Paytm Cracks After Macquarie Downgrade, Despite Stellar Numbers

On 10-January, Macquarie further downgraded the stock of Paytm from Rs.1,200 to Rs.900. At that price, the stock of Paytm would be more than 58% below the IPO issue price of Rs.2,150. Interestingly, it was Macquarie that had downgraded the Paytm stock on listing with a downside target of Rs.1,200.

Why did Macquarie downgrade Paytm target second time?

One of the reasons for the sharp fall in the price of Paytm in the last 2 days was the sharp downgrade of the price target by Macquarie. Here is why.

1) Macquarie is of the view that Paytm has limited potential to meaningfully scale up its business of distribution of merchant loans on its Paytm platform.

2) Macquarie expects the losses to widen in the coming year due to lower revenue expectations as well as higher costs associated with manpower, cloud and software. The brokerage expects Paytm losses to widen between 16% and 27%.

3) It has also expressed concerns about the possibility of capping charges in its payment business. Interestingly, the payments business still accounts for about 70% of the overall gross revenues of the company. However, Paytm earns most of its money from giving out its Paytm instruments for payment processing.

4) Macquarie has also expressed concerns over the recent foray into insurance being rejected by the regulator. According to the brokerage, this would logically mean that even the banking license may get delayed for the time being. 

5) Finally, Macquarie has expressed two additional concerns on the Paytm stock. It sees the recent spate of exits at the top as a short term negative for the stock price. It also believes that the stock was grossly overvalued at the time of the IPO and even at these prices, it is yet to get close to fair value.

However, what cannot be argued is that even in the midst of these concerns expressed by Macquarie, the Dec-21 quarter top line numbers are fairly impressive.

What Paytm has reported in the Dec-21 quarter

For now, Paytm is yet to officially announce its quarterly results but like many of the other high market cap companies, Paytm has provided guidance on some of the critical top line numbers. Here are the highlights.

1) On a YoY basis, the number of loans disbursed through the Paytm platform has grown 5-fold to 44 lakhs in the Dec-21 quarter. This is partly due to the low base in Dec-20 quarter and also due to a rapid pick up in Fintech driven lending across India.

2) It is not just the volume of loans, but even the value of loans are sharply up 365% at Rs.2,180 crore in the December quarter. There has been a fall in the per-capital loan size, but that is expected in this kind of business.

3) On the lending side, Paytm operates across 3 areas viz. BNPL schemes, personal loans and merchant loans and has shown growth in all of the individual segments. Paytm has also clarified that it does provide any First Loan Default Guarantee to lending banks and NBFCs.

4) The all important top line metrics, gross merchandise value (GMV) grew 123% on a YoY basis to Rs.250,100 crore in the Dec-21 quarter. That translates into a little under $34 billion in GMV overall.

5) One important micro measure is the monthly transacting units (MTUs). On a YoY basis, the MTU has grown by 37% at 6.44 crore MTUs on an average. Paytm saw consistent growth in MTU even on a sequential basis each quarter.

6) One of the big drivers of growth for Paytm is the number of devices deployed across the merchant base. This number has increased on a sequential basis from 9 lakhs to 13 lakhs and to 20 lakhs in the last 2 sequential quarters.

It is hard to take a call on the stock since the top line numbers are quite strong even as the profits may still be elusive. The good news is that some of the early investors in the stock like Blackrock and Canadian Pensions are still favourably inclined to the stock.