Paytm shares at Rs 1,050? Motilal Oswal revises share price target. Here's why

Domestic brokerage Motilal Oswal Securities has revised its share price target on One 97 Communications (Paytm) to Rs 1,050, as it believes that the constant improvement in contribution margin and operating leverage will continue to drive Paytm’s operating profitability. The brokerage said Paytm is on track to report Ebitda breakeven in 2HFY25 after reporting adjusted Ebitda breakeven, almost a year ahead of its guidance. It has raised its FY25 gross merchandise value (GMV) and disbursement estimates for FY25 by 5 per cent and 21 per cent. The brokerage expects the mix of financial revenue to increase to 32 per cent by FY25E from 19 per cent in FY23.

Paytm’s stock has delivered 34 per cent return since Motilal Oswal Securities initiated coverage on the counter in April this year.  Its lending business has demonstrated robust traction in loan disbursals with the total number of loans disbursed surging 4.6 times YoY in FY23, said Motilal Oswal Securities, adding that the business momentum also remains robust with gross merchandise value (GMV) growing 35 per cent YoY to Rs 2.65 lakh crore during April-May (55 per cent YoY growth in FY23).

"The company maintains quarterly merchant addition run-rate of 10 lakh-plus with the total number of devices deployed surging to 75 lakh in May (118 per cent YoY growth). The sustained growth in the deployment of devices will enable robust transaction volumes and drive healthy growth in merchant and consumer loans," Motilal Oswal said.

The domestic brokerage said that from an annualised 1QFY23 run-rate of Rs 22,200 crore value of loans, the company has reached an annualised run-rate of Rs 60,000 crore in April-May, and the same is tracking higher than its estimates. Merchant loans also improved in May after a drag in April, due to technology system upgrade at one of the leading partners, it said.

"The profitability of Paytm’s core payment business is further enhanced by its financial services division, which benefits from inherently higher contribution margin. The mix of financial services revenue has increased to 19 per cent in FY23 from only 4 per cent in FY19. With faster growth in GMV, merchant acquisition and cross sell rate, we estimate Paytm’s financial revenue to record 75 per cent CAGR over FY23-25 with the mix reaching 32 per cent by FY25," Motilal Oswal Securities said.

On the cost front, Paytm has seen moderation in payment processing charges, marketing activities, and promotional expenses over the recent years. Direct expenses have moderated to 51 per cent of revenue in FY23 from 162 per cent in FY19. Similarly, indirect expenses have moderated to 51 per cent of revenue from 69 per cent in FY19. While Paytm will continue to invest in growth and merchant base expansion, the improvement in operating leverage will nevertheless aid profitability, Motilal Oswal said.

Earlier on June 29, BofA Securities suggested a price target of Rs 1,020 on the Paytm stock.

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