PB Fintech, Paytm, Nykaa & Delhivery: Here’s what JM Financial says on internet cos

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Investors across the world have recently shied away from loss-making companies amid deteriorating macroeconomic environment. Domestic brokerage JM Financial said in a note that this response has been well received by the company management and that Indian Internet companies are not only prioritizing profitability, but also clearly indicating the way forward.

JM Financial said One 97 Communications (Paytm), PB Fintech and Zomato have guided towards profitability of adjusted EBITDA levels between Q4FY23 and Q2FY24. It added that Delhivery should also be able to deal with spoton integration issues and turn a profit by the fourth quarter of FY2023.

Nykaa, it said, is taking a disciplined approach to its investments in the fashion and eB2B segments, while CarTrade is pointing to higher operating leverage in its business.

“We believe that demonstrating profitable growth is the need of the hour, but at the same time companies must adopt a mindful approach to plant the seeds for non-linear growth in the future. We believe that investors can focus on the potential profitability and timeline ‘s confidence could lead to a re-rating.” In the event of these companies, profit margins are expected to grow rapidly after break-even,” it said.

PB Fintech | Target: Rs 910

JM Financial said that PB Fintech is perhaps where the management has been most vocal about the estimated adjusted EBITDA breakeven in Q4FY23. As of Q2FY23, the company has already achieved adjusted EBitda level profitability in its core online insurance business, which Paisabazaar expects to turn profitable in Q4FY23.

JM Financial said the company has already demonstrated a favorable trend with the adjusted EBITDA margin reaching minus 9 EPR in Q2 FY2023. It expects PB Fintech to reach profitability in Q4 FY2023 as Q4 is a very strong quarter for insurance in terms of weather. “However, we are expecting a loss again in H1FY24, with sufficient profit in H2FY24 to ensure that the company generates,” it said.

Nayaka | Target: Rs 280

The domestic brokerage said that even though Nykaa’s beauty and personal care (BPC) segment is doing well, the contribution margin is expected to increase to 24.1 per cent in Q2FY23, given the investments the company is making in fashion and other segments. Yes, questions are being raised on that.

While fashion is a positive contributor, the company incurred a loss of Rs 71.40 crore at the EBITDA level in this segment, while the other segment also suffered a loss of Rs 44.70 crore. The company expects BPC Ebitda margin to improve by 200-250 bps YoY from 8.3 per cent in FY22 and expects the fashion segment to break even by FY25.

“We expect BPC to surprise positively to reach 11 per cent EBITDA margin in FY23 with potentially further scope for improvement, but fashion to reach EBITDA break-even in FY25 And other segments can reach positive.

EBitda only till FY27. JM Financial said, this margin improvement in BPC will be a result of operating profit on employee expenses as well as rationalization of marketing expenses with Nykaa becoming a household name for online BPC purchases.

The brokerage estimates that the company will deliver 40 per cent growth in GMV, 38 per cent in revenue and 82 per cent in Ebitda during FY2022-25.

Paytm | Target: Rs 600

JM Financial said it expects Paytm’s revenue to grow at a robust CAGR of 32 per cent during FY22-26, largely helped by the financial services business. This is even when it looks at the risk of current take rates. The brokerage has set a target of Rs 600 on Paytm stock.

“While the financial services business is relatively new for Paytm, we see strong growth runway going forward given the large untapped opportunity. Furthermore, we believe the incremental path to profitability will primarily hinge on continued improvement in overall revenue. Dependent, which is linked to reduction in marketing and cash back expenses and ESOP cost for Paytm,” it said.

JM Financial said that payment processing fee has seen a softening in the recent past which has improved profitability, adding that it expects incremental reduction in payment processing fee to be difficult.

“We like the management’s vision to improve efficiency and focus on profitability and expect Paytm EBITDA breakeven by FY26E. Also, we expect adjusted EBITDA breakeven by FY24 as directed by the management.” We forecast GMV and revenue CAGR of 34 per cent and 32 per cent over FY22-26E,” it said.

Delhiwari | Target: Not rated

JM Financial said Delhivery managed a strong and successful IPO in May 2022 at a time when most internet stocks were struggling to raise funds. JM Financial said, a major driver of the successful listing was that the company demonstrated pro forma profitability for FY22, while also seeing a 63 per cent increase in revenue.

However, SpotOn has not been a smooth integration and has resulted in the company reporting an adjusted EBITDA loss of Rs 342 crore in H1FY23 as against a profit of Rs 7.2 crore in FY2012. With the company claiming that the integration is now complete and has an incremental gross margin on revenue of 50 per cent, JM Financial expects Delhivery to turn profitable by the end of the current financial year.

“However, we expect an improvement in margins as the company may benefit from amortizing fixed costs,” it said.

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