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On Friday, Paytm's stock gained 5.87% and closed at 467 apiece on the NSE after Citi Research stated in a note that Paytm's lending business has been expanding at a rapid and steady rate, outpacing those of its rivals, such as PayU's LazyPay. Citi continues to value Paytm as BUY with a target price of Rs. 1055, and Citi, which recently published a report on PayU's Buy Now Pay Later product LazyPay, stated that Paytm Postpaid is far superior to the former due to the fact that LazyPay (PayU's BNPL product) had a customer base of 3.9 million as of June'22 compared to Paytm Postpaid active accounts at c5 million (+0.8mn vs +2mn for Paytm).

“Paytm has gained market share in digital payments vs PayU, although the growth appears comparable on MDR-generating TPV basis at 59% YoY for PayU vs c52% YoY (Paytm) for Jan-Jun’22. In the BNPL segment, Paytm is seeing faster growth in active customer base vs PayU’s Lazypay. Lazypay’s reported loss-rate has increased CYTD to 3.1% (+30bps vs CY21) – something to watch out, for the broader BNPL space in India (Paytm has reported stable asset performance across its lending partners’ portfolio with loss-rates at 1.1-1.3% for the postpaid BNPL product). We note that Paytm’s business in lending space is distribution (no b/s exposure) and therefore its revenue/cost-structure are commissions-based. Paytm is trading at 5x FY24E EV/Contribution Profits (4x EV/Gross Profits). We acknowledge overhang risks from further selling by existing pre-IPO shareholders and that fintech is a competitive space but at these valuations, those risks are overdone," said Citi in a note.

The Citi report said that while Lazypay reported a loss rate at ~ 3.1% YTD (cal. yr 2022), an increase of 30 bps versus 2021, Paytm has reported stable asset performance across its lending partners’ portfolio with loss-rates at 1.1-1.3% for the postpaid BNPL product. At the conclusion of the second quarter of FY 2023, there were over 15 million online and offline merchants who accepted Paytm Postpaid, with over 6 million subscribers. In Q2FY23, there were 220% more Postpaid Loans disbursed than the previous quarter while their value climbed by 449% YoY and 20% QoQ to 4,050 Cr. Additionally, Paytm's financial services revenue for the 1H was US$55 million (+400% YoY), compared to LazyPay's US$41 million (+438% YoY).

Prosus, the parent company of PayU, added regarding the Indian payments industry that “In India, our largest payments market, TPV grew 59% to US$28bn, and revenue increased 48% to US$183m, following increased digitalisation in ecommerce, financial services and bill payments, and a rebound in post pandemic travel “

The research analysts of Citi said further in a note that “We value Paytm on SoTP basis, assigning different multiples to the three key verticals. We value the Payments business on an EV/GP basis at 13.5x Sep’24E (at par with global payment companies on EV/GP basis; EV/S: 4x) resulting in Rs466/sh (Rs429/sh earlier). We value the Financials Services business on EV/S at 12x (we expect higher profitability in the financial services vertical and in-line with global fintech offering similar services; multiple at 20% premium to global peers ) – Rs375/sh (Rs353/sh earlier). We value the commerce and cloud vertical at 3x EV/S at the lower end of global e-commerce valuations – Rs81/sh. Overall, this approach (+ net cash and investments) yields a TP of Rs1,055/sh. This stock is High Risk based upon our quantitative model, but its healthy net cash position and likely declining cash burn going forward do not support a High Risk rating."

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 decisions. 

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