Paytm Gets A 'Buy' As BofA Securities Sees Better Margins

Paytm's parent One97 Communications Ltd. may see margins improve as its revenue mix shift towards high-margin Soundbox and lending, according to BofA Securities.

The brokerage raised the stock to 'buy' from 'neutral' and increased the price objective to Rs 885 from Rs 780, according to a June 7 investor note. That implies a potential upside of 24.7%.

Paytm's strong revenue momentum in BNPL (buy now, pay later) and merchant lending, according to the brokerage, is likely to continue even if at a slower pace. This will lead to a 34% revenue CAGR from fiscal 2023 to fiscal 2026, according to BofA Securities.

The brokerage said Paytm is well-positioned to continue to dominate the small and medium enterprise merchant landscape, where the "subscription model via Soundbox is improving merchant stickiness".

Shares of Paytm jumped as much as 8.11%, the most since Feb. 9, before paring some gains to close 6.19% higher at compared to a 0.49% decline in benchmark Nifty 50 on Thursday.

Of the 13 analysts tracking the stock, 11 maintain ‘buy’, while two suggested ‘hold’, according to Bloomberg data. The consensus price target implies a potential upside of 20.9% over the next 12 months.

BofA Securities said the competitive intensity has fallen in the past six months as fintech companies are struggling due to the funding winter, stricter RBI norms, and declining discounts. "We see limited competition for Paytm in its Soundbox business as well as in the BNPL/merchant lending space," the brokerage said.

BofA Securities added that continued digitisation is driving growth in the payments space for the company. It estimated consumer/merchant payments to grow at a 22% CAGR from fiscal 2023 to fiscal 2025.

The brokerage also considers Paytm as one of the beneficiaries of UPI uptake and potential ONDC traction, the note said.

BofA Securities 'buy' call stems from its optimism on Paytm's fundamentals and room for aggressive scaleup without taking any balance sheet risks. The brokerage finds the risk-reward ratio turning more positive.

Paytm's lending business provides an upside optionality, giving it the room to scale up subject to execution, BofA Securities said. Its business model continues to show good traction, and cross-selling helps improve profitability, the brokerage said.