Paytm is one of the most compelling growth stories: Goldman Sachs

Paytm is one of the most compelling growth stories in the Indian internet space that is available at an attractive price, wrote analysts at Goldman Sachs in a recent note. The global research and broking house suggests investors buy the stock at the current levels and maintains a 12-month target price of Rs 1,100 on the counter. Their risk-reward analysis indicates 112 per cent upside in the stock from the current levels in a bull-case scenario, and a 12 per cent downside in a bear-case.

While the Paytm stock is down 49 per cent year-to-date (YTD) on regulatory headwinds and valuation contraction for high growth companies, Goldman Sachs sees the business model continuing to show strong traction. Within their internet coverage, they view Paytm as one of the most compelling growth stories at an attractive price. 

Paytm, Goldman Sachs said, operates across multiple Total Addressable Markets (TAMs), most of which is expected to grow at over 20 per cent compounded annual growth rate (CAGR) over the next five years. Paytm’s non-payments revenue, according to Goldman Sachs, is expected to grow from 36 per cent of total revenues in the June 2022 quarter of the current fiscal (Q1-FY23) to 44 per cent by FY26, driving adjusted EBITDA margin from -16 per cent to +14 per cent over the same period.

“Since our initiation in December 2021, we have steadily raised our estimates by around 13 per cent (FY24 revenues), and are currently 5 per cent / 24 per cent ahead of consensus on FY25 revenue/adjusted EBITDA as we expect elevated growth in high margin segments to lead to faster profitability,” wrote Manish Adukia, Rahul Jain and Harshita Wadher of Goldman Sachs in a September 22 note.

That said, the analysts believe that the lock-in expiry (86 per cent of Paytm’s outstanding shares) in November 2022 may represent an overhang on the stock, they expect the company to deliver nearly 50 per cent revenue growth for the next few quarters and continue its transition from an erstwhile payments-only business to one with a strong financial services portfolio.

“We forecast FY24 to be the first full year of adjusted EBITDA profitability for Paytm, and see this as a key catalyst for the stock, which currently trades at 3.6x FY24 revenues, similar to global peers, but with a CY21-24 sales CAGR of 38 per cent, versus 29 per cent for the peer group. On EV/gross profit, however, Paytm trades at an 11 per cent discount to peers, for a gross profit growth that is 1.3x versus peers. Even within India internet, Paytm’s growth outlook is similar vs peer group, but valuation is at the lower end,” they said.

While regulations have remained a key focus area for Paytm investors, Goldman Sachs believes the recent developments such as digital lending guidelines, UPI through credit card, RBI’s payments vision document, etc. are largely neutral/positive for Paytm. 

 

"We believe the RBI’s discussion paper on payment charges and ensuing guidelines could help resolve another overhang for Paytm in the near/medium term, and the next catalyst could be potential resolution of user onboarding ban on Paytm Payments Bank, which Paytm recently mentioned PPBL is making good progress with," Adukia, Jain and Wadher wrote.