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Paytm hits to record low after Macquarie slashed its target price by 25%

One97 Communications, the parent company of Paytm, plunged to a record low on Monday after Macquarie, an Australian independent investment bank, slashed its target price for the stock by 25 percent or to Rs 900 from Rs 1,200. The brokerage upheld its ‘underperform’ rating on Paytm, revising its loss estimates for the firm for FY22-25 by 16-27 percent due to decreased revenue and increased employee and software costs.

IPO of One97 Communications Ltd., operator of PayTM, at the Bombay Stock Exchange in Mumbai

Courtesy: Dhiraj Singh via Bloomberg

On the BSE, Paytm’s shares dropped as much as 3 percent to an all-time low of Rs 1,152.05. At this pricing, the stock is traded at a 45.1 percent discount to its issue price of Rs 2,150. Paytm is among Dalal Street’s worst public listings of 2021. It’s initial public offering (IPO) was the largest in Indian history.

Due to lower distribution & commerce/Cloud revenue, Macquarie reduced its revenue CAGR projection for Paytm from 26 percent to 23 percent for FY21-26E. Paytm’s price-to-sales multiple was adjusted from 13.5 to 11.5 times. Macquarie stated its revenue estimates, particularly on the distribution side, are in concern as a result of various business updates as well as earnings. Macquarie said in a note, “Post the various business updates and results, we believe our revenue projections, particularly on the distribution side, are at risk.”

The brokerage reduced its revenue forecast for Paytm by 10 percent per year until 2025-26 due to relatively weak distribution and cloud revenue, which was only marginally offset by greater sales from payment operations. Macquarie now forecasts Paytm’s earnings to grow at a 23 percent annual rate over the next five years, up from a 26 percent annual rate earlier.

Paytm’s regulatory concerns, according to Macquarie, are the “elephant in the room.” According to the brokerage firm, the Reserve Bank of India’s recent proposal to cap fees on digital payments might have a meaningful effect on the company’s revenue. “Senior executives have been resigning from Paytm, which is a cause of concern and could impact business in our view if the current rate of attrition continues,” it added.

Macquarie is highly concerned about Paytm’s lending vertical, which the company’s management had highlighted as a key growth factor before the IPO. According to Macquarie, Paytm’s average loan ticket size has been falling and now stands at less than Rs 5,000.

JPMorgan, on the other hand, believes the company can achieve about 60percent revenue growth with over a tenfold increase in contribution profits. Paytm was deemed a one-of-a-kind “fintech horizontal” due to its potential to generate monetization. Paytm is unlikely to be mimicked by competitors that are primarily vertically focused, according to JPMorgan. Paytm is expected to outperform consensus projections for FY23 and FY24, according to the multinational brokerage.

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