Rs 850-crore buyback at premium to support Paytm stk in near-term: JPMorgan

The number of shares bought back will be 10.5 million at the maximum buyback price of Rs 810, representing 1.6 per cent of the paid-up share capital

Paytm shares fell 2 per cent on the BSE on Wednesday even as global brokerage JPMorgan said the Rs 850-crore share buyback could support the stock's price in the near-term. In comparison, the benchmark S&P BSE Sensex edged 0.23 per cent higher. 

"We expect the buyback announcement at a 50 per cent premium to provide support to the stock price in the near term. We reiterate 'over-weight' rating on the stock and an unchanged target price of Rs 1,100 as the reduction in cash because of buyback offsets the reduction in share count," the brokerage said in a note on Wednesday. Morgan Stanley, meanwhile, maintained an 'equal-weight' rating with a target of Rs 695.

One97 Communications Limited, the parent company of Paytm, has announced the open-market buyback at a maximum price of Rs 810, which is 50 per cent premium to Tuesday's closing price. The buyback amount represents roughly 7 per cent of the paid-up capital and free reserves as at March, 2022.

The number of shares bought back will be 10.5 million at the maximum buyback price, representing 1.6 per cent of the paid-up share capital.  Meanwhile, at current market price, the indicative number of shares bought back would be around 16 million shares, representing 2.4 per cent of the paid-up share capital. The company's directors and key management personnel will not sell any shares during the buyback period. 

According to Dolat Capital, buyback at current valuation makes sense given declining need for organic capital allocation and very compelling valuation for the Paytm business. 

"The buyback would relinquish around 2 per cent of the company's equity base at a significant discount from the IPO price. Also, this would also mean that significant part of the incremental supply (if any) in near future would get absorbed," the brokerage said in its report.

It has a 'buy' rating on the stock with a target price of Rs 1,400 as it believes Paytm would turn adjusted ebitda neutral by the fourth quarter of financial year 2022-23 (Q4FY23), assuming revenue growth of 60 per cent YoY for second half of current fiscal (H2FY23). 

Since its IPO in November 2021, Paytm's revenue has increased from Rs 1,080 crore in Q2FY22 to Rs 1,910 crore in Q2FY23, up 76 per cent year-on-year. The company has reduced adjusted ebitda losses from Rs 420 crore to Rs 170 crore during the period. 

JPMorgan expects the company to burn $33 million over the next three quarters before turning ebitda breakeven (on an adjusted basis) in Q2FY24. 

Meanwhile, Paytm's total gross merchandise value (GMV) grew 37 per cent YoY for two months ended November, 2022, to Rs 2.28 trillion. While average Monthly Transacting Users (MTU) grew 33 per cent YoY to 84 million last month, total devices deployed rose to 5.5 million.

"The monthly additions in November sustained a strong pace of 0.4 million. This also led to a rise in the number of eligible merchants for loans and thus drove higher payment volumes/subscription revenue," Paytm said.

The total number of loans disbursed grew 150 per cent YoY for October-November, while total value of loans disbursed

grew 374 per cent YoY. The lending business saw disbursements growing at an annualized run-rate of Rs 3,900 crore.

In the past one month, Paytm has underperformed the market by falling 14 per cent, as compared to 1.7 per cent rise in the S&P BSE Sensex. Further, in the past three months, it has declined 27 per cent as against 3.8 per cent gain in the benchmark index. Paytm shares trade 75.4 per cent below their IPO price of Rs 2,150 per share.