Paytm shares: JPMorgan remains overweight, sees over 60% upside
Paytm share price has fallen more than 54% in 2022 (YTD) so far
PremiumAnalysts at JPMorgan believe a sustained improvement in the profit margin contribution (Q4F22 35%) at Paytm seen over the last 2Qs sets the stage for operating leverage Q2F23 onwards as indirect costs moderate - resulting in a consistent downtrend in Adjusted EBITDA loss and an eventual path to breakeven.
Following a period of restriction, the brokerage has re-instated its Overweight rating on Paytm shares with a March 2023 price target of ₹1,000 apiece, implying a potential upside of over 60% from the current stock level.
“Lending business scale up, an increased contribution from devices and credit card sourcing should result in consistent quarterly improvement in contribution profits which should touch near 40% by 4Q23. A reduction in the adj. EBITDA loss with better cost controls in indirect expenses will be a key fundamental stock driver," the note stated.
While Paytm does not directly take credit risk on loans syndicated, the losses for the company (and industry at large) shows contained levels of delinquencies in BNPL and merchant lending loans and below levels under-written by partner financial institutions. This in turn could start to drive some incentive income Q4 onwards, as per JPM.
The digital financial services firm's consolidated net loss widened to ₹761 crore during the fourth quarter ended March 2022 from ₹444 crore loss in the year-ago quarter.
Though, Paytm said it is on track to achieve break-even by quarter ending September 2023, which it hopes will be driven by continued revenue growth, along with moderation in costs as operating leverage kicks in.
“Working backwards from the guidance of achieving breakeven by 2Q23 and assuming a 42% contribution margin by that point, the implied indirect expense growth will need to grow by 34% over 6 quarters or at a 22% CAGR, which is well above F22 growth of c.50%. The company has sharply increased its employee costs led by hiring in field force. Given that most of the roll out is done, indirect cost should start to moderate 2Q23 onwards," JPMorgan added.
The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
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