Paytm share price rallies 15% in 5 days; coverage initiated by Axis Capital with ‘Buy’ rating, check target

Paytm (One 97 Communications) stock price has soared 15% so far this month to now trade at Rs 807 per share. Although the share price is still down massively from its IPO price of Rs 2,150 apiece, analysts at Axis Capital have now initiated the coverage with a ‘Buy’ rating and projected another 16% upside from Friday’s lows. “Paytm’s wide distribution network allows it to acquire customers and merchants efficiently with low incremental cost of acquisition, retain them via increasing payments and commerce use cases, and monetize via cross-selling and up-selling,” Axis said. The brokerage firm has pinned a target price of Rs 940 on Paytm.

The fintech giant’s ability to acquire customers and merchants is seen as something that can help Paytm considering the current environment when many startups might need to revisit their business models due to the funding winter, Axis Capital said.

Paytm, in partnership with financial institution partners (FIPs), follows a distribution-led model to provide consumers and merchants access to digital and customized financial products on its platform. Here, analysts see a massive cross-sell and up-sell opportunity. “We expect financial services revenue to post ~58% CAGR over FY22-27, driven by higher cross-sell of credit products and increase in product penetration within its customer base,” Axis Capital said. Paytm cross-sells its merchant loans to high vintage merchants who have long and stable transaction history on its platform. 

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Analysts said that Paytm has made a conscious effort to drive device deployment as it looks to increase penetration and drive cross-sell of other products and services. Paytm also uses UPI payments data to help cross-selling.

Towards profitability

“We estimate contribution margin to increase to 47% of revenue by FY27 vs 30% in FY22, driven by an increasing share of higher margin revenue from financial services (~20% of FY27 revenue vs. 8.8% in FY22),” Axis Capital said. Analysts further said that they expect EBITDA (Before ESOP cost) to break even by the fourth quarter of the financial year 2023-24 driven by higher contribution margin and moderation in indirect costs. “Paytm has guided to turn adjusted EBITDA positive by September 2023 (Q2FY24E). Instead of aggressively cutting costs in the short term, we expect the company to continue to invest in products, and customer reach and incentivize merchants/customers to drive adoption of payment services and financial products which can drive revenue growth over the medium term,” they added.

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Coverage initiated at BUY

Axis Capital has pinned a target price of Rs 940 per share on Paytm. The target price translates to an upside of 16% from Friday’s trading price of Paytm. “Our DCF-based target price of Rs 940 implies 4.6x price/ revenue on FY24E. Higher valuation vs. global peers should sustain if it continues to deliver GMV and MTU growth, improves unit economics, and maintains asset quality in the underlying loans it distributes in partnership with financial institutions,” Axis said.

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