Paytm has excess cash, buyback won’t hamper growth plans: Morgan Stanley

One 97 Communications (OCL), which owns the brand Paytm, announced that its board approved a proposal for buyback of equity shares. All directors present voted unanimously in favour of the proposal, including all independent directors, a company release said.

On Wednesday, Morgan Stanley indicated that the company's directors and key management personnel (KMP) will not sell shares during the buyback period. The global financial company said the buyback won't hamper any growth plans as it believes the company will generate excess cash after taking into account the investments required for growing the business. It also expects tailwinds on cash generation from improving adjusted earnings before interest, taxes, depreciation, and amortisation (Adj Ebitda).

Paytm has $1.1 billion in cash as of September 2022 and $127-million outlay of cash for buyback, which includes buyback tax, is not a significant amount, according to Morgan Stanley.

The financial company also said it expected it to burn $33 million over the next three quarters before turning Adj Ebitda breakeven in the second quarter of FY24E (2QFY24E). Morgan Stanley expected the buyback announcement at a 50 per cent premium to provide support to the stock price in the near term. The reduction in cash because of the buyback offsets the reduction in share count thereby keeping our price target (PT) unchanged. The financial company has stated 'reiterate OW (overweight)'.

An overweight rating on a stock usually means that it deserves a higher weighting than the benchmark's current weighting for that stock.

According to the statement from Morgan Stanley, it will be a ₹8.5-billion open market buyback. The Paytm board approved a buyback of shares worth ₹8.5 billion ($103mn) at a price not exceeding ₹810, which will be at 50 per cent premium to today's closing price, through the open market route. The number of shares bought back will be 10.5 million at the maximum buyback price of ₹810, representing 1.6 per cent of the paid-up share capital. The buyback amount represents 7 per cent of the paid-up capital and free reserves as on March 2022 and hence shareholders' approval is not required, according to Morgan Stanley.

The statement also said key managerial personnel (KMPs) would not participate. Paytm highlighted that the company's directors and KMP -- Founder and CEO Vijay Shekhar Sharma and Executive Director, President and Group CFO Madhur Deora -- will not sell shares during the buyback period.