Paytm shares surge 54% in 3 months, rebound 79% from May lows; is the rally here to stay?

Shares of One 97 Communications, the parent company of Paytm, have experienced a notable recovery recently, with the stock closing the last three months in positive territory. The stock rebounded, gaining 54% to ₹554 apiece due to multiple positive developments that encouraged investors to buy the stock on dips. 

The stock is now trading 79% above its all-time low of ₹310, reached in May 2024 during a four-month decline. This decline followed the Reserve Bank of India's (RBI) decision to wind down Paytm Payments Bank due to compliance issues, which led to a significant drop in Paytm's stock.

The company recently agreed to sell its entertainment and ticketing business to food delivery giant Zomato. As part of the agreement, Paytm will continue to offer ticketing and entertainment options on its app for the next 12 months. However, users will be redirected and prompted to switch to Zomato's forthcoming app for the 'going-out' segment.

This move is intended to replace revenue from its entertainment ticketing business by focusing on expanding core areas such as payments and financial service distribution, according to the company.

The deal first came to light in mid-June when Zomato announced that it was in talks with Paytm to acquire the movie and event ticketing business.

Path to profitability

In the June quarter, the company reported a wider loss, impacted by weakness in its payments business following the central bank's directive to shut down its banking unit in February. The digital payments firm’s consolidated net loss expanded to ₹840 crore, compared to a loss of ₹358 crore a year earlier.

Its revenue from operations during the reporting quarter fell by 36% to ₹1,502 in April-June, aligning with the company's estimates of ₹1,500 crore to ₹1,600 crore.

Going forward, the company expects its profitability and revenue to improve starting in the second quarter, driven by better cost management. It anticipates improvements in operating metrics, including gross merchandise value and merchant device additions, while employee costs are expected to decrease from July to September.

Earlier this year, the RBI's restrictions also led several lending partners to halt loans distributed via the company's platform, resulting in a 1.4% sequential decline in loans during the June quarter.

As part of its cost-saving measures, the company proposed last Wednesday to cap the salaries of its non-executive independent directors. Paytm announced that its independent board members will now earn a maximum annual compensation of up to ₹4.8 million ($57,228), with the reduced pay effective in April.

Previously, a non-executive independent director earned as much as ₹20.7 million annually. The company aims to save between ₹4 billion and 5 billion in employee costs each year.

₹600 target price

In a recent note, global brokerage firm Bernstein reiterated its 'buy' rating on the stock with a target price of ₹600 per share. Bernstein projected that the business, in its current structure, is expected to achieve profitability by 2026–27 and outlined three potential “routes” to profitability.

According to Bernstein, the company's business, if structured within a bank or NBFC with a payments bank license, could become profitable “almost immediately,” thereby “unlocking maximum value.”

Alternatively, finding a corporate parent—a “middle path”—could make the business “less accident-prone.” If the company pursued neither of these options, Bernstein believes Paytm is likely to turn profitable by FY27, supporting their target price of ₹600.

Meanwhile, Citi Research raised its target price for the stock to ₹440 per share, up from the previous target of ₹410 per share, citing the sale of Paytm's entertainment ticketing business to Zomato as a favourable development for the company. Despite this increase, the new target price still suggested a potential downside of 21.5%.

Emkay Research believes that the sale of Paytm's entertainment business to Zomato will enhance the company's cash reserves, potentially allowing it to expand its rewards and cash-back programmes. This move is seen as a strategy to revitalise its struggling payments business following the recent RBI actions. While the one-off gains from the sale may reduce the net loss for FY25E, they could negatively impact future earnings, it noted. 

Based on preliminary estimates, the net value added or change in target price from the deal is projected to be only ₹25 per share, which is significantly lower than the stock price reaction observed following the news of the deal (even when excluding the anticipated payment aggregator approval).

As a result, the brokerage has maintained its ‘reduce’ rating on the stock with a target price of ₹375 per share.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.