Jefferies initiated coverage on Paytm with a buy rating and a target price of Rs 1,300, as it sees India’s leading payments player entering the league of large profitable fintechs globally.
Shares of One 97 Communications, which runs Paytm, were trading at Rs 943. The stock, which was one of the biggest wealth eroders last year, has so far rallied around 80% in the calendar year 2023 making it amongst the better-performing fintech stocks globally this year.
Continued momentum in credit originations and margin expansion in payments would upfront profitability ahead of market expectation, Jefferies said in its latest note. “In four quarters, Paytm will enter the global list of large profitable fintechs and valuations are yet to reflect its changed profile,” it said.
Jefferies said Paytm will turn profitable and be amongst the few large profitable fintechs globally that enjoy strong growth of over 30 per cent, double-digit Ebitda margins and stable profitability.
It noted that its valuations at 3.6 times estimated FY25 EV/revenue remain at a 40 per cent discount to this group. Jefferies used the DCF valuation methodology with growth assumptions of near-term 27 per cent, long-term 17 per cent and terminal 8 per cent.
In the last 2 years, Paytm’s revenues have jumped 3x and gross margins surged to 54% from 13%.
“We expect revenue growth to remain in the fast lane (31% CAGR over FY23-26E) driven by (a) 55% CAGR in financial services revenues led by ~4x jump in credit originations, and (b) 50% CAGR in merchant subscription revenues on the back of aggressive deployment of merchant devices (~3x network expansion) as Paytm asserts its ..
The brokerage said Paytm’s large ESOP costs are a drag on profitability as the cost of issuance towards the large pool of ESOP-issued pre-IPO is currently making up 18% of revenues. “As the period of vesting for a large part of the pool ends in 1HFY25, we expect ESOP costs to start declining from 2HFY25E. Outside of ESOP cost, employee and fixed cost as a % of revenues continue to fall due to operating leverage,” it said.
Paytm has successfully arrested its cash burn, and Jefferies expects it to turn free cash flow positive in H2 and generate healthy free cash flow thereon. “With continued operating leverage and declining ESOP costs, we expect Paytm to turn profitable by 3QFY25E and deliver sustained growth in accounting profits from thereon,” it said.
Jefferies said Paytm’s lending partners remain in control of risk underwriting thresholds and given the short tenor of loans, are jointly creating a large base of credit-tested users. Delinquency trends, it said, have improved in BNPL where share of repeat users is 65 per cent.
As portfolio vintage grows, rising share of credit tested users in disbursals (from 50 per cent currently) will help control asset quality outcomes, Jefferies said.
“At our valuation, we get implied EV/revenue of 4.6 times and EV/adjusted Ebitda of 37 times (Sep’25). Using SOTP (for stake in associates), we arrive at a PT of Rs 1,300. Key risks are asset quality deterioration impacting credit business growth, supply pressure from PE selling and regulatory risks,” it said.
Earlier in the week, Goldman Sachs had hiked its target price on Paytm to Rs 1,250, saying it expects fintech to be the most profitable company within the internet sector.
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