Top brokerages welcome Paytm's Q1 results, reiterate 'buy' rating

Leading digital payments and financial services company Paytm has received positive feedback from top brokerages such as Goldman Sachs, JP Morgan, Morgan Stanley, ICICI Securities, Yes Securities and CLSA after reporting its Q1FY23 financial results.

In their brokerage notes, they highlighted Paytm's strong growth in revenue and contribution margins during the quarter in addition to sharp improvement in net payment margins.

In its note, Goldman Sachs said that the company "remains firmly on the path to profitability" following its Q1FY23 results.

The brokerage also raised its EBITDA estimates for Paytm and believes that Patytm's Q1FY23 results should "help provide more visibility to investors" on the company's profitability target.

 

"We believe Paytm's 1QFY23 results should help provide more visibility to investors on the company's path to profitability (adjusted EBITDA improved 25 per cent q-o-q and was 14 per cent better vs GSe), and we view this as a key catalyst for the stock. Revenue growth at 89 per cent YoY in 1QFY23 remains elevated, and while we expect a deceleration in growth in subsequent quarters, we forecast a robust 37 per cent FY22-25E revenue CAGR for Paytm, at the higher end of global fintech peers," the brokerage firm elabolated.

Goldman Sachs maintained its 'Buy' rating for the stock with a revised target price of Rs 1,100.

JP Morgan also welcomed Paytm's Q1FY23 financial results, citing sharp revenue growth (over 89 per cent y-o-y and 9 per cent q-o-q) and contribution margin (43 per cent +830bps q/q).

It said the sharp margin improvement was driven by a reduction in payment processing charges resulting in expansion of payments business profitability (35 per cent gross margin, 10bps net MDR).

"The contribution margin print in 1Q is what we had assumed to happen in late F24/25. Incremental contribution margin in the business is running at 60 per cent (on YY basis) suggesting further improvement ahead," the brokerage added.

Analysts at JP Morgan also highlighted lower processing costs for the quarter, which have driven payment margin improvement.

The brokerage said that Paytm's financial services business remains strong andA revenue growth in this segment at 60 per cent (q-o-q) "is tracking ahead of expectations and seen in continued traction for the company's loan syndication business".

The brokerage maintains its aOverweight' rating for the stock with a target price of Rs 1,000.

ICICI Securities said that Paytm continues to improve its margins, with losses coming down sequentially.

The brokerage said that the company's Q1FY23 results was characterised by: A) reduction in payment processing charges leading to improvement in net payment rates; B) continued acceleration in lending business with disbursements of Rs 56 billion; C) enhanced contribution/adjusted-EBITDA (before ESOP cost) margins due to increased net payment rates and rising contribution of financial services revenue; D) sustained growth in monthly transacting users (MTUs) and deployment of offline devices and strong QoQ growth in gross merchandise value (GMV).

The brokerage continued to maintain its 'Buy' rating for the stock with a target price of Rs 1,285.

Yes Securities said in its brokerage report that it acknowledges improvement in Paytm's trajectory after the company's Q1FY23 financial results. Some of the factors that led to this improvement include strong growth in revenue from operations and significant improvement in contribution profit.

While the brokerage said it "awaits delivery and sustenance of profitability", it highlighted that the company continues to show improvement with strong growth in payments services revenue, net payments margin and contribution margin.

With this, the brokerage has now upgraded its rating for the Paytm stock to 'Neutral' with a target price of Rs 850.

Morgan Stanley said that Paytm registered another strong quarter with revenue growth in Q1FY23 at almost 90 per cent y-o-y, led by better than expected take rates in both payments and financial services.

The brokerage noted that the key highlight during the quarter was sharp improvement in contribution margin, which increased to 43 per cent of revenues in comparison to 35 per cent in Q4FY2022.

The brokerage has increased its target price for the Paytm stock to Rs 785 with an equal-weight rating.

CLSA summed up Paytm's results by saying that the company put up a "good show" during the quarter.

In its note, the brokerage said Paytm's Q1FY23 was a "continuation of prior quarter trends" with healthy GMV growth, while cross-selling of merchant devices and loan distribution "remains the key focus and incremental driver of EBITDA breakeven".

"Most P&L numbers were largely in line with our expectations, while payment processing costs were significantly lower. This led to 13 bp net take-rate in 2QFY23 itself, while we were expecting it to happen in FY24," it added.

The brokerage has increased the target price of the Paytm stock to Rs 650.

Paytm started the new fiscal year with 89 per cent (year-on-year) revenue growth in Q1FY23 at Rs 1,680 crore, while EBITDA (before ESOP) loss reduced to Rs 275 crore, marking an improvement of Rs 93 crore (on-quarter).

The company's contribution profit grew 197 per cent Y-o-Y to Rs 726 crore, leading to an increase in contribution margin to 43 per cent of revenues in comparison to 35 per cent in Q4FY22.

Its user engagement, measured by monthly transacting users (MTU), grew 49 per cent (on-year) to 74.8 million during the quarter, while the total devices deployed increased to 3.8 million (2.8 million added in the past 12 months).

Paytm's payments services revenue grew by 69 per cent y-o-y, while revenue from financial services grew 393 per cent y-o-y during the quarter, led by massive growth in Paytma's loan distribution business.

During the quarter, Paytm disbursed 8.5 million loans, representing a growth of 492 per cent Y-o-Y and 30 per cent Q-o-Q.

The value of the loans disbursed stood at Rs 5,554 crore, marking a growth of 779 per cent Y-o-Y or 56 per cent Q-o-Q.

Moreover, the company has now reached an annualized run rate of approximately Rs 24,000 crore of loan disbursements through its platform, with significant upside potential from increasing penetration.