Paytm stock may fall 44% from IPO price, says Macquarie, questions valuation; check target price

Macquarie’s target price on Paytm shares is 44% lower than the IPO price of Rs 2,150.
(Image: REUTERS)

International brokerage firm Macquarie has initiated coverage on Paytm stock with ‘underperform’ rating, and a target price of Rs 1,200 per share. Macquarie’s target price on Paytm shares is 44% lower than the IPO price of Rs 2,150. Earlier today, Paytm stock listing disappointed investors as the fintech major fell over 25% from the IPO price on its debut. Analysts at Macquarie said that Paytm is a “cash guzzler”, adding that regulations and competition are added worries for the stock. “Paytm’s valuation, at ~26x FY23E Price to Sales (P/S), is expensive especially when profitability remains elusive for a long time,” Macquarie said in the note. Paytm stock was trading at Rs 1,602 in late morning trade today.

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Fingers in too many pies

Macquarie said that Paytm has too many fingers in too many pies. “PayTM has a history of spinning off several business verticals without achieving market leadership or profitability,” they added. Currently Paytm operates in the Payments segment, consumer lending, Payment gateway, credit card, wealth, mini application platform, advertising, and even ticketing.

However, none of the businesses of Paytm are profitable yet. “PayTM has been a cash burning machine, spinning off several business lines with no visibility on achieving profitability,” analysts said. The foreign brokerage firm said that Paytm has drawn in equity capital of Rs190 bn since inception, of which only Rs 132 bn has gone towards funding losses. Paytm, as analyzed by Macquarie, generates very low revenues for every dollar invested or spent towards marketing which makes the company a cash guzzling machine.

Another decade of losses?

According to Macquarie’s estimates, Paytm will only generate positive free cash flow (FCF) by Financial year 2029-30. “Despite factoring in an aggressive ~50% CAGR increase over the next five years in non-payment business revenues led by distribution business, we expect PayTM to generate +ve FCF only by FY30E,” the report said. On the other hand, EBITDA breal-even is expected only by financial year 2025-26.

China link may hurt banking license prospects

While many domestic brokerage firms have said that Paytm getting a small finance bank license would open more doors for the company, however, Macquarie thinks otherwise. “In our view, PayTM is not a practical contender for a universal/small finance bank license. The main reason in our view is that Chinese controlled firms, Alibaba and Ant group still own close to 31% stake in One97 Communications (PayTM parent entity) post the IPO,” the report said. Other regulatory hurdles are also seen as possible setbacks for Paytm. Watchdogs such as RBI, SEBI, and IRDA clamping down on service providers to reduce costs.

Valuations sky-high

Factoring in regulatory risks, no clear path to profitability, and the cash guzzling machine that Paytm is, Macquarie has termed the business as overvalued at the upper end of the price band of Rs 2,150 per share. “We value PayTM using 0.5x PSg multiple on Dec-23 annualised sales to arrive at our TP of Rs1,200, implying 44% downside to the upper end of its IPO price band,” they said.