Paytm shares jump 12% in two days; here's what fuelled rally

Paytm parent One97 Communications' extended rally for the second straight session on Tuesday, surging 12% in two days after the fintech major achieved an operating profitability milestone during the December quarter. The stock price also got a boost after some foreign brokerages raised their target price for Paytm shares, expecting a potential upside of up to 120% from the current market price.

Paytm share price opened a tad higher at ₹558.30 against the previous closing price of ₹558 on the BSE. During the session, the largecap stock gained as much as 20% to hit an intraday high of ₹669.60 on the back of strong volume trade. Paring most of early gains, the stock settled 5.6% higher at ₹589.25 with a market capitalisation of ₹38,262 crore. On the volume front, 9.32 lakh shares changed hands over the counter as compared to the two-week average volume of 1.85 lakh stocks.

Paytm shares have risen 21% in the last two and half months after hitting a 52-week low of ₹439.60 on November 24, 2022. It touched a 52-week high of ₹984.90 on February 7, 2022. The stock has delivered a negative return of 37% in the last one year, while it shed 29% in the six-month period. In the last one month, the stock rose 4.5%, whereas it gained 9% in a week.

For the October-December quarter of the current fiscal, Paytm reported a net loss of ₹392 crore as compared to loss of ₹779 crore in the same period a year ago. The revenue from operations rose 42% year-on-year (YoY) to ₹2,062 crore, driven by increase in merchant subscription revenues, growth in loan distribution and momentum in commerce business. Of this, the company’s payments revenue grew by 21% YoY at ₹1,197 crore, whereas the revenue for its financial services business grew 257% at ₹446 crore, thus accounting for 22% of total revenues. During the quarter, the company’s earnings before interest, taxes, depreciation and amortisation (EBITDA) before ESOP improved by ₹452 crore YoY. 

Paytm Founder and CEO Vijay Shekhar Sharma said the company achieved its target for operational profit excluding ESOP cost. “I wrote to you on April 6, 2022, and set a target for EBITDA before ESOP cost breakeven by the September 2023 quarter,” he said.

During the quarter under review, the company’s gross merchandise value (GMV) for its payments business grew by 38% YoY to ₹3.5 lakh crore. “Our payment processing margin this quarter was within the range of 7-9 basis points (bps) of GMV as indicated in December 2022. This is proforma for Q3 FY 2023 UPI incentive, and despite the inclusion of interchange costs for Paytm Postpaid,” the company said.

Analysts view on Paytm Q3 results

Post Q3 results, foreign brokerage houses such as Citi, Goldman Sachs, Bank of America (BofA), CLSA have recommended a “Buy” rating on Paytm shares and raised target price by up to 120%. While Citi, CLSA, and Goldman Sachs have assigned “Buy” rating to the stock, BofA maintained its 'neutral' rating.

Goldman Sachs

The agency has assigned a ‘Buy’ rating, citing that Paytm’s current share price continues to offer a compelling entry point into India’s largest and one of the most profitable fintech platforms. Goldman Sachs said Paytm’s valuation multiples are at a discount to the global/India peer group, for a growth outlook that is better or in line with the peer group. It has given a price target of ₹1,150, an upside of 119% from current market price.

“Not only do we expect profits to sustain, but with continued strong traction in disbursals, operating leverage, and UPI reimbursement in Mar ’23, we expect adjusted EBITDA margin to expand to 6% in Mar ‘23 (vs +2% in Dec ’22), with c.US$190 mn in adjusted EBITDA by FY25, one of the highest within our India internet coverage,” it said in a report.

Citi

The foreign brokerage has also given “Buy” rating with a price target of ₹1,061, saying that Paytm delivered Adj. EBITDA before ESOPS three quarters ahead of guidance on in-line revenues (+42% YoY), driven by resilient net payment margins, sharply lower A&P spends and overall fixed costs controls. It added saying that Paytm continues to leverage well its payments platform (85mn MTUs, 6mn device merchants) to drive lending distribution, with significant headroom for growth ahead.

Bank of America

Bank of America has a neutral recommendation on Paytm with a price target of ₹730 per share. It seems optimistic on fundamentals and sees room for Paytm to scale up aggressively without taking any balance sheet risks. While Paytm has key differentiating factors versus peers, overall given higher competition & additional regulatory risks, BofA expects a slower path to monetisation leading to delayed EBITDA breakeven.

CLSA

CLSA has also recommended “Buy” rating with a target price of ₹750, saying that Paytm recorded a strong performance in 3QFY23 as it posted positive Ebitda (ex of ESOP costs), beating its own guidance of break-even by Sep-23 by a margin of three quarters. It added that Paytm’s revenue was largely in line as beats in other financial services and commerce revenue made up for a miss in payments.