Goldman Sachs says Paytm’s current share price is a compelling entry point, ICICI Securities issues Buy rating

Analysts believe Paytm's ESOP costs will gradually reduce and are currently at par with other listed tech cos in India as well as globally ICICI Securities report said that by FY26, Paytm's monthly transacting users are likely to double

Paytm, India's leading digital payments and financial services, continues to get 'Buy' calls from top brokerages. After Goldman Sachs, BofA, Morgan Stanley and Dolat Capital, ICICI Securities has also issued a Buy rating for Paytm.

Goldman Sachs had given Paytm a Buy rating, with a target price of Rs 460 on February 7. On Monday, the investment bank reiterated its Buy rating, pointing out key notes for investors. The report said that "the current share price offers a compelling entry point into India's largest and amongst the fastest growing fintech platforms".

ICICI Securities has now initiated coverage for Paytm and highlighted the company's strong growth potential in terms of target addressable market (TAM), giving a "Buy' rating and target price of Rs 1,362.

Goldman Sachs highlighted that Paytm continues to gain market share across both UPI and non-UPI payments, besides strong growth in lending business. It said Paytm's net payments take rate or spreads have, defined as revenue less payment processing charges (PPC) as a proportion of Gross Merchandise Value (GMV) have been improving.

"Paytm's net payments take rate (or spreads, defined as revenue less payment processing charges as a proportion of GMV) have been improving. From 8 bps in 3QFY22, we forecast spreads to widen to 11 bps by FY26E as a result of Paytm's scale benefits; increasing share of UPI for wallet money addition; rising share of wallet for online payments (vs in-store, which have zero MDR); and rising share of device rental revenues," the brokerage noted.

Paytm's ESOP costs to gradually reduce, currently at par with other listed tech cos in India as well as globally.

Goldman Sachs noted that Paytm's Employee Stock Ownership Plan (ESOP) costs will reduce gradually and is currently at par with other listed tech companies in India as well as globally.

"We forecast ESOP charge for Paytm to be highest (at Rs 3.9 billion per quarter) for first two years (when the first tranche vests, per Paytm), and then gradually reduce over the next three years. Paytm also has about 15 million un-granted options and per our estimate, the total share count could increase by 46 million (or 7 per cent of current outstanding), if all options were to be vested/granted," said the Goldman Sachs note.

"We note that as a proportion of total operating expenses, Paytm's ESOP cost is not significantly different vs other global platforms such as Airbnb and DoorDash, as well as recently listed India internet peers such as Zomato and PB Fintech."

Meanwhile, ICICI Securities in its note called out Paytm's immense growth potential in terms of target addressable market (TAM), buoyed by its leadership position in India's digital payments ecosystem.

The brokerage said Paytm's digital payments business has the potential to grow strongly in future, reflecting its "sizeable two-sided digital ecosystem with proven leadership in payments".

"Paytm is well ahead in the race of digitisation, building a robust full stack technology suite integrated across the ecosystem with distinct features, high success rates, easy user interface, and customer convenience. It has an early mover advantage in rolling out wallet, FASTag, and is ahead of the curve in (skill based) online gaming, too," said the note by ICICI Securities.

During the October-December quarter, the company saw its revenues jump by 89 per cent y-o-y to Rs 1,456 crore, EBITDA losses (before ESOP expense) came down to Rs 393 crore from Rs 488 crore during the same quarter in the previous year.

In its latest filing with the stock exchange, Paytm had shared its highest ever growth in monthly transacting users to 68.9 million users. Now, it seems analysts are bullish about this growth momentum to continue. ICICI Securities highlighted that Paytm's monthly transacting user base (MTUs) is likely to double over FY22-26E to more than 120 million.

Paytm had said that in Q3 FY 22, its merchant payments-led GMV stood at Rs 2.5 lakh crore. Analysts at ICICI Securities forecast that Paytm's merchant GMV would grow at 36 per cent CAGR over FY22-26E to reach Rs 30 trillion and within this, MDR linked GMV is estimated to grow at more than 25 per cent.

The brokerage noted that Paytm's contribution margin has potential to further improve 40 per cent-46 per cent by FY24E/FY26E.

"Aided by this contribution margin, there is some visibility of EBITDA getting into positive territory post FY26E. Adjusted EBITDA margin (excluding non-cash ESOP charges) will turn positive by FY26," it added.

Both Goldman Sachs and ICICI Securities believe that Paytm's lending business, in which it partners financial institutions to provide loans on its platform, has the potential to grow rapidly in the medium term.

Goldman Sachs said: "We believe Paytm will be able to continue to scale its lending portfolio, and forecast $10 billion in disbursals by FY26E, vs $900 million in FY22. Paytm has continued to add new partners for its lending products over the last few quarters, suggesting to us that lenders are finding value in this partnership."

Paytm's lending business witnessed record growth in January 2022, maintaining the positive trend witnessed in the Q3 FY 22 earnings. Last month, Paytm registered 1.9 million loan disbursals, marking a y-o-y growth of 331 per cent; aggregating to a total value of Rs 921 crore (y-o-y growth of 334%). This also included a staggering growth in its Buy Now, Pay Later product -- Paytm Postpaid.

"For Paytm's BNPL product, 30 per cent + of the monthly sign-ups (Dec '21 quarter) were new-to-credit customers, helping expand the credit base for Paytm's financial partners. Per Paytm, performance of the company's loan portfolio has resulted in higher confidence from lenders to increase the scale of this business," it added.

Meanwhile, ICICI Securities also shared an optimistic outlook about Paytm's lending business, estimating 18-19 million consumers (15 per cent of MTUs), and an increasing number of merchants to avail lending products through Paytm platform by FY26E.

Sharing a medium-term outlook, it estimated the total lending business revenue to grow at 61 per cent over FY22-26E.