Paytm, still considered the poster child of the digital payments revolution in India, has gone through a rocky road after its explosive IPO in 2021. However, the latest change is that the turnaround has begun. Brokerage firm, the international one, Jefferies, has increased its target price in Paytm to ₹1420, a strong indicator that the company has picked itself up and is now confident in its future and its pillars.

Market and significant shift in sentiment

In November 2021, Pay firm, Paytm parent company One97 Communications, took centre stage with the biggest IPO in Indian history, raising ₹18,300 crore in proceeds. It was projected to be the exporter of its dominance in the fintech channel with the listing decision. Rather, the share plummeted more than 27% upon listing, creating much panic around its business model, profitability outlook, and burn policy.

In the months preceding thereafter, the Paytm valuation collapsed massively. They are doubly pressured by regulatory examination, particularly of their lending arm and payments bank. At some stage, the share fell below a fifth of its issue price, a warning sign of over-valued technology IPOs. However, deep down, the company was placing a fresh pivot in its approach by reducing its expenditures, implementing lean processes, and working on environmental development.

The recent note by Jefferies represents the first perspective taken. The brokerage has retained its Buy or buy rating on Paytm and changed the target price to ₹1,420, which involves a close to 19% upside against its current price of ₹1,197.10 on the BSE (as of September 22). The optimism is fueled by the brightening of financial, transaction discipline, and bright prospects in lending and financial services.

Jefferies estimates that Paytm will turn to a loss of ₹1,500 Crore in FY25, to a profit of ₹500 crore in FY26, and then to a profit of ₹1200 crore in FY27. This performance has been credited to its low operating cost, steady contribution margin of approximately 58%, as well as increased revenue of its lending and financial services business lines.

The lending business of Paytm is one product that is contributing to the recovery and is experiencing a steep pace of growth. Paytm took advantage of some of its vast distributor networks of over 45 million merchant users to establish a credit product distribution channel. The other non-banking financial companies (NBFCs) with which the company collaborates also enable the company to provide working capital loans and consumer credit without necessarily having a lending license.

Jefferies also mentioned the resurgence of Paytm Buy Now Pay Later (BNPL) service, which now has the UPI feature. This postpaid-on-UPI product will be a highly promising financial services revenue generator. At a 7% increase to FY27 EBITDA with adoption at but one-third of prior levels, Jefferies puts the potential of the product in perspective.

Challenges and improving investor confidence

The comeback by Paytm does not only concern new products but also concerns execution. It is also more operationally disciplined than it was a year ago, with the company concentrating on its profitable business segments and cutting unproductive costs. This has aided in stabilizing margins and enhancing the confidence of the investors.

Its contribution margin, one of the indicators of the unit economics, has held steady at approximately 58% of the company. This has formed the foundation of sustainable profitability coupled with cost optimization. Jefferies has faith that with these margins projected to stay the same whilst Paytm expands its lending and financial services business, such margins will be significant to the application of this win-win strategy in the long term.

In early 2024, Paytm experienced a significant blow as the Reserve Bank of India (RBI) restricted its payments bank on grounds of compliance. Its relocation caused its stock price to plunge sharply and raised issues concerning its regulatory status. Paytm also acted swiftly, putting together its operations, promoting governance, and redoubling its partnerships.

Paytm has resisted the regulatory headwinds. The fact that it has recovered and earned the confidence of investors once again is a sign of an organization maturing and learning its lesson. The new surge in its share price and the optimism expressed by Jefferies indicate that the market is coming to accept this development.

Conclusion

The slowing down of Paytm into a possible turnaround tale despite the IPO flop is symptomatic of the uncertainty and potential of startups in India. As Jefferies increased its target price to ₹1,420 and forecasted a path to profitability, it appears that the fintech giant is regaining its footing. Since the epic market launch with the issues of regulation and the failure to convince investors, the fintech giant has been struggling.