After Q2 earnings, the price of Paytm's stock drops by 3%; experts predict an increase of up to 41%; should you buy?

 After Q2 earnings, the price of Paytm's stock drops by 3%; experts predict an increase of up to 41%; should you buy?

After the digital payments company announced a consolidated net loss of 292 crore for the second quarter of FY24, the share price of Paytm dropped more than 3% on Monday. On the BSE, Paytm shares dropped as much as 3.47% to 953.00 per share.

The parent company of Paytm, a major player in the financial industry, One 97 Communications, reduced its loss in the second quarter of FY24 by 49% over the same quarter a year earlier.

In the September quarter, the Vijay Shekhar Sharma-led business reported consolidated revenue from operations of 2,519 crore, an increase of 32% over the 1,914 crore reported in the same quarter last year.

The fintech industry leader reported negative profits before interest, depreciation, taxes, and amortization (EBITDA) of 232 crore in the second quarter of FY24, which is less than the 538 crore loss seen year over year.

Most analysts anticipate that the company's operational leverage will generate operating profitability and enable it to reach net profitability by the second half of FY25E.

What brokerages have to say about Paytm's Q2 earnings and its stock is as follows:

Securities by BofA

Paytm's Q2 results mostly matched the revenue forecasts provided by BoFA Securities, while EBITDA above those forecasts thanks to consistent payments growth and credit uptake. Slower loan growth was expected since Paytm was intentionally trying to concentrate on portfolio quality rather than loan growth. 

Following the second quarter, BofA Securities increased its FY24 and FY25 EPS to -14.9 and -2.1. It maintained its 'Buy' recommendation for Paytm and increased the target price from $1,020 to $1,165 per share based on positive risk-reward factors.

Silverman Sachs

As it anticipates continuing growth in loans and payments, along with significant operational leverage in the business model, Goldman Sachs sees upside for both Paytm profits and multiples. Additionally, Paytm may be stimulated by the settlement of pending regulatory difficulties and/or the entry of a bank as a lending partner. 

At $200 million in FY25 EBITDA, we still anticipate Paytm to be the most profitable Indian online firm, and we view the company's transition to net income positivity in FY25 as another trigger for the stock. Paytm trades at a 20%–50% discount to Zomato/Nykaa at 37x FY26 P/E, which we do not believe is reasonable given Paytm's, according to Goldman Sachs.

The company has a 'Buy' rating with a target price of 1,250 per share, which has not altered. 

Views from Citi As prospective competition heats up and the merchant lending business, which leverages the devices base, is showing strong growth momentum and loan performance trends, Paytm's accelerated investments behind the devices business are seen as a plus. 

Citi increased its projections for Adjusted EBITDA and Adjusted EBIT for the fiscal years 25 and 26 by 31% and 28%, respectively.

"Because our projections now take into account a sizeable portion of growth upside potential, we reduce our multiple to 48x from 56x before. Due to the greater risks associated with Fintech than B2C Consumer Tech, our revised multiple for Zomato is 20% lower than our TP-multiple. Given good fundamentals and our favorable perspective on its aggressive/front-loaded investments into the devices business, we still expect considerable upsides notwithstanding the runup YTD, Citi said.

The company now has a 'Buy' recommendation from Citi, and the price target has increased from $1,160 to $1,300 per share.

Financial Services by Motilal Oswal

Paytm announced a Q2FY24 that was substantially in line with expectations, with steady increase in GMV and positive trends in disbursements. This resulted in a healthy increase in overall income along with significant momentum in subscription devices. According to Motilal Oswal Financial Services, stable payment margins and an increase in the mix of financial activity increased the contribution margin to 57%.

Although adjusted EBITDA fell significantly short of the brokerage's expectations, it still expects the business to reach EBITDA breakeven by FY25. According to the brokerage, operational profitability will continue to be driven by operating leverage and contribution margin improvements. 

The company values Paytm at 20x FY28E EV/EBITDA and reduces it to FY25E using a 15% discount rate. It has a 'Buy' rating on Paytm stock and set a target price of $1,160 a share, which would represent a gain of 17.5% from Friday's closing price.

Capital Dolat

Dolat Capital believes that Paytm can compound its revenues by 8x over the decade that follows and would turn highly profitable starting in FY25E. As a result, Dolat Capital believes that DCF valuation is the ideal tool to value the genuine long-term potential of the business. 

The estimates are divided into two stages, with the first stage's revenue CAGR expected to be 26.4% over FY23-FY30E and the second stage's revenue CAGR expected to be 16.1% over FY30-FY40E. We anticipate it to achieve a steady state EBIT margin of 16% during FY31-FY40E and become PAT profitable in FY25E, according to the brokerage business. 

In its DCF assumptions, it has accounted for a cost of capital of 11% and a terminal growth rate of 2% (after FY40e). 

It kept the company with a 'Buy' rating and set a target price of $1,400 per share, anticipating a gain of more than 41% from Friday's closing price.

The stock has increased by more than 52% in a year, while the price of Paytm shares has increased by more than 81% YTD.

At 10:00 am, Paytm shares were down 2.29% on the BSE, trading at 964.75 each.