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Paytm’s investors weren’t particularly thrilled with the company’s better than expected December quarter results (Q3FY22) announced on Friday night. Shares of One 97 Communications Ltd, Paytm’s parent company, were trading flattish in Monday’s morning trade on the NSE when the Nifty50 index was lower.
Post Q3, analysts from Macquarie Capital Securities (India) Pvt. Ltd cut their target price for the stock to ₹700 apiece from ₹900 apiece earlier. Macquarie’s analysts point out that the ESOP charges will be a recurring expense (about Rs1600 crore annually) going forward & it wasn’t factored in its estimates. ESOP refers to employee stock option plans.
Paytm’s net loss widened to ₹779 crore in Q3 from ₹473.5 crore in Q2 and ₹535.5 crore in Q3FY21. Losses rose because the company accounted for ESOP charges of ₹390 crore last quarter. True, Paytm’s Ebitda (earnings before interest, tax, depreciation and amortization) loss before ESOP cost declined sequentially and year-on-year to ₹393 crore.
But some analysts reckon looking at Ebitda before ESOP does not give a fair view for start-ups. As such, Paytm’s Ebitda loss after taking into account ESOP costs stands at ₹788 crore in Q3. In a report on 6 February, YES Securities Ltd said, “ESOPs are part and parcel of startup culture and, importantly, this cost is going to remain in the base now for about 5 years."
Sharing a similar view, analysts from Macquarie reckon they don’t believe that investors need to look at Ebitda ex ESOPs. “The issue with PayTM is that the ESOPs have been issued at a very nominal exercise price favouring the employees and that the costs is being borne indirectly by the minority shareholders here," said Macquarie’s analysts.
To be sure, Paytm has done well on revenue performance and contribution margin (a key metric for fintech companies) has improved, too. Contribution profit is operating revenues less payment processing charges, promotional cashback and incentives, and other direct costs. Contribution margin at 31.2% was higher than analysts' estimates and up from 8.9% in Q3FY21 and 24.0% in Q2.
Gross merchandise value (GMV) increased by 123% year-on-year. GMV is the value of total payments made to merchants through transactions on various platforms of Paytm. Growth in online and offline merchant base, increase in the user engagement, and favorable impact of the festive season led to this increase.
Consequently, payments and financial services revenue grew by 98% y-o-y to Rs1,117 crore. What also helped is the growth in device subscriptions, large partner wins in payment gateway services and expansion of use-cases on the Paytm app. The offering of financial services through the financial institutional partners rose considerably in Q3 as loans disbursed through its platform grew by 401%. The average loan value works out to approximately Rs5,000. Paytm considers small value loans as its strength and differentiator.
Further, the revenue from commerce and cloud services grew by 64% y-o-y aided by strong growth in advertising revenue and festive season spending.
To be sure, it remains to be seen how Paytm copes with the intense competitive environment, going ahead. But the growth prospects in the financial services segment are something the company can bank on. Analysts don’t expect the company to report a net profit till FY25. As such, continuous revenue and contribution profit growth key are monitorables for the stock.
As things stand, Paytm’s shares have more than halved from its issue price of Rs2150 apiece during its initial public offering (IPO) in November. Higher valuations and concerns on profitability have weighed on sentiments for the stock. The recent correction in global fintech stocks hasn’t helped, either. Stocks such as Paypal Holdings Inc, Freshworks Inc, Block Inc are down 55-60% in the last six months as investors brace themselves up for the Fed rate hikes in 2022.
“We bake in higher cost of equity (16%) to reflect rising cost of capital and increase our full diluted share-count to 695 million (up 7%) to fully account for un-granted ESOPs (36 million) versus just granted earlier. This drives our price target to Rs1,350 (versus Rs1,850 previously)" said analysts from J.P. Morgan India Pvt. Ltd in a report on 7 February.
Post Q3, YES Securities has upgraded its rating to ‘reduce’ from ‘sell’ with a revised target price of ₹990 apiece. “Underlying traction is positive but it’s too early to turn bullish," said the broking firm. Paytm's shares currently trade at about ₹956 on NSE.
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