Paytm's Buyback Plan Shows Management Confidence On Business Traction And Profitability Plans: Analysts

Analysts believe Paytm's buyback plan shows management confidence on business traction and profitability plans

- Dolat Capital Views the move to be very positive and would enhance business confidence

- Further added that Paytm's business traction both on growth and profitability is trending faster than what was anticipated at the time of IPO

- ICICI Securities sees it to be ahead of time and will be a surprise to the market

Paytm, India's leading digital payments and financial services company and the pioneer of QR and mobile payments, on Thursday, December 8, announced that its Board of Directors will hold a meeting on December 13 to consider a proposal for a share buyback. Optimistic on its growth prospects and reasserting its guidance on turning profitable at an operating level next year, top brokerage firm Dolat Capital has said that the buyback will clear cloud on looming concern.

The analysis and research firm has also reiterated its stock rating to BUY and continued to maintain Paytm's stock at a Target Price of Rs 1,400, with an upside of 175%. Dolat Capital added that Paytm has 649 million shares outstanding, and has net cash and investment balance of Rs 92 billion as of Sept-22. "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," it said.

'To take away investors' concerns around profitability & cash generation'

Dolat further added: "We believe following factors would have led to this decision - Business traction both on growth and profitability is trending faster than what was anticipated at the time of IPO. Annualised burn rate at current rate is less than $75 million. To turn FCF positive by H1FY24 and EBIDTA positive ideally by H2FY23 (accumulated 30% of incremental revenues into incremental EBIDTA on LTM basis, while Contribution margins stands at 44%, suggesting further room for improvement)."

The research firm said, "We believe the Buyback announcement would take away multiple investor concerns around profitability and cash generation roadmap of the business, any further pressure from potential supply from large investors in near future, and would boost confidence on Management's optimal capital allocation practice and potential for further earnings accretion in future through Buyback route."

Dolat has also mentioned: "We believe the optimal size of the Buyback would be around Rs 8 billion-Rs 10 billion through open market purchase route. In this way the company would be able to relinquish 2.5% of its equity base that too at a significant discount from the IPO price. This would also mean that significant part of the incremental supply (if any) in near future would get absorbed."

'Buyback will be a surprise to the market'

Kunal Shah of ICICI Securities has mentioned: "The management was confident about becoming an FCF-generating company (net of capex) in 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."

Recently, after the analyst meet, he said: "Paytm has exceeded expectations in the past few quarters and added that the company remains "ahead of the guided timeline to achieve operating profitability". It also said that the company should start generating free cashflow (FCF) in the next 12-18 months. It also maintained a 'BUY' rating for the Paytm stock at a target price of Rs 1,285.