Paytm shares are up 3% today on the brokerage Bernstein's update. Should you buy


Shares of One97 Communications Limited, the parent company of Paytm, saw a significant uptick in early trading on the Bombay Stock Exchange (BSE) following a positive update from global brokerage Bernstein. By 10 am, Paytm's stock had risen by 2.74%, reaching Rs 868.80, after Bernstein raised its target price for the fintech giant from Rs 750 to Rs 1,000. Along with the upgraded target price, Bernstein reaffirmed its "Outperform" rating, signaling growing confidence in Paytm’s future growth prospects and financial recovery.

This price target revision reflects Bernstein’s increased optimism about Paytm’s ability to drive substantial earnings growth, especially under favorable conditions. The brokerage pointed out that a significant shift in market sentiment has occurred, with the focus now shifting from survival concerns to discussions about Paytm’s long-term growth potential. Bernstein’s updated outlook suggests that Paytm could see a near 100% upside in its earnings per share (EPS) if a bullish scenario unfolds, driven by several key factors that could enhance the company’s profitability in the coming years.

A major factor contributing to Bernstein’s positive outlook is the anticipated recovery in Paytm's payment processing margins. These margins have been compressed recently, sitting at just 10 basis points (bps) due to regulatory actions. However, Bernstein projects that these margins could recover to 15 bps, especially as products like wallets and credit-linked UPI (Unified Payments Interface) gain more traction in the market. A revival of this magnitude in payment margins could have a substantial impact on Paytm's overall financial performance, potentially adding 25% to its EPS, which would further enhance its growth trajectory.

In addition to margin recovery, Bernstein also highlighted that regulatory actions aimed at limiting the market dominance of rival players, such as PhonePe and Google Pay, could create an opportunity for Paytm to reclaim a more significant share of UPI transactions. Bernstein expects that these regulatory changes could add 8% to Paytm’s EPS over time. Furthermore, Bernstein predicts that Paytm’s gross merchandise value (GMV) will experience a strong compound annual growth rate (CAGR) of 25% through FY30, driven by the growing adoption of its services and its expanding product offerings.

Another key area identified by Bernstein as a driver of Paytm’s future growth is its lending business. The company’s recent acquisition of a Non-Banking Financial Company (NBFC) license opens up new avenues for Paytm to channel more loans through its own balance sheet. This expansion into lending is expected to reduce Paytm’s reliance on third-party lending platforms, thus lowering its regulatory risks. Bernstein estimates that this move could increase Paytm’s EPS by an additional 30%, further strengthening its overall financial position.

Despite the optimistic projections, Bernstein issued a note of caution, acknowledging that the successful realization of these growth opportunities depends largely on the company’s ability to navigate the regulatory environment effectively and execute its lending strategy. Regulatory challenges remain a key risk, and Paytm’s management will need to remain agile and proactive in adapting to the evolving regulatory landscape to ensure the company's success.

Paytm’s recent financial results also provide some context for Bernstein’s updated outlook. In Q2 FY25, the company reported a consolidated profit of Rs 928.3 crore, marking a significant turnaround from the loss of Rs 290.5 crore reported in the same quarter of the previous year. However, it is important to note that this profit was largely driven by a one-time exceptional gain of Rs 1,345 crore from the sale of Paytm’s ticketing business to Zomato, which offset a 34% year-on-year decline in revenue to Rs 1,660 crore. This decline in revenue highlights the ongoing challenges Paytm faces in its core business operations, including competition and regulatory constraints.

Despite these hurdles, Paytm’s stock has demonstrated remarkable growth, up 34% year-to-date and an impressive 136% over the last six months. The continued surge in Paytm’s share price reflects investor optimism regarding the company’s ability to overcome its challenges and capitalize on new growth avenues. With its expanding footprint in the fintech space, particularly in lending and payment processing, Paytm is well-positioned to build on its recent successes and continue growing at a healthy pace. While challenges such as regulatory hurdles and competition remain, the market sentiment remains positive, driven by the company’s evolving business strategy, potential for long-term growth, and the strong execution of its business plan.

In conclusion, Paytm’s impressive stock performance, along with Bernstein’s updated price target and growth outlook, highlights the growing confidence in the company’s future prospects. As Paytm continues to focus on margin recovery, lending expansion, and regulatory opportunities, investors are becoming increasingly optimistic about its ability to unlock significant long-term value, potentially transforming it into a leading player in India’s rapidly expanding fintech ecosystem.


 

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