Whalesbook
Goldman Sachs has initiated coverage of One97 Communications, the parent company of Paytm, with a 'Buy' rating and a target price of ₹1,400. This optimistic outlook suggests a potential 22% upside for the stock, even though the Reserve Bank of India (RBI) recently cancelled the banking license for its associate, Paytm Payments Bank Limited (PPBL).
RBI Action and Limited Direct Impact
The central bank's decision on April 24th, following earlier restrictions in January, has drawn attention. However, Goldman Sachs notes that the direct financial impact on Paytm is expected to be minimal. Paytm had already written down its investment in PPBL and does not earn revenue from the bank. Operational separation between the two entities was completed before this regulatory move.
Strategic Shift for Service Continuity
Paytm had proactively reduced its dependence on PPBL. It obtained a Third Party Application Provider (TPAP) license from the National Payments Corporation of India (NPCI), allowing it to migrate its Unified Payments Interface (UPI) operations. This strategic separation ensures service continuity for millions of users and merchants.
Core Business Remains Strong
Despite the regulatory challenges, Paytm's core business metrics remain robust. Goldman Sachs observed continued gains in both consumer and merchant market share. This has led to an acceleration in Paytm's Gross Merchandise Value (GMV) growth to 26% year-on-year.
Revenue Moderation and Margin Focus
Revenue growth is forecast to moderate to 14% year-on-year in the fourth quarter, partly due to the absence of Payments Infrastructure Development Fund (PIDF) incentives. Nevertheless, the brokerage expects Paytm to maintain stable Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) margins, projected at 5.8%, although short-term pressures are possible.
Key Areas to Watch
Investors will be monitoring how Paytm handles the impact of lower incentives, the growth of its postpaid lending business, and any lingering effects from the PPBL situation. The potential relaunch of its wallet business, pending RBI approval for a Prepaid Payment Instrument (PPI) license, is also a key focus. External challenges, including slower growth in travel services and credit card adoption, have led to minor downward revisions in revenue and earnings estimates.