Paytm shares hit record low as Macquarie cuts revenue forecast

Shares of Paytm parent One97 Communications witnessed a selloff after brokerage Macquarie Capital Securities (India) cut its target price on the digital payments firm citing lower revenues and higher costs on employees and software.

The stock fell 5.89% to ₹1,159 on the National Stock Exchange on Monday as the foreign brokerage slashed its target price on the stock by around 25% to ₹900.

This isn't the first bearish outlook of the stock by analysts. On its listing day, Paytm's market capitalisation fell to around $14 billion, much lower than the $20 billion that it was valued at its IPO price of ₹2,150 after Macquarie cut its target price by 44% to ₹1,200. The startup had fetched a valuation of $16 billion when it raised $1 billion in 2019.

"We believe our revenue projections, particularly on the distribution side, is at risk and hence we pare down our revenue CAGR (compound annual growth rate) from 26% to 23% for FY21-26E," the brokerage said. "We are roughly cutting revenue estimates for FY21-26E on an average by 10% every year due to lower distribution and commerce/cloud revenues offset partially by higher payment revenues."

The brokerage also increased its losses per share estimates by 16-27% for FY22-25E owing to lower revenues and higher employee and software expenses.

Paytm's foray into insurance was recently rejected by insurance regulator Insurance Regulatory and Development Authority (IRDAI). This, according to the brokerage, could impact the company's prospects of getting a banking license.

On digital payments, the brokerage said the Reserve Bank of India's (RBI) proposed cap on wallet charges could be the elephant in the room. "Payments business still forms 70% of overall gross revenues for Paytm, and hence any regulations capping charges could impact revenues significantly," it said.

The brokerage pointed out that higher attrition rate among senior management of the company is a cause of concern and could impact business.

It also highlighted a steady drop in the average ticket size of loans disbursed by the firm. "In the past 12 months, Paytm's average ticket size for loans disbursed by it has been consistently coming down and stands at sub ₹5,000 levels. At this size, we don't think it is doing many merchant loans and most of the loans are small value BNPL loans," the brokerage said, adding that the eventual distribution fees realised by the company are likely to be much lower than its earlier estimates.

Competition will limit the company's commerce revenue growth and distribution business will continue to be led by small ticket BNPL loans, it said.

Shares of Paytm parent One97 Communications, which launched India's biggest initial public offering last year, had hit the lower circuit on market debut. Macquarie had earlier downgraded the stock to 'underperform', saying Paytm's business model lacked focus and direction and the company was a 'cash guzzler'.

Analysts had also called out the company for its history of spinning off several business verticals without achieving market leadership or profitability. Its key business — digital payments — got disrupted when the government-backed NPCI rolled out UPI, a real-time retail payment system, in December 2019.

Morgan Stanley, however, has been sanguine about the digital payments firm. Last month, it initiated coverage on the company with an 'overweight' rating and a price target of ₹1,875.

Paytm's last major funding round was in 2017 when it was valued at $8 billion.