Is Paytm scrip still overvalued?

Facing Headwinds

- Paytm shares fell over 6% on Mon

- Further 3.32% fall on Tuesday to Rs1,119.50

- It fell 47.93% so far from issue price of Rs2,150

- Irda rejected its plan to foray into insurance sector

- Its payment business accounts for 70% of revenues

- Payment business will be under threat if there are any regulatory changes

- Reports that HDFC MF reducing its holding in Paytm also negatively impacted the share price

Mumbai: Experts feel that the shares of Paytm are still overvalued. Shares of One 97 Communications, which owns Paytm brand, fell sharply by over six per cent on Monday to hit its all-time low of Rs 1,151 before closing at Rs 1,157.9. The stock on Tuesday further fell Rs38.40 or 3.32 per cent and closed at Rs1,119.50 on BSE. Paytm shares fell 47.93% so far from issue price of Rs2,150 per share.

Experts cite the rejection of its plan to foray into insurance sector by the sectoral regulator, IRDAI also behind its poor show on the bourses.

Manoj Dalmia, founder and director at Proficient Equities, says: "Paytm stock plunged by six per cent and is further down 1.48 per cent making its all-time low. Paytm's payment business accounts for about 70 per cent of revenue, which will be under threat if there are any regulatory changes. Also, its entry into insurance sector has been rejected by regulators. The stock is trading at about 17-time FY23 sales and it seems overvalued considering higher expenses and risk of attrition of senior executives.

Rs1285 was a key support area. The price has already crossed this level. We expect a small retracement till Rs1336.35 if any buying happens. Otherwise, it will go further downwards to Rs724.60, he added. The shares of the company came under pressure following news that HDFC Mutual fund, one of the four mutual funds that were anchor investors in its IPO, significantly reduced its holding of Paytm across two schemes in the month ended December.

Paytm fell 6 per cent Monday and it lost 13 per cent since December 31.

While MFs held 0.81 per cent in the company as of November 17, disclosure of reduction in holding by HDFC Mutual fund in the company, weakened sentiment.

"Paytm's try into insurance was recently rejected by IRDAI, this could also impact its prospects of getting a banking licence. We expect Paytm to be more downside to touch the levels of Rs 1050-1000 in near terms. Investors may remain cautious towards taking fresh positions in Paytm for time being," says Ravi Singh, vice president & head of research, Share India Securities.

He feels that Paytm is oversold on the hourly chart of the Relative Strength Index, therefore he has recommended to buy the company's shares in the range of 1100 to 1140, stop loss at 1077 with a target of 1244.

We initiate coverage on One 97 Communications (referred to interchangeably as Paytm or OCL in the report) with a SELL rating and a target price of Rs1,240. Paytm faces stiff challenges in its customer acquisition engine which would slow down its revenue growth in the core payments business while scale-up of its related ecosystem businesses (Commerce, Cloud and Financial Services) leaves much to be desired, he added.

As per a report by JM Financial, Paytm will need to keep funding its MTU growth and thus the road to profitability largely relies on the growth trajectory of other businesses. While BNPL / loan origination / merchant credit offer a large opportunity canvas, building a successful lending business is a long drawn process and requires razor sharp focus and topnotch execution against formidable opponents.

Also, Paytm will need to adapt itself to this evolving regulatory environment for digital lenders; this, in our view, is likely to get stringent than conducive. We forecast GMV CAGR of 41.1 per cent, revenue CAGR of 36.1 per cent and GMV/MTU CAGR of 18.2 per cent over FY21-26E for Paytm. However, even with our robust growth expectations (which in turn are a function of its ability to fund MTU growth through cashback / discounts), and an EBITDA breakeven by FY27E, we find valuations rich and the path to profitability fraught with high execution risks in context. Our target price of Rs1,240 is based on 55x FY30E EV/EBITDA discounted back to FY24, it said.

However, the company said that it has recorded a stellar growth in quarter ending December, combined with scale-up of lending business and devices.

'Focus on lending leads to huge scale-up as lending products register 5x growth in volumes: Number of loans disbursed through our platform increased by 401 per cent y-o-y to 4.4 million loans in Q3 FY 2022. This is in continuation of the significant growth seen in the past

quarter', PayTM said in a statement.

In Q3 FY 2022, the value of loans disbursed through our platform during the quarter was Rs 21.8 billion (run-rate of $1.2 billion), an increase of 365 per cent y-o-y. We have seen stellar growth in each of the lending products, i.e. Paytm Postpaid (Buy-Now-Pay-Later), personal loans and merchant loans, it added.

Paytm's payments ecosystem - with presence across merchants and customers - acts as a robust customer acquisition, engagement and retention engine giving multiple customer journeys and monetization opportunities.

Experts also believe that rapid scale of UPI and competitors that are developing UPI-based use cases should significantly impact Paytm's revenue growth for the payments business. While MTUs could continue to grow at a healthy pace as long as Paytm continues to fund growth aided

by cashbacks/discounts, analysts see Payments revenues clocking a 30 per cent CAGR vs a 43 per cent CAGR in GMV over FY21-26E with Payments take rate (as % of total GMV) dropping to 31bps from current 48bps+ levels (as per JMFe). Financial services, other businesses scale up is road to profitability: Financial services scale up, through BNPL/merchant lending/loan origination, offers a large opportunity canvas and growth is a not a challenge (we see financial services revenues at 128 per cent CAGR over FY21-26.