Paytm Positioned for Profitability, Goldman Sachs Sees Massive Potential
Paytm's Path to Prosperity, Goldman Sachs Boosts Target Price by 34%
18 October 2023
Goldman Sachs raised Paytm's target price, foreseeing it as the most profitable among Indian internet companies due to its strong presence in the digital payments market.
Paytm is expected to turn net income positive by FY25, potentially acting as a catalyst for the stock's growth, despite facing regulatory challenges like MDR caps and market share decline.
Key catalysts for Paytm's success include resolving regulatory issues, onboarding a bank as a lending partner, and continued growth in lending and payments segments, making it an attractive investment opportunity.
Paytm's parent company, One 97 Communications Ltd, received a significant boost on October 16 as Goldman Sachs raised the stock's target price, citing the company's potential to become the most profitable among India's internet companies. The fintech giant, led by Vijay Shekhar Sharma, is well-positioned to capture a substantial share of India's digital payments market due to its industry-leading scale and engagement, according to Goldman Sachs analysts.
Goldman Sachs also expects Paytm to achieve net income positivity in FY25, which could act as a catalyst for the stock's growth. The brokerage acknowledges that Paytm faces challenges, including regulations like merchant discount rate (MDR) caps, market share decline, and slower financial services expansion. However, they view Paytm's valuation as attractive compared to its growth outlook.
The analysts anticipate continued momentum in Paytm's lending and payments segments, with strong operating leverage in its business model. Furthermore, the resolution of outstanding regulatory issues and the inclusion of a bank as a lending partner are seen as potential catalysts for Paytm's success.
One of the key catalysts mentioned in the report is the resolution of the regulatory issue surrounding Paytm Payments Bank. On October 12, the Reserve Bank of India imposed a penalty on Paytm Payments Bank for non-compliance with KYC norms and prohibited them from onboarding new customers, citing supervisory concerns. Goldman Sachs sees the resolution of this regulatory issue as crucial for the Paytm stock.
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The brokerage has increased the target price for Paytm to Rs 1,250 per share, suggesting a potential 34% upside from the closing price on October 13. Paytm's business model has shown impressive growth in recent quarters, including increased cross-selling on its platform, leading to improved profitability.
Despite the challenges and regulatory hurdles, Paytm's financial outlook remains positive. The company's growth trajectory and operating metrics make it one of the most compelling growth stories in the Indian internet sector, according to Goldman Sachs. They believe Paytm's valuation is attractive given its growth profile, even trading at a discount compared to peers like Zomato and Nykaa.
Investors' concerns about the impact of an adverse credit cycle on Paytm have been addressed, with the company expected to prioritize credit quality over growth. Goldman Sachs anticipates a 36% YoY growth in financial services revenues for FY25, further strengthening the company's position in the fintech space.