Analysts bullish on Paytm, brokerages tag 'buy'

Paytm, India’s leading mobile payments and financial services company, has secured the backing of top analysts and investors who believe that the company’s business model has the potential to create value and profitability at scale. In Q2FY23, Paytm posted a 76% y-o-y revenue growth at Rs 1,914 crore, while its EBITDA before ESOP cost saw a sharp improvement of 61% y-o-y to Rs 166 crore.

Soon after Paytm released its Q2FY23 financial results, analysts at top brokerage firms lauded its strong performance and said the company “remains ahead” of its September 2023 profitability guidance. Their assessment is based on the company’s strong business model, involving a two-sided ecosystem of payments and financial services for consumers and merchants. 

Operating leverage coming through for Paytm’s strong business model

As pioneers of India’s QR and mobile payments revolution, Paytm’s business model is focused on driving financial inclusion through a wide range of payments and financial services. The company offers a comprehensive suite of payments services to acquire consumers and merchants, and leverage the two-sided ecosystem to cross-sell high-margin financial services and merchant services (commerce and cloud). 

This business model is now raking in the big numbers for the company. Paytm’s core payments business continues to see stronger growth, with net payments margin crossing 400% in Q2FY23, while its commerce business has also turned profitable. Most importantly, the company’s loan distribution business in partnership with financial institutions has seen immense growth despite having incredible headroom for future expansion. 

Analysts, investors remain bullish

Top brokerages including the likes of Goldman Sachs, JP Morgan, ICICI Securities, CITI JM Financial, Morgan Stanley, BoFa and more have maintained ‘Buy’ rating for Paytm, citing the company’s ability to consistently deliver stronger revenue growth from payments, loan distribution and devices business. They also believe that the company is moving on an accelerated path towards profitability, with increasing growth in profitable revenue and lower EBITDA before ESOP cost. 

Goldman Sachs analyst Manish Adukia noted in the brokerage’s most recent note on Paytm that the company exceeded expectations on both topline and EBITDA. “We see consistent improvement in profitability as a key catalyst for the stock, and expect multiples for the stock to re-rate higher as Paytm approaches adjusted EBITDA breakeven by mid-CY23,” he observed in the brokerage note. 

Based on Paytm’s Q2FY23 financial results, BofA’s Sachin Salgaonkar noted that the company has seen platform expansion and increased monetization across businesses, while Sumeet Kariwala for Morgan Stanley highlighted the improvement in payments business revenue and strong loan disbursement. 

More recently, Saurabh Kumar of JP Morgan said in a November 18, 2022 note that one of the key drivers of margin expansion for Paytm’s payments business has been scaling up of device subscriptions, with 5.1 million deployments as of October 2022. He also noted that Paytm’s financial services scale up remains “ahead of plan”, supported by the strong growth in loan distribution. It may be noted that Paytm’s loan distribution business has now reached an annualised disbursement run rate of Rs 37,000 crore.

“We remain Overweight on the stock and believe continued indirect cost control (marketing, sales and cloud costs) remains key to achieve Adj Ebitda,” Kumar added. 

This shows that analysts remain bullish on Paytm’s ability to generate profitability, all thanks to the company’s sustainable business model that is focused on driving greater financial inclusion and creating long-term value for shareholders. This is reflected in the company’s financial results, which are getting stronger by the quarter. 

As the company business model continues to deliver stronger monetization, more investors are now confident about the company’s future growth potential. For Paytm, however, the journey to build a scalable and profitable financial services business has just started.