BofA Securities ups Paytm share price target to Rs 1,020 from Rs 885. Here's why

Foreign brokerage BofA Securities has revised upward its target for One 97 Communications Ltd (Paytm) to Rs 1,020 apiece from Rs 885 earlier, citing favorable risk-reward.

BofA Securities said the growth in the Soundbox segment may stay strong for the next 2-3 years with limited competitive risks. It considers the business to be a high-margin one and sees room for surprise in consolidated Ebitda margin as the business gains scale. It sees visibility of 40-50 lakh Soundbox additions per year for the next 2-3 years and said Soundbox will be a high margin and profitable business for Paytm

“Paytm was the first company in India which started deploying Soundboxes at scale and in process created a new market. As a result, Paytm has a first mover advantage in this space,” BofA Securities siad.

BofA Securities expects the company’s momentum in high-margin lending and Soundbox business to remain good for at least next 3-4 quarters and witness upside risks to consensus estimates.

“We estimate India has 40-45 million merchants with decent business size: of these 2.5 million are large merchants, 20-25 million are tax compliant SMEs and 15-17 million are SMEs with low turnover. We believe the target market for Soundboxes is 25 million medium sized SMEs and 15-17 million smaller SMEs. We estimate Paytm could add 15 million devices in the next 2-3 years,” BoFA said.

As Paytm charges Rs 100 per month, the visibility on subscription revenue is high. BofA Securities said it expects EBIT margins to be 40 per cent in steady state and expects payback on the boxes in the 12-14 months (capex per box is Rs 1,250).

Given the rising contribution from high margin businesses and cost control initiatives, it expects Paytm's margin improvement to happen at faster than earlier expected pace.

“As a result, we increased our FY25/26E EPS to -3.86/5.29, leading to our DCF value increase to Rs 1,024. We also increase payments/financial services multiple to 3.5x/6x (from 3x/5x) to factor in re-rating of global peers and expect narrowing gap for Paytm given its improving business momentum. As a result, we increase our PO to Rs 1,020 from Rs 885” it said.

BofA expects Soundbox to be a high margin and profitable business for Paytm. The payback is 12-14 months, while it has visibility of 4-5 mn Soundbox additions per year for next 2-3 years. And the subscription revenue and operational leverage will likely ensure the growth sustainability and FCF improvement.

 

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