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Macquarie initiates underperform rating on Paytm; cuts target price by 40%
Photo Credit: VCCircle

Brokerage firm Macquarie Research has initiated an "underperform" rating on Paytm owner One97 Communications saying its business model lacks focus and direction. The report came ahead of its listing debut on Thursday, which opened at a 9% discount.

The brokerage firm has reduced its target price to Rs 1,200 a share, down 40% from its issue price of Rs 2,150 apiece calling the company a 'cash guzzler'. The firm also pointed to worries due to regulations and competition.

“Dabbling in multiple business lines inhibits Paytm from being a category leader in any business except wallets, which are becoming inconsequential with the meteoric rise in UPI payments. Competition and regulation will drive down unit economics and/or growth prospects in the medium term in our view. Unless Paytm lends, it can’t make significant money by merely being a distributor. We therefore question its ability to achieve scale with profitability,” Macquire said in a note to its investors.

“Most things that Paytm does, every other large ecosystem player like Amazon, Flipkart, Google, etc, are doing. The competition is quite evident in the buy now pay later (BNPL) space and distribution of various financial products. Longer term, take rates in the distribution business will be driven southwards by competition and regulation,” the brokerage firm added.

Macquire expects RBI likely to come up with regulations in the Fintech space, particularly in the BNPL space. “ We are also not enthused with the company’s complicated organisation structure, related-party transactions, churn in top management and a thinly staffed board with 75% of members being based out of India” it said.

The stock opened at Rs 1,950 on the National Stock Exchange and the listing price on the BSE was Rs 1,955, against the issue price of Rs 2,150.

By 11.00 am, the share price dropped further by almost 25%, and was trading at Rs 1613.80 apiece on BSE.

The mega initial public offering (IPO) of Paytm, among India’s leading digital payments platforms, saw a tepid response from investors having subscribed 1.89 times last week.  

For FY21, Paytm losses narrowed down due to lesser marketing expenses further aided by lower payment processing charges. Paytm didn’t report an operating profit or a net profit in FY21 and clocked sales of Rs 3,186 crore.

Paytm’s valuation, at 26x FY23E Price to Sales (P/S), is expensive especially when profitability remains elusive for a long time. “We are unwilling to give it a premium here as we are unsure about the path to profitability. Key risks include change in regulations which allow monetisation of UPI and receipt of a banking license” report added.

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