A restaurant advertises the use of the Paytm digital payment system
Courtesy: Dhiraj Singh

Goldman Sachs upgrades rating on Paytm shares to ‘buy’ with target price of Rs 1460

Goldman Sachs, the US-based brokerage firm, has upgraded Paytm’s parent company One97 Communications to buy from neutral following the release of its December quarter results, highlighting robust growth projections and better risk-reward. The brokerage’s target price for the digital payment company has been revised from Rs 1600 to Rs 1460.

A restaurant advertises the use of the Paytm digital payment system
Courtesy: Dhiraj Singh

Paytm’s stock has plunged 30 percent so far this year, according to Goldman Sachs, and the risk-reward ratio has flipped to the upside. According to the brokerage, the stock has a 119 percent upside opportunity and a 14 percent downside probability in the bull case scenario. Goldman Sachs further said the current share price takes into account a series of bearish factors, including merchant discount rate (MDR) caps, a drop in market share, as well as a slower ramp-up of the financial services sector, all of which are unlikely.

“We believe Paytm’s strong topline growth of 89% YoY in 3QFY22 (December quarter) will help allay investor concerns around declining payments take rate in recent years. In addition, Paytm continues to gain market share across both UPI (unified payments interface) and non-UPI, and its lending business is seeing robust traction,” the brokerage firm said in a note to clients.

The brokerage firm expects that robust topline growth will address investor concerns about the recent downturn in payments take rate. According to Goldman Sachs, Paytm will achieve adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) break-even by the fiscal year 2024-25. There is a small probability that the company will need to raise funds again since it has a healthy balance sheet, it added.

Paytm is currently trading at a 10 percent discount to global fintech counterparts, but its revenue growth is stronger, according to the brokerage. The current share price reflects a 5.6 times multiple for its payments division, which is lower than the peer group. According to the brokerage firm, this prompted the upgrade.

According to Goldman Sachs, other major factors fueling the upgrade included a higher-than-expected take rate, ongoing market share gains in the payments business, continued positive traction in lending, healthy loan portfolio performance, as well as a major improvement in the risk-reward ratio. Paytm operates in numerous Total addressable markets (TAMs), most of which are expected to flourish at 20percent or higher CAGRs over the next five years, it added. Paytm is well-positioned to encapsulate the market share of digital payments in India, and its business model is distinguished by network effect, according to the brokerage firm.