Foreign brokerage Citi on Thursday said while overhanging risks for One 97 Communications (Paytm) such as competition and selling by existing pre-IPO shareholders stay, such risks look overdone at the prevailing valuations.
Even as Paytm shares were trading lower for the fourth straight day, Citi suggested a target of Rs 1,055 on the stock, suggesting a potential 139 per cent potential upside.
In a bull case scenario, it sees the stock at Rs 1,230, suggesting a 179 per cent potential upside.
In a bear case scenario, it sees the stock at Rs 605, a potential 37.5 per cent upside.
"We value the Payments business on an EV/GP basis at 13.5x Sep’24E (at par with global payment companies) resulting in Rs 466/share (Rs 429/share earlier). We value the Financials Services business at Rs 375/share (Rs 353/share earlier). We value the commerce and cloud vertical at Rs 81/share. Overall, this approach yields a TP of Rs1,055," it said
Citi called the stock 'High Risk' based on its quantitative model, but Paytm healthy net cash position and likely declining cash burn going forward do not support a 'High Risk' rating, it said.
Citi said Paytm has gained market share in digital payments versus PayU. This is even as the growth appears comparable on MDR-generating TPV basis at 59 per cent YoY for PayU against 52 per cent YoY (Paytm) for January-June period. In the BNPL segment, Paytm is seeing faster growth in active customer base against PayU’s Lazypay, it said.
"Lazypay’s reported loss-rate has increased CYTD to 3.1 per cent (up 30bps vs CY21) – something to watch out, for the broader BNPL space in India (Paytm has reported stable asset performance across its lending partners’ portfolio with loss-rates at 1.1-1.3 per cent for the postpaid BNPL product)," Citi said
Citi said Paytm’s business in lending space is distribution and therefore its revenue/cost-structure are commissions-based. Paytm is trading at 5 times FY24E EV/Contribution profits and 4 times EV/Gross profits.
"We acknowledge overhang risks from further selling by existing pre-IPO shareholders and that fintech is a competitive space but at these valuations, those risks are overdone," it said.
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