Paytm stock may rally up to 119%: Goldman Sachs' bull case scenario

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NEW DELHI: Goldman Sachs, which recently cut Paytm‘s price target to Rs 1,600 from Rs 1,630, has further reduced it to Rs 1,460, but upgraded its rating on the scrip to ‘buy’ from ‘neutral’ post the company’s third quarter earnings.

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The price target suggests a 53 per cent potential upside for the stock over Friday’s closing price. The brokerage sees the stock at Rs 2,090 in a bull case scenario and at Rs 820 in a bear scenario.

“Paytm’s share price is down 30 per cent YTD and we now see risk-reward as skewed to the upside, with 119 per cent upside in our bull case vs 14 per cent downside in our bear case,” Goldman said in a note.

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Reacting to its quarterly numbers, the scrip rose 1.83 per cent to Rs 970.65.

Goldman Sachs said its current analysis suggests the current share price is implying multiple headwinds including MDR caps, a decline in market share for Paytm, and significantly slower ramp-up of Paytm’s financial services, which appears unlikely.

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The brokerage said it’s rating change is based on expectations of better than expected take rate and continued market share gains in payments vertical. Goldman Sachs sees continued strong traction in lending, with new disclosures suggesting healthy performance of loan portfolio.

Cloud business, it said, is tracking ahead of expectations, led by advertising.

“We believe Paytm’s strong topline growth of 89 per cent YoY in Q3FY22 will help allay investor concerns around declining payments take rate in recent years. In addition, Paytm continues to gain market share across both UPI and non-UPI, and its lending business is seeing robust traction (up 201 per cent YoY revenue growth in Q3). We raise our topline estimates for Paytm by 7-10 per cent and expect growth momentum to sustain,” it said.

The brokerage has forecast 89 per cent YoY revenue growth in Q4FY22, with 35 per cent revenue CAGR over FY22-25.

“We expect Paytm’s increase in scale to result in an improving margin trend, with the company reaching adjusted Ebitda breakeven by FY25. We also note that Paytm has a strong balance sheet (US$1.4 bn cash as of Dec ‘21), and see limited likelihood of the company needing to raise capital again (US$210 mn annual cash burn),” it said.

Paytm operates across multiple TAMs, most of which may grow at 20 per cent plus CAGRs over the next 5 years, the foreign brokerage said, adding that Paytm remains well-positioned to capture share of digital payments in India and view Paytm’s business model as characterized by network effect.

In the meantime, YES Securities has upgraded the stock to ‘reduce’ from ‘sell’ with a revised target of Rs 990, suggesting 4 per cent potential upside. JM Financial has maintained its ‘sell’ call on the stock, with a target of Rs 875.

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