Paytm Gets Thumbs Up From Brokerages Despite Concerns About Lending Vertical

Multiple brokerages reiterated their bullishness on Paytm after the fintech giant reported better-than-expected Q3 FY24 earnings last week despite its lending business witnessing some degrowth on a quarter-on-quarter basis.

At least three brokerages raised their price targets (PTs) on Paytm post Q3 results with expectations that it would be able to compensate for the loss in revenue due to scaling down of postpaid loans by strengthening other business verticals.

For instance, BofA raised its price objective on the stock to INR 950 from INR 905 earlier, implying an upside of 21.1% to the stock’s last close on the BSE. The international brokerage expects Paytm to continue posting strong growth in personal and merchant loans.

On the other hand, Goldman Sachs noted that while there are near-term headwinds to Paytm’s growth, particularly in lending, it is well poised to deliver robust growth and profitability in the long term due to its leading position in payments and fintech lending. 

Goldman Sachs raised its PT on the fintech major to INR 860 from INR 840 earlier, which implies a 9.7% upside to the stock’s last close.

However, unlike BofA, which has a ‘buy’ rating on the stock, Goldman Sachs maintained its ‘neutral’ call.

The brokerage acknowledged the positive surprise which Paytm delivered by demonstrating uptick in the high-ticket loans segment but said the segment is in early stages and its growth trajectory is unclear at this point. 

“In addition, we believe the range of outcomes for smaller ticket loans remains quite wide,” the brokerage said.

Paytm said it sees a big opportunity in the high-ticket loan business and that it disbursed INR 490 Cr of such loans in Q3.

It is pertinent to note that following its decision to scale down its small ticket loan business in December 2023 due to regulatory changes, Paytm’s loan disbursals declined over 4% on a quarter-on-quarter (QoQ) basis to INR 15,535 Cr in Q3 FY24.

The value of postpaid loans disbursed by Paytm fell 17% QoQ but the value of disbursed merchant loans grew 9.3% QoQ and that of personal loans increased 13.6% QoQ.

Overall, Paytm’s net loss narrowed over 43% from last year and 24% QoQ to INR 222 Cr in the reported quarter.

“We expect margins to continue to expand, but at a more gradual pace than in previous quarters, and expect net income profitability towards end of FY25 (full year in FY26),” said Goldman Sachs, adding that it is encouraged by the stable credit metrics across the company’s different segments that is expected to position Paytm well when macro improves.

Meanwhile, CLSA raised its price target on Paytm shares to INR 960 from INR 925 earlier, saying the company is likely to offset the bulk of the BNPL business loss by doing a small bit in various things – new revenue streams, cost reduction, and more.

However, maintaining its ‘outperform’ rating and INR 950 PT on Paytm, Bernstein said that the impact of its BNPL slowdown would be more severe from the next quarter. 

“…personal loan disbursals will need to pickup sharply to maintain a healthy lending revenue growth,” it said, reiterating its projection of Paytm achieving a break-even in FY25.

Macquarie also retained its ‘neutral’ rating at a PT of INR 650 on the Paytm stock, which implies a downside of more than 17% to its last close.

The brokerage noted that even excluding high-ticket personal loan disbursements, small-ticket personal loan disbursements remained flat on a QoQ basis, which could be attributed to the festive season, as per trends seen across other lenders. 

“We regard a consistent increase in high-ticket personal loan disbursements as a key catalyst for the stock,” Macquarie added.

After a sharp decline by the end of last year after its lending business rejig, shares of Paytm have once again picked up momentum. The stock has gained more than 23% year to date, and ended last trading session at INR 784.2 on the BSE.

“While key risks are slower ramp-up of lending business and intense competition, strong execution could trigger earnings upside and re-rating with over 34% upside in 2024,” said Jefferies, which has a PT of INR 1,050 on Paytm.

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