Paytm stock rating ‘Overweight’, Morgan Stanley sees 43% upside; target price still below IPO price

Paytm stock has received its first bullish rating, coming from global brokerage Morgan Stanley, with as much as 43% upside. Morgan Stanley analysts have initiated coverage of Paytm parent company One97 Communications with an ‘Overweight’ rating, and a target price of Rs 1,875 per share. The target price set by Morgan Stanley is still below the price at which Paytm shares were offered in the IPO. Paytm stock price has tanked 40% from its IPO price since listing in November. Morgan Stanley was one of the Book Running Lead Managers of the Paytm initial public offering. Paytm stock was up 2.45% on Wednesday, trading at Rs 1,342 per share.

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Bull, base and bear case targets

Base case target price is set at Rs 1,875 per share. Here, Paytm is expected to record revenue growth of a 43% CAGR over the next five years, with the share of financial services/commerce & cloud rising to 39% versus 27% currently.

Bull case target price expects the stock to rally Rs 3,800 per share. In such a scenario, Morgan Stanley has built revenues of Rs 260 billion in fiscal year 2026, which is 57% higher than the base case.

Bear case scenario may see the stock falling further to Rs 800 per share. Here analysts expect revenues of Rs 83 billion by 2026. “This is driven by reduced digital payment charges under wallets/credit cards, weaker delivery on loan underwriting in financial services, and weak execution on advertisement revenues in cloud/commerce segment,” they said.

Well placed with large TAM

“Through its digital payment platform, we believe Paytm has built a strong customer acquisition engine, which has achieved significant scale – both with consumers and merchants,” Morgan Stanley analysts said in the report. They added that India has a distinctive tech architecture and is significantly under-penetrated in financial services, an area where Paytm is well placed to benefit via bank/NBFC partnerships, and its rapidly cross-selling financial services/ commerce at low incremental costs. “As financial services ramp up, we expect revenues and profitability to grow strongly over the next five years,’ they added.

Morgan Stanley analysts believe Paytm can see strong growth in its addressable markets. The retail digital merchant payments of Paytm are pegged to grow by >5x to $1.8 trillion by the financial year 2025-26; retail/ SME loan disbursements vertical can achieve a 23% CAGR to $0.9 trillion during the same timeframe; commerce services to grow at a 25% CAGR over the next five years to $300 billion. Analysts believe Paytm’s EBITDA to break even in the fiscal year 2025.

Valuations justified?

“We value PAYTM at $17 billion using an EV/revenue methodology, which is applied to our revenue estimates in F26 (five years out) and discounted back to arrive at our price target of Rs 1,875,” Morgan Stanley said. The brokerage firm has compared Paytm with fintech firms listed in the United States and Australia. “We consider players such as Affirm Holdings Ltd, PayPal and Square in the US and Afterpay in Australia. We agree that the current profitability of these players is higher than at PAYTM. Having said that, we believe PAYTM’s profitability can be comparable to these players as it scales up the share of financial services/cloud and commerce revenues,” they added.