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57% upside for Paytm? JPMorgan sees stock at Rs 1,000. Here's why

57% upside for Paytm? JPMorgan sees stock at Rs 1,000. Here's why

The brokerage said Paytm is undergoing a model shift from chasing “growth at any loss” to “profitability at scale”. 

JPMorgan said financial services business scale-up has remained a key value driver and that loss rates on syndicated loans are running below normal. JPMorgan said financial services business scale-up has remained a key value driver and that loss rates on syndicated loans are running below normal.

Foreign brokerage JPMorgan, which has an 'overweight' stance on One 97 Communications (Paytm), maintained its price target of Rs 1,000 on the scrip, suggesting a 57 per cent potential upside on the counter. 

In a September 29 note, the brokerage said Paytm is undergoing a model shift from chasing “growth at any loss” to “profitability at scale”. 

It said moderation in indirect expenses from September quarter onwards should be a catalyst. 

"On the other hand, contribution margin (CM) should enjoy incremental tailwinds from incentive income from below-normal loss rates in syndicated loans, scale-up of co-brand credit card issuances, and potential UPI P2M (person to merchant) subsidy," it said in a September 29 note.

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On Friday, the scrip was quoting at Rs 635.45 apiece on BSE, down 52 per cent year-to-date. JPMorgan's target price on the counter suggests a 57.36 per cent potential upside over Friday's intraday level. 

"We estimate incremental CM of 60 per cent – well above 43 per cent in Q1F23- suggesting scope for further improvement. Q2 earnings print on loss reduction rate will be a key catalyst," it said. 

Paytm has maintained its guidance of adjusted Ebitda profitability by September 2023 and the brokerage felt most investors remained skeptical, given the sharp increase in indirect expenses since listing, negating gains in CM since last year. 

JPMorgan said financial services business scale-up has remained a key value driver and that loss rates on syndicated loans are running below normal. It felt payments business is now decisively in positive margin territory. 

"Further tailwinds to Payment business margins exist from potential UPI P2M monetisation either from MDR introduction (unlikely) or from increased subsidies from the government (currently at $200 million for the system) to support network investments. UPI’s P2M becoming monetisable via government rebate is a major mid-term positive for payment economics," it said.

Meanwhile, the brokerage said competitive intensity could moderate in the payments/digital lending space from fintechs given the tightening of funding and regulatory hold in the sector. 

"In our view, this could benefit Paytm as it is well funded to drive expansion and has also highlighted that it is compliant with the digital lending regulatory guidelines, which we think can clear the regulatory overhang on the FS part of its business model," it said.  

Published on: Sep 30, 2022, 12:19 PM IST
Posted by: Amit Mudgill, Sep 30, 2022, 12:02 PM IST