Emkay upgrades Paytm to add, sees 15% upside, here’s why

Brokerage firm Emkay upgraded the view on One97 Communications, the parent of Paytm, to 'add' from 'reduce', saying the regulatory front will improve and cost saving measures are expected to support its journey to profitability. It has revised the price on Paytm stock to Rs 750, indicating an upside of 15 per cent from its previous closing price at Rs 651.50.

Following Emkay’s upgrade, Paytm shares rose as much as 4 per cent to hit an intraday high of Rs 678, data from stock exchange showed.

The upgrade comes as a relief under easing regulatory conditions, especially with expected approvals from NPCI and RBI , which should allow Paytm to bring in new users and online merchants onboard shortly. Emkay expects this to complement strong cost-cutting measures to drive a business turnaround.

The brokerage also said that Paytm loan disbursal business is seeing early signs of reacceleration, with the growth expected to come mainly from merchant loans. The company has been doing well on its broking and insurance distribution businesses, which have already broken into profitability. To strengthen cash buffers and reduce net losses for the fiscal, Paytm will offload its entertainment business in the second quarter of FY25.

Paytm has retained its 41 million merchants and successfully migrated its 78 million user base to new partner banks. With this foundation, the company is now well placed to receive the long-awaited NPCI approval on new user onboarding and secure a payment aggregator license from the RBI .

The biggest push area in Paytm has been cost optimisation. There have been expectations from the CEO that the firm would save up to Rs 400-500 crore of staff costs by staff attrition, which is a mix of voluntary and involuntary. Emkay projects 15 per cent year on year decline in operating expenses for FY25 which, therefore, holds good prospects of becoming positive operating EBITDA by the fourth quarter of FY25.

Looking ahead, Emkay tweaked its growth estimate on Paytm's payment gross merchandise value (GMV) and operational revenue to 31 per cent and 22 per cent over FY25-28. Continuing with cost optimisation and the rebound of the company's lending business, Paytm is also expected to turnaround net profit positive by FY27 - more than two years earlier.

While Paytm remains discounted to its peers PayPal and Paysafe at a premium, the valuation of 4x EV/TTM operating revenue was factored in. The future rerating for the company would be contingent on the regain of lost users, further growth in lending business, and an uninterrupted regulatory environment, says Emkay.