Macquarie Capital Securities (India) has initiated coverage on One97 Communications, the parent company of digital payments platform Paytm, with an 'underperform' rating and a target price of Rs 1,200.
The brokerage said the company's business model lacks focus and direction.
One97 Communications (Paytm) is a cash guzzler and achieving scale with profitability is a big challenge, pointed out the global brokerage.
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Dabbling in multiple business lines has weighed on the company from being a category leader in any business except wallets. Unless the company lends, it cannot make significant money by merely being a distributor, the brokerage said.
This makes Macquarie question Paytm's ability to achieve scale with profitability.
Most things that Paytm
does, every other large ecosystem player like Amazon, Flipkart, Google, etc, are doing, Macquarie said.
From a long-term perspective, rates in the distribution business are likely to be driven southwards by competition and regulation, the brokerage said.
"PayTM’s valuation, at around 26x FY23E Price to Sales (P/S), is expensive especially when profitability remains elusive for a long time. Most fintech players globally trade around 0.3x-0.5x PSG (price to sales growth ratio) and we have assumed the upper end of this band. We are unwilling to give it a premium here as we are unsure about the path to profitability," Macquarie said in a note to clients.
The brokerage added that, despite baking in an aggressive compounded annual growth rate of about 50 percent over the next five years in non-payment business revenues led by distribution business, it expects Paytm to generate positive free cash flow only by FY30.
The Reserve Bank of India could introduce regulations in the Fintech space which could be a negative for Paytm.
"We are also not enthused with the company’s complicated organisation structure, related-party transactions, churn in top management and a thinly staffed board with 75 percent of members being based out of India," Macquarie said in the note.
Though, the key game-changer could be an ability to monetise UPI, which could completely swing the investment case, Macquarie said.