No respite for Paytm’s investors; Macquarie cuts target price again.

Investors in One 97 Communications Ltd., the parent of Paytm, are a worried lot with the stock’s substantial underperformance since its listing on the bourses. Shares fell about 4% in early deals on Thursday, a day when then the benchmark Nifty50 index was up roughly 2%

The latest cause of pain is that Macquarie Capital Securities (India) has reduced its target price (TP) for the stock, yet again. The brokerage has slashed its TP for Paytm by nearly 36% to 450 as it has reduced its target PSg (price to sales growth) multiple from about 0.35 times to about 0.2 times, effectively valuing Paytm at 4.5x Dec-23E sales versus the earlier about 7x sales.

 

The cut comes at a time when the US Federal Reserve has hiked the interest rate by 25 basis points. One basis point is one-hundredth of a percentage.

“Globally, fintechs have corrected sharply. When we initiated on Paytm, fintechs globally traded at 0.3x-0.5x PSg (price to sales growth ratio). However, multiples have now declined to 0.07x-0.35x. As a result, we now value it at 0.2x PSg vs the 0.35x PSg used earlier” said the Macquarie report.

Recall that Macquarie had set an TP of 1,200 at the time of Paytm’s initial public offering. Currently, Paytm shares are hovering at 610 apiece, having recovered from an all-time low of 572 seen on 16 March. As such, the stock is now down a massive 72% from its issue price of 2,150.

In general, there is a challenge in valuing companies with negative earnings and free cash flow. This means that multiples are based on sales numbers which can correct very sharply. The benchmark valuation for Paytm has been the valuation of global fintechs, said Macquarie’s analysts.

Amid this, the latest developments specific to Paytm haven’t helped investor sentiments either. The Reserve Bank of India (RBI) announced that it has banned Paytm payments bank from adding customers. While analysts at Macquarie do not expect the impact from this restriction to be substantial, there could be a material adverse impact on the brand and customer loyalty hereon.

The embargo also lowers the possibility of Paytm getting a small finance bank license. Note that Paytm does not lend on its books but only acts as a platform for lenders. “With the RBI recently raising issues with Paytm payments bank and Chinese ownership being 25%+, we believe the probability of Paytm getting a banking license is significantly lower now, thereby impeding its ability to lend. Given this, and competition from other Fintechs in the payments space, we remain skeptical about Paytm’s longer-term ability to generate free cash flow” added the Macquarie report.

 

Due to this ban, Paytm will have to increase its efforts to enhance engagement with the existing customers to balance the impact of restriction on onboarding new users, note analysts at ICICI Securities in a report on 13 March.

Also, stricter RBI regulations and compliance norms and increasing competitive intensity could be key risks.

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