No relief for Paytm investors; Macquarie cuts target price again

The latest cause of pain is that Macquarie Capital Securities (India) has again lowered its target price (TP) for the stock. The brokerage has reduced its TP for Paytm to around 36% 450 as it has lowered its target PSG (price of sales growth) from around 0.35x to about 0.2x, effectively valuing Paytm at 4.5x Dec-23E sales vs. around 7x its earlier sales.

The cut comes at a time when the US Federal Reserve has hiked interest rates by 25 basis points. A basis point is one hundredth of a percentage.

“Globally, fintechs have become increasingly correct. When we started on Paytm, Fintech traded globally at 0.3x-0.5x PSg (Price to Sales Growth Ratio). However, the multiplier is now reduced to 0.07x-0.35x. As a result, we now use it 0.2x PSG versus 0.35x PSG earlier,” the Macquarie report said.

Recall that Macquarie wrote a T.P. 1,200 at the time of initial public offering of Paytm. Currently hovering over the stock of Paytm 610 each, after recovering from an all-time low of 572 viewed on 16 March. As such, the stock is now down by a whopping 72% from its issue price. 2,150.

In general, valuing companies with negative earnings and free cash flow poses a challenge. This means that multiples are based on sales numbers which can be correct very quickly. Analysts at Macquarie said the benchmark valuation for Paytm has been the valuation of global fintechs.

Meanwhile, the latest developments, especially for Paytm, haven’t helped investor sentiments either. The Reserve Bank of India (RBI) announced that it has banned Paytm Payments Bank from adding customers. While analysts at Macquarie don’t expect a substantial impact from this ban, there could be a significant adverse impact on brand and customer loyalty here.

The ban also reduces the chances of Paytm getting a small finance bank license. Note that Paytm does not lend on its books but only acts as a platform for lenders. “RBI has recently raised the issue of Paytm Payments Bank and Chinese ownership being 25%+, we believe the chances of Paytm getting a banking license are now quite slim, thereby hampering its lending capacity. is coming. Given this, and competition from other fintechs in the payments space, we remain skeptical about Paytm’s long-term ability to generate free cash flow,” the Macquarie report added.

Due to this ban, Paytm will have to increase its efforts to increase engagement with existing customers to balance the impact of the ban on onboarding new users, analysts at ICICI Securities noted in a report on March 13.

In addition, stricter RBI regulations and compliance norms and increasing competitive intensity could be major risks.