To fully understand the recent upgrade of One97 Communications (Paytm) to a Buy rating with a target price of ₹1,050, it’s important to delve into the factors that influenced this decision. One of the key catalysts for this upgrade was the recent NPCI approval received on October 24th. This approval lifted a major regulatory overhang on the company, which is expected to help Paytm rebuild its Monthly Transaction User (MTU) base in the next 12-18 months.
With this regulatory hurdle out of the way, Paytm can now focus on cross-selling retail financial products such as loans, insurance, and wealth products to its user base. This move is expected to improve revenue per user and drive growth for the company in the coming years.
Additionally, Paytm has been seeing strong traction in its merchant device subscription revenue and has been increasing its share of UPI on Credit Card transactions with Merchant Discount Rate (MDR). The company is also experiencing growth in its merchant loan business, with a better take rate, which is expected to contribute positively to its bottom line.
Furthermore, Paytm has been optimizing its costs and has been generating non-operational income, including treasury income from proceeds of recent stake sales. These factors are expected to help Paytm achieve profitability by FY26 and accelerate growth thereafter.
One interesting point to note is Paytm’s Cash/MCap ratio, which stands at 21%, significantly higher than that of Zomato at 5%. This provides a margin of safety for Paytm and gives it the flexibility to accelerate business growth, make strategic acquisitions, or even reward shareholders through dividends or buybacks.
Looking ahead, potential further easing of regulatory stances, such as obtaining a payment aggregator license, could act as a positive catalyst for Paytm in the future.
In conclusion, the upgrade of Paytm to a Buy rating reflects the company’s strong growth potential, improved regulatory environment, and strategic initiatives to drive revenue and profitability. Investors may want to consider the bullish outlook for Paytm and its prospects in the evolving digital payments and financial services landscape.
