Paytm: Down over 40% from 52-week high, should you consider the stock now?
Shares of One97 Communications (Paytm) have been experiencing a persistent downward trend, with a decline of over 3 percent on Wednesday, following a more than 6 percent drop in the previous session. The stock has faced a considerable downturn of 31.5 percent in December alone.
Shares of One97 Communications (Paytm) have been experiencing a persistent downward trend, with a decline of over 3 percent on Wednesday, following a more than 6 percent drop in the previous session. The stock has faced a considerable downturn of 31.5 percent in December alone, exhibiting negative returns in 8 out of the 9 sessions so far. Notably, it has been in the green in only 1 session of December.
This recent decline follows an almost 5 percent drop in November. The overall trend reflects weak investor sentiments and a substantial correction of more than 40 percent from its 52-week high of ₹998.30, reached on October 20, 2023. This decline represents the most significant fall for the company on the back of its announcement of changes to its small ticket loans and Buy Now, Pay Later (BNPL) business.
The ongoing challenges and changes in Paytm's business strategy appear to be impacting investor confidence, leading to a notable correction in the stock's value over the past couple of months.
Despite this recent decline, the stock has shown a 17 percent increase in the last 1 year and a 12 percent rise in the year-to-date performance for 2023.
Read here: Paytm share price down 38% since October highs. Should you Buy, Sell or Hold?
The decline in investor confidence is linked to recent brokerage downgrades, triggered by Paytm's decision to scale back small-ticket loans in response to regulatory changes. The strategic shift away from small ticket Buy Now, Pay Later (BNPL) loans is expected to have a significant impact on the platform's overall loan originations, as small ticket-size BNPL loans constitute over 50 percent of total disbursements.
Although Paytm has outlined plans to expand its credit distribution business by focusing on higher ticket loans for consumers and merchants in collaboration with banks and NBFCs, analysts remain cautious. Concerns persist regarding the departure from small ticket-size BNPL loans, reflecting uncertainties and challenges associated with the strategic shift.
During a recent analyst call, Paytm revealed strategic plans to meet the growing demand for higher ticket-size loans ranging from ₹3 lakh to ₹7 lakh. The company also highlighted increased demand for low-risk personal loans and merchant loans. These announcements provide insights into Paytm's efforts to adapt to market changes and diversify its loan offerings amid challenging market conditions.
Read here: Paytm cuts small-ticket loan portfolio: What that means for stock - explained
Fundamental View
The recent decline in Paytm's share price has prompted analysts to either downgrade their recommendations or adjust their price targets for the stock over the next 12 months. Despite these downgrades, it's notable that none of the analysts have issued a "sell" recommendation on the stock.
This indicates that while there may be concerns or adjustments in their outlook for Paytm, analysts have not completely turned bearish on the stock.
However, the target prices of various brokerages for the stock vary from ₹830 to ₹1,120.
Motilal Oswal: The brokerage has retained its positive view on the stock but has cut its target price to ₹1,025, implying a massive potential upside of 71 percent. MOSL commended Paytm's recent strategic move, suggesting that it not only benefits the leading payments platform but also has positive implications for other non-banking financial companies (NBFCs). It noted that market reactions often exhibit exaggeration, whether in fear or greed.
MOSL also addressed the recent fluctuations in Paytm's share prices, stating that the market reaction might have been overstated. The brokerage emphasised that the adjustment relates to a relatively small portion, approximately 4-5 percent of personal loans in the less than ₹50,000 category. While postpaid loans contribute insignificantly to the overall loan book, it acknowledged that this development sheds light on potential concerns regarding the disbursement of retail loans.
Read here: Paytm to bring 10 mn merchants on ONDC platform by 2025: Vijay Shekhar Sharma
The brokerage also remains watchful on the longevity of these measures and the outlook in low-ticket unsecured loans. It trimmed its FY24 and FY25 disbursement estimates by 15-18 percent, resulting in an 11-16 percent cut in its adjusted Ebitda over FY24 and FY25 (estimated).
JM Financial: The brokerage has a bullish view on the stock and has the highest target price among peers at ₹1,120, implying a strong potential upside of over 86 percent.
As per the brokerage, the rally in Paytm shares since 2022 lows was led by a strong uptick in loan distribution business revenues and operational efficiencies thereof. With a "slightly abrupt" pullback on a key growth lever, this brokerage expects Paytm's stock price to keep reacting negatively until growth trends stabilise and a new strategy plays out.
"We've revised Paytm's FY24E Ebitda loss to ₹680 crore (down 11 percent and adjusted Ebitda to ₹760 crore) and FY25E Ebitda to ₹470 crore (down 31 percent and adjusted Ebitda to ₹1,500 crore) and reduced our target price to ₹1,120," JM Financial.
Geojit Financial Services: Meanwhile, Geojit downgraded the stock to ‘hold’ and revised its target price to ₹941, indicating a potential upside of 57 percent
"The RBI regulations are expected to have limited impact on the company’s performance given that Paytm’s lending partners have a relatively smaller share of unsecured lending. Furthermore, we believe the company will be able to pass on the higher cost arising from the widened capital buffers to the consumers. However, the exit of Berkshire Hathaway and the widening of risk weights have affected the market sentiment leading to a decline in the stock price. We are cautious on the short- to medium-term outlook of the company and, therefore, downgrade the rating on the stock to HOLD with a revised TP of Rs. 941 at 4.3x FY25E P/sales," it explained.
Read here: Paytm share price hits 20% lower circuit on brokerage downgrades
Other brokerages
Morgan Stanley | Rating: Equal Weight
Target Price: ₹830 | Upside: 38 percent
JPMorgan | Rating: Downgraded to Neutral
Target Price: Revised to ₹900 (from ₹1,200 earlier) | Upside: 50 percent
Goldman Sachs | Rating: Downgraded to Neutral
Target Price: ₹840 | Upside: 40 percent
Jefferies | Rating: Maintained Buy
Target Price: Revised to ₹1,050 (from ₹1,300 earlier) | Upside: 75 percent
These assessments indicate a range of perspectives on Paytm's stock. While Morgan Stanley has maintained an ‘equal weight’ rating, JPMorgan and Goldman Sachs have downgraded the stock to 'neutral.' Jefferies, on the other hand, continues to have a 'buy' rating but with a reduced target.
It's evident that recent developments or changes in Paytm's strategic direction have prompted analysts from different firms to reassess their outlooks on the company, resulting in varied recommendations and target price adjustments. Investors may consider these perspectives while making their own evaluations and decisions.
Read here: Penalties rise as RBI turns up scrutiny of banks, NBFCs
Technical View
Om Mehra, Technical Analyst, SAMCO Securities
Paytm is currently trading at ₹670. In 2023, the stock has surged by almost 76% from a low of ₹527 to a high of ₹998. The price has recently fallen from higher levels and has retrenched to 61.8% of the Fibonacci level. Furthermore, the stock showed a rising wedge breakdown, which is a bearish pattern.
The Relative Strength Index (RSI) currently languishes in the oversold zone at 18. In addition, the MACD indicator indicates a slowed reversal from current levels. Despite trading below key moving averages, the stock may undergo consolidation after a sharp recovery, presenting a strategic accumulation opportunity within the 600-620 support zone.
The broader market reflects an 8% surge in Nifty within a month, urging a cautious stance, while mid-cap stocks might continue to outperform, poised for further upward momentum. Amidst this market flux, an astute approach involves monitoring the stock's price at key support levels ₹600-620 for potential entry points.
Read here: Warren Buffett’s Berkshire Hathaway exits Paytm, sells complete 2.46% stake
Rohan Shah - Technical Analyst, Religare Broking Ltd
Paytm has been in a bear grip after hitting the 52-week high of 998 levels and has plunged about 35% thereon. The sharp sell-off recently has led the price to negate its higher high and higher low formation on the weekly chart. Furthermore, the decline in today's session has recorded a breakdown from the rising trendline, which is drawn connecting the significant lows. Besides, it has slipped below its long-term moving average i.e. 200 DEMA which suggests weakness in the overall trend. Going ahead, a breakdown below 650-640 would propel further selling pressure, taking the price lower towards the 610-580 zone. In case of any bounce due to oversold positions, we believe the 700-725 zone will act as a critical resistance area.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.
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