Paytm Gets ‘BUY’ Rating from UBS with Price Target of ₹900

Dhaneshwar Prasad

One 97 Communications Ltd., the parent company of leading digital payments and financial services platform Paytm, has received a ‘BUY’ rating from global financial services company UBS in its latest research report. UBS has established a price target of Rs 900 for Paytm shares, suggesting a potential increase of 24.48% from the current levels.

According to a report by UBS, Paytm is projected to reach a break-even point on the EBITDA level by FY25. The brokerage firm predicts that Paytm’s EBITDA margins will increase to 20% by FY28, thanks to the benefits of operating leverage and improved monetization.

UBS pointed out that reaching EBITDA breakeven would be a significant catalyst for Paytm’s revaluation, similar to the trend observed in other modern internet companies such as Zomato.

Investors in these companies place a higher emphasis on achieving profitable growth rather than focusing solely on net profits at the moment.

25% Share of India’s GMV Driven by Payments Business

Paytm has built a strong brand in digital payments with extensive merchant and customer acquisition. Paytm has successfully captured a significant 25% share of the industry’s gross merchandise value (GMV) in payments.

UBS noted that monetization in Paytm’s payments business has accelerated with the rapid uptake of devices and merchant loans.

Now that the regulatory challenges surrounding payments have eased, Paytm can take advantage of the projected 24% compound annual growth rate in the payments player fee pool from FY23 to FY28.

According to UBS estimates, Paytm’s lending business is expected to experience a significant growth of seven times in the next two years until FY24. It is anticipated that the number of lending partners will grow from 4 at present to approximately 9 by FY22.

UBS is very optimistic about Paytm’s merchant loan business, thanks to the company’s exclusive data on merchant transactions and settlements that helps identify potential payment issues early on.

Paytm’s merchant loans have a distinct advantage when it comes to data, making them a safer option compared to other unsecured loans.

Valuations Significantly Lower than Peers

The UBS report highlights that Paytm’s valuations have de-rated significantly and are now trading at a substantial discount to peer fintech firms globally as well as in India.

According to UBS, the RBI’s stricter regulations on unsecured lending have played a role in Paytm’s share price dropping by 25% from its highest point in 2023. Nevertheless, the effect follows a recurring pattern and is confined to specific industries such as postpaid loans.

According to UBS, Paytm’s revenues are projected to experience a significant growth of 21% compound annual growth rate (CAGR) from FY24-28. This takes into account the ongoing expansion in various areas of the company’s operations, including payments, lending, commerce, and cloud services.

Paytm, excluding ESOP costs, has already reached 20% of revenues as margin and turned EBITDA positive in FY24 as per UBS. The brokerage firm anticipates a gradual expansion of the EBITDA margin to 20% by FY28, propelled by the benefits of operating leverage.

Paytm Well-Positioned to Benefit from Digital Growth in India

UBS believes that Paytm is in a favorable position to take advantage of the significant growth in digital payments, lending, and internet usage in India. The company has already achieved an impressive level of scale and brand recognition, positioning itself as the leader in these segments.

Regulatory concerns surrounding fintech companies have diminished, alleviating a significant burden on the stock. By consistently executing their plans, Paytm is projected to reach EBITDA breakeven by FY25. Furthermore, they are expected to experience strong revenue growth and expand their margins in the years ahead.

UBS has given a ‘BUY’ rating on the stock, citing a favorable risk-reward ratio and an upside potential of 24.48% over the next 12 months. For those who have a patient approach to investing, it may be wise to consider purchasing the stock when it experiences temporary declines in order to potentially achieve favorable returns.

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Former Sony professional turned multi-business owner and stock investor, Dhaneshwar leverages his MBA to produce market, IPO and biz content and personal investments on
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