Macquarie Denies for any Headwinds Impact on One97's Paytm

Foreign brokerage Macquarie said on Monday there is no signs of headwinds abating at Paytm as it slashed the target price to Rs 900.

One 97 Communications or Paytm stock was down almost 5.95 per cent on Monday at Rs 1,158.

Since November 18, 2021, Paytm's stock price has fallen 40 per cent vs Sensex's flat performance, Macquarie said.

Post the various business updates and results, Macquarie said revenue projections, particularly on the distribution side, is at risk and hence we pare down our revenue CAGR from 26 per cent to 2 per cent for FY21-26E.

"We are roughly cutting revenue estimates for FY21-26E on an average by 10 per cent every year due to lower distribution and commerce/cloud revenues offset partially by higher payment revenues. We cut our earnings (increase our loss projections) by 16-27 per cent for FY22-25E owing to lower revenues and higher employee and software expenses. We cut our TP sharply by 25 per cent owing to lower target multiple of 11.5x (Price to Sales ratio) (from 13.5x earlier) and lower sales numbers."

Macquarie laid out several challenges which exist for Paytm from regulatory to business specific.

"'The elephant in the room'- RBI's proposed digital payments regulations could cap wallet charges. Payments business still forms 70 per cent of overall gross revenues for Paytm and hence any regulations capping charges could impact revenues significantly. Add to that, Paytm's foray into insurance was recently rejected by the insurance regulator IRDA. We believe this could impact Paytm's prospects of getting a banking license," it added.

Senior management attrition is another cause of concern, it said. Senior executives have been resigning from Paytm which is a cause of concern and could impact business in our view if the current rate of attrition continues.

"Can it do lot of merchant loans? We aren't sure," Macquarie said.

"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, we don't think it is doing many merchant loans and most of the loans are small value BNPL loans. Hence the eventual distribution fees realised by them are likely to be much lower than our earlier estimates.

"We cut our revenue projections for FY22-26E and hence our CAGR reduces from 26 per cent to 23 per cent. The main reason is that we have pared down our commerce and particularly distribution business revenues.

"Competition will limit commerce revenue growth and distribution business will continue to be led by small ticket BNPL loans there by limiting revenue potential in our view.

"We cut our earnings projections or increase losses for FY22-26E driven by lower revenues and higher employee and software and cloud expenses. There is competition for tech talent, and we see pressure on employee expenses to remain. Key risks to our UP call are a change in regulations which allow monetisation of UPI and receipt of a banking license," Macquarie added.