Full Story: UBS Cuts Paytm Share Price Target, Says Q4 Results May Hurt

(CTN News) – As a result of the RBI FAQs issued recently, UBS expects One 97 Communications Ltd (Paytm) to retain a large portion of its customer and merchant base once certain approvals are granted by the National Payments Corporation of India (NPCI).

There is likely to be a 15-20 percent loss of merchants, customers, and devices in the March quarter (Q4) over the December quarter, as well as a 60 percent decline in loan originations on a quarter-over-quarter basis, according to UBS.

As a result of wallet business losses and only gradual normalization in the payment business and loan origination business, the company expects FY25 to be weak and bake in a 2 percent revenue decline.

In FY25, Paytm is expected to increase its marketing expenditures to regain lost customers, which leads to increased EBITDA losses, resulting in lower earnings per share. Our price target has been lowered to Rs 510 from Rs 650.

UBS said this implies 2.4x EBITDA to FY25E sales – a 70 percent discount to Indian internet peers (vs 41 percent over the past two years).

UBS said on Wednesday that Paytm’s valuation is justified given its lower growth and margin profile and the weakened sentiment caused by the RBI action. During the trading session on Wednesday, Paytm shares were locked at Rs 406.15, the lower circuit limit of 5 per cent.

As UBS indicated in its initiation note, a re-rating will depend on execution, suggesting it is unlikely to occur in the near future despite its thesis of a large re-rating potential.

UBS expects Paytm to experience a near-term financial impact on its business as well as some permanent loss of business during FY25E. Paytm is expected to lose 5-7 percentage points of its 25% share of the payments industry, primarily as a result of wallet loss (2-3 percentage points permanent loss) and churn among merchants and customers.

It estimates that the net payments margin will decline from 7-9 basis points to 6-7 basis points, as a result of the loss of high-margin wallet business and likely easier terms to retain merchants. The origination of loans is likely to be suspended throughout most of Q4 and will only resume following the stabilisation of the payments business in FY25E.

We expect loan disbursements to decrease 14 percent YoY in FY25E, while cloud and commerce are expected to decline 18 percent in Q4 due to a lesser direct impact and a growth rate of 18 percent in FY25E.

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