Paytm share price target: Macquarie sees 44% downside in ‘cash guzzler’ Paytm, sets target at Rs 1,200 – The Economic Times

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The brokerage said despite factoring in an aggressive 50 per cent compounded annual growth rate (CAGR) increase over the next five years in non-payment business revenues led by distribution business, it expects Paytm to generate positive free cash flow (FCF) only by FY30.

NEW DELHI: On the day of its listing, foreign brokerage Macquarie initiated coverage of One 97 Communications (PaytmNSE -27.40 %) with an underperform rating. It has a target of Rs 1,200, suggesting 44 per cent potential downside from the issue price of Rs 2,150.

Paytm’s business model lacks focus and direction, it said while calling the company a ‘cash guzzler’.

Macquarie said achieving scale with profitability is a big challenge and that regulations and competition are added worries.

“Paytm’s valuation, at 26 times FY23 price to sales (P/S), is expensive especially when profitability remains elusive for a long time. Most fintech players globally trade around 0.3-0.5 times PSG (price to sales growth ratio) and we have assumed the upper end of this band. We are unwilling to give it a premium here as we are unsure about the path to profitability. Key risks include change in regulations which allow monetisation of UPI and receipt of a banking license,” it said.

Macquarie said most things that Paytm does, every other large ecosystem player like Amazon, Flipkart, Google, etc, are doing. The competition is quite evident in the BNPL (buy now, pay later) space and distribution of various financial products, it said. In the longer term, take rates in the distribution business will be driven southwards by competition and regulations, it added.

“Dabbling in multiple business lines inhibits Paytm from being a category leader in any business except wallets, which are becoming inconsequential with the meteoric rise in UPI payments. Competition and regulation will drive down unit economics and/or growth prospects in the medium term in our view. Unless Patym lends, it can’t make significant money by merely being a distributor,” Macquarie said.

“Therefore, question its ability to achieve scale with profitability. We value the stock using a 0.5 times PSG multiple on December 2023 annualised sales to arrive at our target price of Rs 1,200, implying 44 per cent downside The key game changer could be an ability to monetise UPI, which could completely swing the investment case. A 10bp fee on
UPI provides a fair value of Rs 2,900-3,300 based on PSG/DCF,” the brokerage said.

RBI will most likely introduce regulations for fintechs, particularly in the BNPL space, Macquarie said, adding that it is not enthused with the company’s complicated organisation structure, related-party transactions, churn in top management and a thinly staffed board with 75 per cent of members being based out of India.

“Macquarie’s MGRS (governance and risk scoring) system places Paytm below median. Obtaining a small finance bank license could be difficult in our view given that Chinese controlled firms own more than a 30 per cent stake in Paytm,” Macquarie said.

The brokerage said despite factoring in an aggressive 50 per cent compounded annual growth rate (CAGR) increase over the next five years in non-payment business revenues led by distribution business, it expects Paytm to generate positive free cash flow (FCF) only by FY30.

Macquarie said Paytm has been a cash burning machine, spinning off several business lines with no visibility on achieving profitability. It has drawn in equity capital of Rs 19,000 crore since inception, of which 70 per cent (Rs 13,200 crore) has gone towards funding losses.

“That Paytm has a problematic business model is exemplified – the business generates very low revenues for every dollar invested or spent towards marketing. This is especially problematic for a low-margin consumer-facing business where competition across each vertical is only increasing,” it said.

Macquarie noted that Paytm’s payments-based business model has been disrupted by UPI – a real-time retail payment system developed by government-backed NPCI. In December 2019, UPI was made available free of cost (zero MDR) by the Indian government, universally to consumers and merchants.

UPI now accounts for 65 per cent of Paytm’s gross merchandise value (GMV), which Macquarie said is expected to increase further to 85 per cent by FY26E. “Hence Paytm’s take-rates should continue to decline,” it said.

While the core payments business has been in operation since 2014, the company has spun off several verticals in the past 3 years, including consumer lending (2020), co-branded credit cards (2020), insurance distribution (2020), wealth management (2018) and its mini-app platform (2020), none of them translated into significant revenues or profitability for Paytm, Macquarie said.

“Furthermore, Paytm has not achieved any meaningful market leadership in any of its verticals outside payments,” it said.

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