PayTM could be entering a low cost-high profit margin regime, say a brokerage firm
- The company is moving in the right direction in terms of growing sales and expected to reach EBITDA breakeven soon
Paytmis among the worst performers of 2022 so far as the stock has slipped 53% during the period.
- Analysts at JP Morgan expect the share price to jump significantly by 60% to ₹1,000 per share.
AdvertisementWhile Paytm is still struggling to make profits or even deliver positive returns to its shareholders, a brokerage firm believes that it will soon reach its breakeven with moderate expenses.
Analysts at JP Morgan believe sustained improvement in the profit margins in the last two quarters at 35%, have set the stage. In the fourth quarter of last year, its profit margins stood at a healthy 35%.
“We believe a sustained improvement in the profit margin contribution at PayTM seen over the last two quarters sets the stage for operating leverage Q2F23 onwards as indirect costs moderate - resulting in a consistent downtrend in adjusted EBITDA loss and an eventual path to breakeven,” said a report by JP Morgan.
The company has been making losses for 11 years since its inception, and like most startups its acquisition costs have been high. However, most startup investors concentrate on unit economics — and improving profit margins which shows that its business can yield money, is comforting to its many nervous shareholders.
In 2022, the Noida-based fintech company is among the worst stock performers as it slipped 53%. But the tide seems to be turning albeit slowly as per the brokerage firm.
After a period of restriction, it reinstated an ‘overweight’ rating on the stock, and sees the share price increase by 60% to ₹1,000 per share.
While the lending business is growing gradually, the losses in the segment indicate contained delinquencies in buy now pay later (BNPL) and merchant loans.
“Lending business scale up, an increased contribution from devices and credit card sourcing should result in consistent quarterly improvement in contribution profits which should touch near 40% by the fourth quarter of 2023. A reduction in the adjusted EBITDA loss with better cost controls in indirect expenses will be a key fundamental stock driver,” said the report.
Paytm also partnered with scheduled commercial banks and NBFCs to offer collateral-free instant loans of up to ₹5 lakh at low-interest rates and also offers a unique daily EMI product customized for small merchants.
End of tunnel for high expenses on employee cost
Paytm has been spending a large chunk of revenue in hiring professionals and in marketing expenses. Now that most of the roll out of employees is done, the indirect cost of employee hiring should start to moderate from July-September FY23.
AdvertisementReduction in costs is also a key factor in its path to profitability. Most startups end up spending heavily on customer acquisition as well as marketing. But Paytm has gained a market share of 15% in a very crowded market. It is now a recognizable brand – which can now aid its path to profitability.
Paytm’s net loss widened by over 70% to ₹763 crore as expenses ate into its topline growth in Jan-Mar quarter 2022.
However, not all brokerages share JP Morgan’s enthusiasm for the stock. “The business trajectory is admirable, but it’s still a long way to go for Paytm to turn profitable,” said YES Securities after March quarter earnings — and maintained its ‘reduce’ rating with a target price of ₹580 per share.
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