One97 Communications: Paytm Shares Hit Record Low As Macquarie Sees Almost 25% Downside

Macquarie retained its lowest rating on One97 Communications Ltd., nearly two months after the parent of the digital payments platform Paytm debuted on the bourses, as it sees “no sign of headwinds abating” and on premium valuation.

The financial services provider maintained its ‘Underperform’ rating on the payments stock and cut its target price to Rs 900 apiece— implying a 25% downside from current levels. Its previous target price of Rs 1,200 target was assigned hours before its listing on Nov. 18, 2021, which was significantly lower than the Rs 2,150 IPO price.

“We believe our revenue projections, particularly on the distribution side, is at risk and hence we pare down our revenue CAGR from 26% to 23% for FY21-26,” Macquarie said in a Jan. 10 report. “We are roughly cutting revenue estimates for FY21-26E on an average by 10% every year due to lower distribution and commerce/cloud revenues offset partially by higher payment revenues.”

The investment banking company also cut its earnings (increases loss projections) for Paytm by 16-27% for FY22-25E, owing to lower revenue and higher employee and software expenses.

Besides, the payments stock has fallen roughly 40% since listing compared with a flat Sensex. Still, it trades at 17x FY23E sales, “which we believe is expensive”, Macquarie said in the report.

Macquarie has also highlighted several challenges to Paytm’s path to profitability.

Regulatory challenges: The Reserve Bank of India’s proposed digital payments regulations could cap wallet charges. Payments business still forms 70% of Paytm’s overall gross revenue and hence any regulations capping charges could impact revenues significantly. Also, Paytm’s foray into insurance was recently rejected by the insurance regulator. This could impact its prospects of getting a banking licence.

Senior management attrition: Senior executives have been resigning from Paytm, which is a cause of concern and could impact business if the current rate of attrition continues.

Low merchant loan disbursal: In the past 12 months, Paytm’s average ticket size for loans disbursed by it has been consistently coming down and stands at sub Rs 5,000 levels. At this size, it isn’t doing many merchant loans and most of the loans are small value ‘buy-now-pay-later’ loans. Hence, the eventual distribution fees realised by them are likely to be much lower than its earlier estimates.

Macquarie’s views on Paytm are in contrast with Morgan Stanley’s and Goldman Sachs’.

Goldman Sachs, while initiating coverage on the stock in December, said Paytm’s business model is characterised by “network effect”, meaning that even a small portion of users availing its services could result in increase in revenues, while providing strong cross-selling opportunities.

According to Morgan Stanley, Paytm’s huge total addressable market and India’s distinctive tech architecture and regulatory supportive partnership approach are key enablers. “Balance sheet risk is low, and Paytm’s technology capabilities to leverage alternative data sets as well as design customised products are some key value adds,” it had said in a Dec. 21 note.

Shares of One97 Communications fell as much as 6% to a record low of Rs 1,152.05 apiece at around 3 p.m. compared with a 1% gain in the Nifty 50 and the Sensex. The scrip ended the session at Rs 1,159 apiece, 5.9% lower.

Of the eight analysts tracking the company, three recommend a ‘buy’, two suggest a ‘hold’ and three recommend a ‘sell’, according to Bloomberg data. The 12-month consensus price targets implies an upside of 34%.