Last Updated: October 19, 2023, 12:12 IST
Jefferies initiated protection on Paytm with a purchase ranking and a goal value of Rs 1,300, because it sees India’s main funds participant coming into the league of huge worthwhile fintechs globally.
Shares of One 97 Communications, which runs Paytm, had been buying and selling at Rs 943. The inventory, which was one of many greatest wealth eroders final 12 months, has to this point rallied round 80% within the calendar 12 months 2023 making it amongst the higher-performing fintech shares globally this 12 months.
Continued momentum in credit score originations and margin growth in funds would upfront profitability forward of market expectation, Jefferies mentioned in its newest notice. “In four quarters, Paytm will enter the global list of large profitable fintechs and valuations are yet to reflect its changed profile,” it mentioned.
Jefferies mentioned Paytm will flip worthwhile and be amongst the few giant worthwhile fintechs globally that take pleasure in sturdy development of over 30 per cent, double-digit Ebitda margins and steady profitability.
It famous that its valuations at 3.6 occasions estimated FY25 EV/income stay at a 40 per cent low cost to this group. Jefferies used the DCF valuation methodology with development assumptions of close to-time period 27 per cent, lengthy-time period 17 per cent and terminal 8 per cent.
In the final 2 years, Paytm’s revenues have jumped 3x and gross margins surged to 54% from 13%.
“We expect revenue growth to remain in the fast lane (31% CAGR over FY23-26E) driven by (a) 55% CAGR in financial services revenues led by ~4x jump in credit originations, and (b) 50% CAGR in merchant subscription revenues on the back of aggressive deployment of merchant devices (~3x network expansion) as Paytm asserts its ..
The brokerage said Paytm’s large ESOP costs are a drag on profitability as the cost of issuance towards the large pool of ESOP-issued pre-IPO is currently making up 18% of revenues. “As the period of vesting for a large part of the pool ends in 1HFY25, we expect ESOP costs to start declining from 2HFY25E. Outside of ESOP cost, employee and fixed cost as a % of revenues continue to fall due to operating leverage,” it mentioned.
Paytm has efficiently arrested its money burn, and Jefferies expects it to show free money move optimistic in H2 and generate wholesome free money move thereon. “With continued operating leverage and declining ESOP costs, we expect Paytm to turn profitable by 3QFY25E and deliver sustained growth in accounting profits from thereon,” it mentioned.
Jefferies mentioned Paytm’s lending companions stay answerable for threat underwriting thresholds and given the quick tenor of loans, are collectively creating a big base of credit score-examined customers. Delinquency traits, it mentioned, have improved in BNPL the place share of repeat customers is 65 per cent.
As portfolio classic grows, rising share of credit score examined customers in disbursals (from 50 per cent at the moment) will assist management asset high quality outcomes, Jefferies mentioned.
“At our valuation, we get implied EV/revenue of 4.6 times and EV/adjusted Ebitda of 37 times (Sep’25). Using SOTP (for stake in associates), we arrive at a PT of Rs 1,300. Key risks are asset quality deterioration impacting credit business growth, supply pressure from PE selling and regulatory risks,” it mentioned.
Earlier within the week, Goldman Sachs had hiked its goal value on Paytm to Rs 1,250, saying it expects fintech to be essentially the most worthwhile firm throughout the web sector.
