Paytm shares may jump over 100% in a year

With shares of Paytm down over 70 per cent from their issue price, analysts now believe the stock is turning favourable from a risk-reward perspective. Also, with the management's focus on profitability and a target of turning free-cash-flow (FCF) positive in 12-18 months, analysts are confident that the fintech company will end cash burn in the next four-six quarters.

ICICI Securities, for instance, has a ‘buy’ rating on the stock, with a target price of ~1,285. According to it, more-than-expected operating profitability (Ebitda before ESOP cost) via consistent margin improvement, and clarifications around regulatory developments with no onerous outcome, provides comfort. Ebitda is earnings before interest, tax, depreciation, and amortisation, while ESOP is employee stock option plan.

“At analysts’ meet, Paytm projected ESOP cost outlook for next five years — declining from a cost base of ~14,700 crore in FY23 (estimated) to ~1,400 crore in FY27 (estimated), assuming cost for ESOPS granted till date. A downward trending cost-line item (although non-cash), and its expected path is welcome on understanding reported profitability,” wrote analysts at Dolat Capital in their report. The brokerage, too, has a ‘Buy’ rating with a one-year target of ~1,400.

Paytm's Ebitda (before

ESOP) declined to -9 per cent in the September quarter of 2022-23 (Q2FY23), from -39 per cent in Q2FY22. This gives visibility around the company turning Ebitda-positive (before ESOP cost) ahead of the guided timeline of Q2FY24, analysts said.

On the bourses, shares of Paytm surged 8 per cent to ~535.45 apiece in the intraday trade on Friday, before settling at ~537, up 7 per cent. In comparison, the S&P BSE Sensex index slipped 0.66 per cent.

JM Financial, meanwhile, has upgraded the stock to ‘Buy’, from ‘Sell’, on the back of gradual improvement in operating metrics.

“On our valuation metric of FY30E Ebitda discounted back to FY24E, Paytm is currently trading at 14x EV/ Ebitda, which is in-line with average valuation of global peers. The upside risks could increase if momentum in revenue continues, along with cost moderation,” it said.

During the analysts’ meeting, Paytm remained optimistic that the ‘Payments Business’ will generate positive FCF on a standalone basis with current spread of about 7-9 basis points (including 3-4 bps of UPI and 15-18 bps of non-upi). In the distribution business, it expects even better yields in loans (currently 3-5 per cent) and large growth in devices (total addressable market of over 100 million merchants) and credit cards (0.3 million activated).