UBS cuts Paytm share price target, says Q4 results may hit hard; full details

Foreign brokerage UBS said the recent RBI FAQs have mitigated the worst-feared outcomes for One 97 Communications Ltd (Paytm), as it expects Paytm to retain a large part of its customer and merchant base post certain approvals from the National Payments Corporation of India (NPCI).

That said, a 15-20 per cent churn in merchants, customers and devices is likely in the March quarter (Q4) over the December quarter, along with a 60 per cent QoQ decline in loan origination, UBS said. It also expects FY25 to be weak and bake in a 2 per cent revenue decline, due to wallet business loss and only gradual normalisation in payments and loan origination businesses.

"We expect Paytm to increase its marketing spend to win back lost customers, resulting in elevated EBITDA losses in FY25, which drives our EPS cuts. We maintain Neutral and cut our price target to Rs 510 from Rs 650. This implies 2.4x EV to FY25E sales – a 70 per cent discount to Indian internet peers (vs 41 per cent two-year average)," UBS said.

In a note on Wednesday, UBS said its valuation is justified given Paytm's its lower growth and margin profile and weakened sentiment after the RBI action. Paytm shares were locked at Rs 406.15 on Wednesday, its 5 per cent lower circuit limit.

A re-rating will depend on execution, UBS said while suggesting that its thesis of a large re-rating potential in its initiation note is unlikely to play out in the near term.

UBS said Paytm will likely experience near-term financial impact on its business along with some permanent loss of business in FY25E. It sees Paytm losing 5-7 percentage points of its 25 per cent share in payments industry, driven by loss of wallet (2-3 percentage permanent loss) and the rest due to merchant/customer churn.

It estimates net payments margin to decline to 6-7 basis points range from 7-9 basis points range, given loss of high-margin wallet business and likely easier terms to retain merchants. Loan origination will likely be paused for most of Q4 and then only pick up post stabilisation of payments business in FY25E.

"We forecast loan disbursements to decline 14 per cent YoY in FY25E. We model a smaller 18 per cent decline in cloud and commerce in Q4 given less direct impact and 18 per cent YoY growth in FY25E," it said.

 

 

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