Paytm’s Rs 850-cr share buyback at 50% premium to support stock in near-term; JP Morgan, Morgan Stanley see up to 104% upside

Paytm, India’s leading digital payments and financial services company and the pioneer of QR and mobile payments, has received positive feedback from top brokerages such as JP Morgan, and Morgan Stanley after the company's Board approved the proposal of buyback of equity shares of the company at a price not exceeding Rs 810 per share and for an amount of up to Rs 850 crore. Both the brokerage firms see up to 104 per cent potential rally in the stock price to Rs 1,100 per share. JP Morgan highlighted Paytm's  buyback won’t hamper any growth plans.

One97 Communications, parent company of Paytm, had cash and equivalents of Rs 9,182 crore at the end of September this year. The company said the buyback will take place in the open market through the stock exchange mechanism. Based on the minimum buyback size and maximum buyback price, the company would purchase a minimum of 5,246,913 equity shares.

JP Morgan – Rating: Overweight (Buy) | Target Price: Rs 1,100 | Upside: 104%

JP Morgan remains upbeat on Paytm, saying in its note that "the buyback announcement at a 50% premium to provide support to the stock price in the near term". The brokerage kept its price target unchanged at Rs 1,100 per share, and reiterated 'overweight' rating on the stock. It highlighted that the buyback won't hamper any growth plans as the company will generate excess cash after taking into account the investments required for growing the business.

The brokerage firm also expects tailwinds on cash generation from improving Adj Ebitda. "Paytm has $1.1bn in cash as of Sep-22 and $127mn outlay of cash for buyback (incl buyback tax) in our view is not a significant amount. We expect it to burn $33mn over the next three quarters before turning Adj Ebitda breakeven in 2QFY24E," the brokerage firm noted.

JP Morgan, in its note, added that the reduction in cash because of buyback offsets the reduction in share count. The brokerage maintains 'overweight' rating for the stock with a target price of Rs 1,100 per share. "We value Paytm using a DCF valuation, baking in a rising cost of capital with a 18.5% COE and a 20x exit multiple that yields a Mar-23 PT of Rs 1,100," it added.

"Lower-than-anticipated growth in MTU (monthly transacting users) and GMV/MTU; lower-than-anticipated growth in loans and the risk of unestablished portfolio credit behavior; and adverse regulatory risks to payment MDRs and restrictions on digital lending," would be some of the key risks to rating and price target.  

Morgan Stanley -- Rating: Equal-Weight (hold) | Target Price: Rs 695 | Upside: 29%

The brokerage firm has given 'equal weight' rating to the stock with an 'attractive' industry view. It has pegged a price target at Rs 695 per share. Morgan Stanley noted that the total outlay owing to the buyback would be ~Rs 10.5 bn and includes applicable buyback taxes. "Cash position has been strong at Rs 91.8b n as of Sept22, and will remain strong post-buyback as well," it said.

The Paytm board highlighted that the buyback is a sign of confidence that the company is on a clear path to delivering cash flow profitability, and stated that the buyback will not have any impact on its growth plans in the near future or its profitability plans,” Morgan Stanley highlighted.