Suresh Ganapathy has been bang on with his price targets for One97 Communications ever since it made a dismal public market debut on November 18, 2020. The parent of Paytm aspires to be a full stack financial services player with a presence across the entire digital payment ecosystem, e-commerce and financial services verticals. But the narrative with which the company went public last year has proved to be just that — a vision statement.

The reality, for now, is that the stock price has been shaky.

On the day Paytm got listed, Ganapathy, who tracks the stock at Macquarie Capital Securities, was blunt in his initiating coverage note titled, “Too many fingers in too many pies”. The analyst stated that the dabbling in multiple business lines prevents Paytm from being a category leader in any business except wallets, which is becoming inconsequential given UPI’s meteoric rise as a digital payments alternative.

That note set an extremely bearish target for the stock which had already ended Day 1 at 27% lower than its issue price of ₹2,150. “We believe Paytm’s business model lacks focus and direction. We initiate with an UP rating and TP of ₹1,200, implying 40%+ downside,” wrote Ganapathy. While price targets set by analysts are usually for a 12-month period, in this case, Paytm exceeded the price target on Day 1 itself by dropping to ₹1,564!

Since then in his subsequent notes, Ganapthy has only been lowering the price targets. In December, he reiterated his target of ₹1,200 when it was trading at ₹1,564 levels. On January 10, when the stock was trading at ₹1,254 levels, he further slashed his price target to ₹900. Two weeks later, on January 24, the stock plunged 8% intraday to ₹881.5.

On February 7, post the Q3 results, the analyst further slashed his target to ₹700, 25% lower from the February 9 close price of ₹941. “The path to profitability still remains the biggest concern,” Ganapthy tells Fortune India.

But what prompted Ganapathy to slash his price target by 25% is the massive loss of ₹780 crore reported in the third quarter, led by large stock options cost of ₹390 crore. Since accounting standards mandate treating employee stock options (ESOPs) cost as an expense, the impact on the bottomline for Paytm is only getting accentuated. Just prior to its issue, the company had issued around 28 million ESOPs, which is expected to result in a recurring annual expense of around ₹1,600 crore since the grants are deep in-the-money with an exercise price of ₹9 against the IPO price of ₹2,150, estimates Macquarie. Ganapathy points out that elevated option expenses were not factored into estimates previously. Since the stock options were issued at a nominal exercise price favouring employees, Ganapathy feels minority shareholders have to indirectly bear the burden of the cost.

The analyst has arrived at the ₹1,600 crore cost, based on the calculation that the 27.5 million ESOPs issued at ₹2,150, 76% of those stock options were issued to founder and CEO Vijay Shekhar Sharma. That's a total outgo of around ₹6,000 crore over five years based on the intrinsic value of determining ESOP costs incurred by the employer.

“This translates into roughly ₹300 crore per quarter over the next five years. Hence it isn’t surprising that Paytm is amortising close to ₹390 crore of ESOP costs per quarter. As more ESOPs get issued, this cost can go up further,” feels Ganapathy.

The analyst has been quite critical of Paytm’s business model, especially the distribution business. “Loan distribution business is still subscale with the company distributing only 39,000 merchant loans, which accounts just 2% of the overall loans by volume,” points out Ganapathy.

While Paytm has disbursed 60,000 personal loans in Q3, the analyst points out 98% of the loans by volume are in the Buy Now Pay Later category where ticket sizes are below ₹3,000. “Inability to lend on its own balance sheet, clearly working on a distribution model and scalability of its merchant loan portfolio are Paytm’s big challenges,” opines Ganapathy.

Factoring in higher losses, Ganapthy now expects the stock to fall to ₹700 over the next 12 months.

It would be interesting to watch if Ganapathy gets an encore this time around.

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