Morgan Stanley keeps the faith in Paytm, expects over 40% upside

In a positive development for Paytm after its disastrous listing on the country’s stock market last month, US investment bank Morgan Stanley has begun coverage on the counter with an overweight rating.

Morgan Stanley has given a price target of Rs 1,875 to the stock. This is a 43% upside from Paytm’s market price as of Tuesday’s close but still 12.8% below the IPO price.

The move comes just weeks after India’s Dolat Capital became the first brokerage to give a ‘buy’ call on the beleaguered digital payments company’s stock.

Paytm had raised $2.5 billion in its IPO but its debut was one of the worst by a major technology firm since the dotcom era of the late 1990s.

After dropping 27% on debut, the counter has struggled to even come close to its listing price, leaving investors, quite literally, red-faced. 

On Wednesday morning, Paytm shares rose over 2% to trade around Rs 1,338 apiece. This is still 38% lower than the company’s initial public offering price of Rs 2,150 per share.

So, what has Morgan Stanley said?

Morgan Stanley, which was the lead banker for the Paytm IPO, sees attractive risk to reward after the stock dropped to a record low of Rs 1,271 late last month. It values Paytm at $17 billion, compared with the company’s current market valuation of around $11.5 billion.

Morgan Stanley analysts said in a report Paytm would break even at operating profit level in the fiscal year 2024-25.

Why exactly is Morgan Stanley optimistic about Paytm?

The investment bank said that Paytm has built a strong customer acquisition engine via payments and that it is now rapidly expanding into financial services at low incremental cost.

Its analysts said that Paytm’s total addressable market is large, the balance sheet risk is low and profitability should improve sharply as financial services scales up.

“Paytm has been able to manage the regulatory changes well so far, and has focused on building models that are aligned to the regulatory thought process,” Morgan Stanley said.

Having said that, the investment banking giant also added a rider. It said that Paytm’s business models are new and have both upside and downside risks depending on how the regulatory environment evolves. This means that regulations remain key to monitor, it added.

What have other brokerages said about Paytm?

Morgan Stanley’s line is diametrically opposite to the likes of Macquarie and Goldman Sachs and India-based JM Financial, which have given Paytm a thumbs down.

Macquarie marked it at a target price of Rs 1,200 per share while JM Financial gave a ‘sell’ call on the counter with a target price of Rs 1,240 per share. Goldman, which was also a banker for Paytm’s IPO, is neutral on the stock.

Dolat Capital Market Pvt Ltd, which was the third brokerage to initiate coverage on the stock, was the first to give a ‘buy’ call on Paytm, with a target price at Rs 2,500 apiece. This is 16% higher than its listing price.

However, Paytm shares have fallen another 16% since Dolat Capital’s buy rating. The brokerage had given the buy call when Paytm’s shares were around Rs 1,600 apiece.