandise Value (GMV) in February, expected to continue into March. This decline is attributed partly to the lack of new user additions and poses a risk of losing customers and merchants to competitors, impacting overall business activity, said the brokerage.

It also informed that currently, Paytm Payments Bank Limited (PPBL) boasts 1.8 million merchants, with approximately 40,000 field employees actively assisting merchants in smoothly transitioning their settlement accounts to alternative banks. Push notifications are being utilized to remind merchants about this transition to minimize business loss.

Read here: Paytm gets a third-party license. What does this mean for you?

Despite efforts to retain its merchant base, MOSL anticipates around 15-20 percent of merchants may churn, particularly those with settlement accounts with PPBL. On the customer side, with 60-70,000 customers having e-NACH mandates with PPBL, there may be a moderate impact. Consequently, marketing expenditures are expected to increase as Paytm aims to regain lost users, it added.

Cutting payment revenues by 27 percent

MOSL estimates that payment revenues for FY25E will decline by 27 percent, mainly attributed to the decrease in Gross Merchandise Value (GMV), impact on wallet transactions, and loss in the merchant and customer base. Consequently, a 28 percent reduction in payment processing margin is projected to a range of approximately 7 basis points (bp), it forecasted. This decline is primarily due to reduced business volumes and an adverse mix as the share of high-yielding wallet business sharply decreases. MOSL anticipates a gradual recovery in GMV growth, estimating a compound annual growth rate (CAGR) of around 20 percent over FY25-27E compared to the approximately 45 percent CAGR witnessed during FY22-24E.

Financial business to see sharp drop too

Amid regulatory interventions, MOSL pointed out that Paytm’s financial business witnessed a moderation in lending segments. Initially, growth in the Personal loan segment was moderated. However, due to regulatory concerns surrounding small-ticket loans, Paytm further reduced the origination of postpaid loans, resulting in a 17 percent quarter-on-quarter decline in 3QFY24. Postpaid loans sanctioned through Paytm Payments Bank Limited (PPBL) were suspended due to RBI’s concerns, it informed.

Additionally, Merchant Loans are on hold as the company awaits additional data on the QR transition before resuming loan sanctioning. However, Personal Loans have fared relatively well, with Paytm anticipating a return to normalcy over the next few quarters, it added. Paytm is also considering entering the secured business loan segment to sustain growth in its financial business over the medium term. As a result, disbursements for FY24E/FY25E have been reduced by 10 percent/40 percent, noted the brokerage.

Read here: Paytm job cuts? Teams may be reduced by 20% in size, says report, company denies

Estimate EBITDA losses to continue over FY25E

In light of looming regulatory challenges, MOSL anticipates Paytm to incur revenue losses due to churn in both its merchant and customer bases. It also estimates that the company could lose approximately 15-20 percent of its combined merchant and customer base to competitors. Consequently, MOSL has reduced its FY25E revenue estimate by 24 percent, expecting EBITDA losses to remain at elevated levels of ₹1,110 crore. Additionally, higher expenses are factored in as Paytm endeavors to stabilize its merchant and customer base.

MOSL also projects Paytm to achieve EBITDA breakeven in FY26E but remains watchful of progress in business migration and recovery in payments and financial businesses over the coming quarters.

Valuation and view

The recent regulatory restrictions have significantly impacted Paytm’s business environment and growth outlook. Despite the company’s extensive reach, its ability to mitigate the business impact will largely depend on the execution capabilities over the coming quarters, said the brokerage.

It expects a decrease in Paytm’s market share within the overall payments market. Consequently, it reviews its estimates, expecting the payment processing margin to decline. This decline is primarily attributed to the sharp drop in the high-yielding wallet business mix. Additionally, the impact on the financial business, particularly on loan origination volumes, is projected to further suppress revenue growth and profitability for Paytm.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 22 Mar 2024, 04:42 PM IST