Shares of Paytm slumped as much as 10.6% to INR 882.1 during the intraday trading on the BSE on Monday (October 23) after the company released its Q2 FY24 earnings last week on Friday.

The stock witnessed profit booking, reversing the uptrend of the last five sessions. The decline came despite Paytm reporting strong quarterly results, with its net loss declining 49% year-on-year and 18.6% sequentially to INR 291.7 Cr.

Brokerages reiterated their positive stance on Paytm’s growth trajectory post its Q2 results, with at least four of them also raising their price targets (PTs) on the stock. 

Motilal Oswal raised its PT on the stock to INR 1,160 from INR 1,000 earlier, implying an upside of over 17% to its last close. The brokerage believes that consistent improvement in Paytm’s contribution margin and operating leverage will drive the company’s operating profitability.

Despite Paytm’s loss and adjusted EBITDA missed the brokerage’s estimates, Motilal Oswal still expects Paytm to achieve EBITDA breakeven by FY25.

The fintech major posted an adjusted EBITDA profit of INR 153 Cr in Q2 FY24.

On the other hand, Citigroup also raised its PT on Paytm to INR 1,300 from INR 1,160, which implies an upside of almost 32% to its last close, despite a slight miss in its adjusted EBITDA outlook.

Though the brokerage noted that there is high risk in fintech, it said Paytm has significant upsides given its strong fundamentals.

Analysts at the brokerage said they have a positive outlook on the company due to its aggressive/front-loaded investments into the devices business.

It sees Paytm’s accelerating investments in the devices business as a positive given that the competition in the space is heating up and as the company’s merchant lending business, which also leverages the devices base, is demonstrating solid growth momentum and “loan performance” trends.

Competition Strengthens

It must be noted that Paytm has doubled down on its strategy for the devices business with the launch of new soundboxes with enhanced capabilities. This comes at a time when the payment devices business is seeing increasing competition from the likes of PhonePe, BharatPe, as well as deep-pocketed Jio Financial Services.

Not just devices, competition seems to be increasing for Paytm across business verticals, particularly in lending. Jio Financial Services and, most recently, GooglePay launched credit services as these players look to grab a pie of the fast growing Indian digital lending market. 

Citigroup, in its research report, said that the digital payments sector is currently super competitive, which remains a risk to its thesis on Paytm. 

“PhonePe and Google Pay have gained market share ahead of Paytm on UPI payments (P2P). In addition to rival platforms, such as PhonePe, several merchant payment players like Razorpay and Pine Labs have built vertical specific platforms and command a head start, especially with the mid-market and large enterprise customers,” the brokerage noted.

Paytm reported an over 31% rise in operating revenue to INR 2,518.6 Cr in Q2 FY24 and attributed the surge to its increasing gross merchandise volume (GMV), merchant subscription revenue, and disbursal of loans during the quarter. 

The company’s loan disbursements jumped 122% YoY to INR 16,211 Cr while the number of Paytm payment devices deployed at shop counters grew to 92 Lakh during the quarter from 48 Lakh in Q2 FY23. 

“We believe Paytm has continued (to) demonstrate ability to sustainably reduce its payment processing charges and strong ramp up of lending distribution business which in turn should aid Paytm to turn profitable by FY25E, in our view,” said JM Financial in its latest research note on the fintech major. 

The brokerage also increased its PT on Paytm to INR 1,325 from INR 1,060 earlier.

The analysts at JM Financial also said that while there remains a concern about the downside risks to the take-rates in Paytm’s financial services business, they expect higher volumes to set-off the potential loss in revenue.

BofA also raised its price objective on Paytm to INR 1,165 from INR 1,020 earlier, which implies an upside of 18% to its last close. It expects Paytm to attain EBITDA breakeven in FY25.

Paytm shares were trading 4.8% lower at INR 939.75 at 2:30 PM on the BSE today.