International brokerage firm Macquarie has initiated coverage on Paytm stock with ‘underperform’ rating, and a target price of Rs 1,200 per share. Macquarie’s target price on Paytm shares is 44% lower than the IPO price of Rs 2,150. Earlier today, Paytm stock listing disappointed investors as the fintech major fell over 27% from the IPO price on its debut.
Analysts at Macquarie said that Paytm is a “cash guzzler”, adding that regulations and competition are added worries for the stock. “Paytm’s valuation, at 26x FY23E Price to Sales (P/S), is expensive especially when profitability remains elusive for a long time,” Macquarie said in the note. Paytm stock was trading at Rs 1,602 in late morning trade today.
The poster boy of digital payments in India, Vijay Shekhar Sharma, now faces the ignominy of being referred to as the first entrepreneur from India’s unicorn club to have the worst listing in the public market.
At current prices, One97 Communications trades at $14 billion, much lower than the $20 billion that it was valued at its IPO price of ₹2,150. In fact, it has fallen below that valuation of $16 billion that it had fetched when the company had raised $1 billion in 2019.
Suresh Ganapathy and Param Subramanian, analysts who authored the report, say that “dabbling in multiple businesses prevents Paytm from being a category leader in any business except wallets, which is becoming inconsequential with the meteoric rise in UPI payments.” Paytm has a market share of 65-70% in the digital wallets business and about 40% in the consumer-to-merchant segment by transaction volume of mobile payment instruments.
The report mentions that Paytm is “a loss leader” in the payments business. “Competition and regulation will drive down unit economics and/or growth prospects in the medium term.” Unless the company enters the lending business, it can’t make significant money by merely being a distributor, thereby “impeding its ability to achieve scale with profitability," it says.
Paytm shares fall 27% on trading debut after India’s biggest IPO
Fintech group loses $5bn in market value as investors question path to profitability. Shares in Indian financial technology company Paytm fell by more than a quarter on its stock market debut, wiping $5bn off its valuation in a rout that underscored investor unease about India’s largest ever IPO.
The 11-year-old company has sold itself as India’s equivalent to Chinese financial groups such as Ant, with businesses in everything from mobile payments and fantasy sports to gold trading.
But the IPO attracted tepid investor interest, with domestic institutions including mutual funds skeptical about its path to profitability and ability to compete with Big Tech competitors such as Google.
Shares in Paytm closed 27 per cent lower at Rs1,564 ($21.05) on Thursday. The IPO is the most important in a string of listings by lossmaking, richly valued internet start-ups in India. Shares in food-delivery company Zomato, beauty ecommerce group Nykaa and insurance aggregator Policy Bazaar all rose from their issue price.
Paytm’s performance over the coming weeks will be watched as a gauge of how far public-market investors will go to back cash-burning tech businesses on the promise of future riches.
Paytm was an early mover in mobile payments but has lost market share to foreign competitors including Google and Flipkart, the Indian ecommerce company owned by Walmart. Its more recent forays into new business areas have yet to pay off.
Supporters of Paytm — which has 50m active monthly users — say the company is well positioned to grow as fintech services become more widely adopted among Indian consumers, thanks to rising incomes and internet penetration.
India equities have been the best performing among large Asian markets this year, with the Bombay Stock Exchange’s benchmark Sensex index up more than 25 per cent. The growth of private fundraising in India has also outstripped that of China.
But rising valuations, with Paytm priced at 43 times its 2021 sales, have left some investors concerned that the market is overheating.
The head of equity capital markets for Asia at one Wall Street investment bank that worked on the deal said take-up had been “very slow” during the book-build for the IPO. “There’s always a deal that comes where they push the envelope and it doesn’t quite work,” he said.
After Paytm, a number of other companies are expected to list in the coming months including Softbank-backed hotel group Oyo and ride-sharing company Ola.
REASON for such a decline
As per Analysts at Macquarie
Fingers in too many pies
Macquarie said that Paytm has too many fingers in too many pies. “PayTM has a history of spinning off several business verticals without achieving market leadership or profitability,” they added. Currently Paytm operates in the Payments segment, consumer lending, Payment gateway, credit card, wealth, mini application platform, advertising, and even ticketing.
However, none of the businesses of Paytm are profitable yet. “PayTM has been a cash burning machine, spinning off several business lines with no visibility on achieving profitability,” analysts said. The foreign brokerage firm said that Paytm has drawn in equity capital of Rs190 bn since inception, of which only Rs 132 bn has gone towards funding losses.
Paytm, as analyzed by Macquarie, generates very low revenues for every dollar invested or spent towards marketing which makes the company a cash guzzling machine.
Another decade of losses?
According to Macquarie’s estimates, Paytm will only generate positive free cash flow (FCF) by Financial year 2029-30. “Despite factoring in an aggressive ~50% CAGR increase over the next five years in non-payment business revenues led by distribution business, we expect Paytm to generate +ve FCF only by FY30E,” the report said. On the other hand, EBITDA break-even is expected only by financial year 2025-26.
China link may hurt banking license prospects
While many domestic brokerage firms have said that Paytm getting a small finance bank license would open more doors for the company, however, Macquarie thinks otherwise. “In our view, Paytm is not a practical contender for a universal/small finance bank license.
The main reason in our view is that Chinese controlled firms, Alibaba and Ant group still own close to 31% stake in One97 Communications (PayTM parent entity) post the IPO,” the report said. Other regulatory hurdles are also seen as possible setbacks for Paytm. Watchdogs such as RBI, SEBI, and IRDA clamping down on service providers to reduce costs.
Valuations sky-high
Factoring in regulatory risks, no clear path to profitability, and the cash guzzling machine that Paytm is, Macquarie has termed the business as overvalued at the upper end of the price band of Rs 2,150 per share.
“We value PayTM using 0.5x PSg multiple on Dec-23 annualized sales to arrive at our TP of Rs1,200, implying 44% downside to the upper end of its IPO price band,” they said.
For More Info Visit TAXAJ Posted By AASHU Team TAXAJ