Experts cheer Paytm buyback, say it shows co’s ability for growth

Even as the markets await the details of the proposed buyback of digital payments and financial services giant Paytm, investors and analysts have cheered the move. The stock is up 22% in the past 3 weeks and 6% since Thursday, when it informed the exchanges about the proposed buyback.

The board meeting to consider the buyback of shares is slated for December 13.

Paytm’s management believes that a buyback could be beneficial for shareholders given the company’s current financial position and liquidity.

A buyback, also known as a share repurchase, is a way for a company to reduce the number of outstanding shares on the market. By buying back its own shares, a company can increase the value of its remaining shares and enhance shareholder returns.

Commenting on the buyback, Dipan Mehta, Director of Elixir Equities, said in a TV interview, “I think it's a smart move on part of the Paytm management.. buyback certainly gives an outlook as to what the kind of cash position is and the confidence the management has that they will be able to turn around the operations and that they do not need to burn so much of cash.”

“At least on the fundamentals side, quarterly numbers are coming through on a positive basis so maybe you know Paytm has turned a corner over here and you could look to at least market-linked performance over the next few months and quarters,” Mehta added.

Meanwhile, Emkay Global Financial Services MD Krishna Kumar Karwa said in a media interview, “Generally buybacks are conducted when corporates feel that their stock is undervalued. Apart from that, it is a tax-efficient way of returning money to shareholders. If a newly-listed platform company is considering buyback even as they work towards profitability, it’s a function of its confidence in its business prospects. It’s also a question of that they may not require to burn further cash and they believe that buying back shares at the current valuation could be more attractive.”

Dolat Capital, which has a ‘buy’ rating on Paytm with a target price of ₹1,400, said the buyback announcement will take away investor concerns surrounding the profitability and cash generation roadmap of the business.

The buyback will not only boost confidence in the company's management and their ability to allocate capital optimally, but it could also lead to further earnings accretion in the future through this route, Dolat Capital added.

“Buyback at current valuation makes lots of sense given declining need for organic capital allocation and very compelling valuation for the Paytm business. We view this move to be very positive and would enhance business confidence,” Dolat analysts wrote.

In another note earlier this month, Dolat said upgraded disclosures by Paytm, detailed business growth plans along with Free Cash Flow focus “raise confidence to profitability path”.

Kunal Shah of ICICI Securities wrote, “The management was confident about becoming an FCF-generating company (net of capital expenditure) in the next 12-18 months, driven collectively by improved profitability across payment and financial services distribution, cloud, etc. So it seems to be ahead of time and will be a surprise to the market.”

In its recent analyst meeting, Paytm said it remains ahead of the guided timeline to achieve operating profitability i.e EBITDA before ESOP cost.

According to Dolat Capital, one potential driver for Paytm's decision to undertake a buyback is the business traction in terms of both growth and profitability. This performance has been better than what was anticipated at the time of the company's initial public offering, it said.

Overall, Paytm's proposed buyback has elicited positive responses from investors and analysts. Furthermore, the confidence shown by the company in terms of its plans to become an FCF-generating company within the next 12-18 months, has further spurred investor interest in the stock.