Why has ICICI given a buy call on Paytm. Does it make sense buying the stock at these prices?

Actually ICICI Securities has initiated coverage on the stock of One97 Communications (Paytm) with a Buy rating. It may be recollected that Paytm has corrected more than 48% since listing and is almost 60% down from the IPO price of Rs.2,150. In the midst of extremely bearish views, ICICI Securities has stuck its neck out and given a buy call on Paytm, with most of the short to medium term valuation concerns addressed.

ICICI Securities is of the view that the downside risks on Paytm are limited considering the sharp fall in price and the high growth aspirations of the company. The company has also been consistently reducing its cash burn, tweaking its business model and also monetizing its leadership position in payments via financial services. Many of these are still work in progress. However, I-Sec has cautioned that the competitive landscape still looks tough.

The Buy rating on Paytm by ICICI Securities has a target price of Rs.1,352 which underlines a potential upside possibility of 64% from the current price level. However, if the monetization levels are lower than expected, it could pose a key risk, as pointed out by I-Sec. The brokerage is also betting on the hidden value of the massive database of customers and merchants being leveraged effectively by the company in the coming quarters.

This comes at a time when the buy recommendations on Paytm have outnumbered the sell recommendations, which is not too surprising considering the fall in price and the quantum of value damage that has happened. The worst case target of Rs.900 had been given by Macquarie and even that had been breached by a large margin. With its persistent growth in gross merchandise value (GMV), the downside risks for Paytm are fairly limited.

For the Dec-21 quarter, Paytm had posted a net loss of Rs.779 crore, sharply wider compared to just about Rs.536 crore in the Dec-20 quarter. However, the big story is on the top line with revenue from operations up 88% to Rs.1,456 crore on a yoy basis. It is not just the revenues but even the gross merchandise value that has gone up sharply in the last quarter showing that in terms of sales growth, Paytm rules the roost among digital plays.

The decision to buy or sell would largely depending on your risk appetite. If you are expecting wonders to happen in the next 1 or 2 quarters, you are likely to be disappointed. Bu this could be a good opportunity for you to gradually nibble away at the stock in small quantities as its valuation is now stands at just about $7 billion. That is the key.