According to a report published by the international brokerage firm on November 28, CLSA has changed its recommendation for the shares of payment services provider Paytm from “sell” to “buy.”
Details about Paytm is now a Buy for CLSA, and the cash burn may be over in six quarters
Risk reward is now “favorable” due to the recent price fall, according to CLSA, which also noted that the business has more than $1 billion in cash on hand.
The company stated that the stock “warrants a look now, even though our discussions with various investors over the previous four months imply some discomfort or uncertainty about scaling up the lending business.”
According to the brokerage, Paytm’s cash burn should be finished in “another 4-6 quarters.” Although the net take-rate “has increased by 13 bps,” fixed cost absorption is still crucial, it was stated.
Following consideration of the aforementioned elements, CLSA declared that it has chosen to “upgrade (Paytm) to buy from sell with a TP (take profit) of Rs 650.”
However, it pointed out that the primary short-term risk is still pre-IPO investors’ ongoing selling.
According to the source, a significant shareholder’s selling over the previous two weeks has caused a 25–30% correction in the share price of Paytm.
One 97 Communications, the company behind Paytm, saw its stock fall to a record low last week and reach a low of Rs 476.65 on the BSE on November 22.
On November 15, the pre-IPO investors’ lock-in period came to an end. Since then, a few institutional investors have started to cut down on their holdings. At an average price of Rs 555.67 per share, SVF India Holdings (Cayman) sold 2.93 crore shares in Paytm, totaling Rs 1,630.89 crore. SVF owned 11.32 billion shares, or 17.45 percent of Paytm, as of September 2022.
Paytm’s valuation is “comfortable,” but CLSA believes it can do more to boost investor confidence.
“We find comfort in the fact that cash on the balance sheet accounts for over a third of market capitalization (Rs 92 billion). The last time Paytm’s market valuation was this high was in 2016. Having said that, we believe some of the disclosures may be improved, “It read.
“First off, while Paytm provides general loan data, it should, like NBFCs, share segment-specific lending revenue and delinquency numbers every quarter. It is a good thing that payment service money is split between consumers and businesses.”
According to the paper, the company’s “revenue growth drivers” would be the distribution of loans and credit cards.
If there are no problems with asset quality, loan revenue in five years might exceed Rs 30 billion, according to CLSA.
The company continued, “Furthermore, we estimate ‘cloud’ revenue to quadruple to Rs14bn during FY22-25 driven by increasing advertising revenue coupled with higher credit card sourcing income.”