Foreign brokerage Citi on Thursday said that as overhanging risks for One 97 Communications (Paytm) such as competition and selling by existing pre-IPO shareholders persist, such risks appear overstated at current valuations.
Even though Paytm shares were trading lower for the fourth straight day, Citi suggested a target price of Rs 1,055 on the stock, suggesting a potential upside of 139 per cent.
In a bull case scenario, this sees the stock at Rs 1,230, suggesting a potential upside of 179 per cent.
In a bearish scenario, this sees the stock at Rs 605, a potential upside of 37.5 per cent.
“We value the payments business on an EV/GP basis at 13.5x Sep’24E (at par with global payments companies), resulting in Rs 466/share (Rs 429/share earlier). We value the financial services business at Rs 375/share.” The stock (Rs 353/share earlier). We value the commerce and cloud vertical at Rs 81/share. Overall, this approach yields a TP of Rs 1,055.”
Citi rated the stock at ‘High Risk’ based on its quantitative model, but Paytm’s healthy net cash position and the potential for further decline in cash burn do not support a ‘High Risk’ rating.
Citi said Paytm has gained market share in digital payments over PayU. This is even when the growth on the basis of MDR-generating TPV at 59 per cent YoY for PayU as against 52 per cent YoY (Paytm) for the January-June period seems comparable. In the BNPL segment, Paytm is witnessing a faster growth in active customer base than PayU’s Lazypay.
“Lazypay’s reported loss-rate rises to 3.1 per cent in CYTD (up 30bps vs CY21) – something to watch for the wider BNPL space in India (Paytm has stabilized its lending partners’ portfolio with loss-rates asset performance is reported) 1.1-1.3 per cent for the postpaid BNPL product),” Citi said
Citi said Paytm’s business is distribution in the lending space and hence its revenue/cost-structure is commission-based. Paytm FY24E is trading at 5 times EV/contributed profit and 4 times EV/gross profit.
“We acknowledge the risks from further sales by existing pre-IPO shareholders and fintech is a competitive space but at these valuations, those risks are overstated,” it said.
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