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Brokerage firm Macquarie Research has initiated an underperform rating on Paytm owner One97 Communications ahead of its listing on Thursday, saying its business model lacks focus and direction.

The brokerage firm has reduced its target price to 1,200 a share, down 40% from its issue price of 2,150 calling the company a 'cash guzzler'. 

“Dabbling in multiple business lines inhibits PayTM from being a category leader in any business except wallets, which are becoming inconsequential with the meteoric rise in UPI payments. Competition and regulation will drive down unit economics and/or growth prospects in the medium term in our view. Unless PayTM lends, it can’t make significant money by merely being a distributor. We therefore question its ability to achieve scale with profitability," Macquire said in a note to its investors.

“Most things that PayTM does, every other large ecosystem player like Amazon, Flipkart, Google, etc, are doing. The competition is quite evident in the buy now pay later (BNPL) space and distribution of various financial products. Longer term, take rates in the distribution business will be driven southwards by competition and regulation", the brokerage firm added.

Macquire expects RBI to come up with regulations in the fintech space, particularly in the BNPL space. “ We are also not enthused with the company’s complicated organisation structure, related-party transactions, churn in top management and a thinly staffed board with 75% of members being based out of India," it said.

Paytm's losses narrowed down due to lesser marketing expenses, further aided by lower payment processing charges. The company didn’t report an operating profit or a net profit in FY21. They clocked sales of 3186 crore in FY21.

The firm's valuation, at 26x FY23E price to sales, is expensive especially when profitability remains elusive for a long time. “We are unwilling to give it a premium here as we are unsure about the path to profitability. Key risks include change in regulations which allow monetisation of UPI and receipt of a banking license," the report added.

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