Goldman Sachs, JPMorgan give thumb up to Paytm

Global financial advisory majors JP Morgan and Goldman Sachs have reiterated their bullish outlook on One97 Communications (Paytm).

Goldman Sachs, which views Paytm as one of the most compelling growth stories at an attractive price, has increased the price target to ₹1,100 (from ₹1,070).

Shares of Paytm, after hitting a high of ₹693.80 in intra-day deal on Thursday, closed 2 per cent higher at ₹688.05, over the previous day's close.

JP Morgan, which hosted Paytm at its Financials tour 2022, said, “Paytm is undergoing a model shift from chasing “growth at any loss” to “profitability at scale”.

Contribution margin

"The company maintained its guidance of Adj. EBITDA profitability by September 2023 – which we believe most investors remain sceptical of — rightly so given the sharp increase in indirect expenses since listing, negating gains in contribution margin (CM) since last year," it added.

Paytm has been reinvesting gains in CM back into marketing and its device business build-out which has limited its EBTIDA margin improvement. "As the investments in business expansion are captured in the base, the increase in indirect expenses could moderate which could drive significant operating jaws in Adj. EBITDA losses. We think this will be key to Paytm achieving its guidance for Sep-23 Adj. EBITDA profitability," it added.

The pre-IPO lock-in on Paytm’s shares (86 per cent of outstanding shares as of June 2022) will end on November 18 and remains an overhang on the stock, said Goldman Sachs.

"While we recognise that lock-in expiry may represent an overhang on the stock, we expect Paytm to deliver 50 per cent revenue growth for the next few quarters and continue its transition from an erstwhile payments-only business to one with a strong financial services portfolio. As a consequence, we expect margins to further improve, and forecast FY24 to be the first full year of adjusted EBITDA profitability for Paytm, and see this as a key catalyst for the stock," it added.

The company has been in news ever since it came out with a massive ₹18,600-crore IPO last year at an issue price of ₹2,150. Last month, reports of the Enforcement Directorate (ED) carrying out fresh raids on online payment gateway firm Paytm sent the stock downwards. But the company’s clarification that the account frozen by ED was not its account helped assuage investor sentiment.

Similarly, the stock came under pressure recently, after proxy advisory firm Institutional Investor Advisory Services India Ltd (IIAS) urged shareholders to vote against company founder Vijay Shekhar Sharma’s reappointment as the Managing Director for five more years. However, the overwhelming response to his reappointment helped the stock recover lost ground.