Paytm shares gain after management shares clarity on cash flow, profitability

Shares of One97 Communications, the parent company of Paytm gained in early trade on Friday after the company's management told analysts that it will become cash flow positive within the next 12-18 months.

It also reiterated the fact that it is confident of strong growth and achieving breakeven on an adjusted EBITDA basis by September 2023. Adjusted EBITDA does not include one-time expenses like an exceptional item, restructuring charges or share-based compensations.

At its analyst day held on Thursday, the management said that it does not see significant regulatory risk to affect its payment margin and that it should remain steady even if there is a reduction in the Merchant Discount Rate (MDR).

A Merchant Discount Rate or MDR is a rate charged to a merchant for payment processing of a debit or credit card transaction. It is also known as a traditional discount rate or TDR.

The management spoke about credit cards during the analyst day, citing a significant pickup in business momentum for the same.

Within the commerce business, Paytm managed to achieve Gross Merchandise Value (GMV) of Rs 2,020 crore and revenue of Rs 130 crore in the September quarter.

Goldman Sachs says that the management shared more visibility on numbers and regulations and that their focus is on free cash flow.

The brokerage said that it is encouraged by the new disclosures made by the company, its focus on profitability and reducing competition in the devices segment. However, the timelines around resolution of merchant and consumer onboarding still remains unclear.

Goldman Sachs has a buy rating on Paytm with a price target of Rs 1,100.

Morgan Stanley also maintained its equal-weight rating on the stock and a price target of Rs 695.

CLSA believes that management's commentary on cash flow is in-line with their view of Paytm's cash burn ending in the next 4-6 quarters. It also cited that the company has more than $1 billion in net cash, which is over 25 percent of its current market capitalisation.

The Hong Kong-based brokerage recently upgraded the stock to buy with a price target of Rs 650.

Shares of Paytm are trading 4.2 percent higher at Rs 522.15.