Shares of Paytm parent, One 97 Communications, continued their gaining streak for the second straight session on Friday, in an otherwise weak broader market, after the management expressed optimism that the company would generate positive free cash flow over the next 12 to 18 months. The fintech stock has risen over 19% in the last six sessions amid brokerages' positive outlook. 

On Friday, Paytm shares opened nearly 1% higher at ₹506, against the previous closing price of ₹501.50 on the BSE. The largecap extended opening gains and rose as much as 5% to hit a high of ₹527, on the back of a surge in buying activities. On the volume front, 9 lakh shares changed hands over the counter as compared to the two-week average volume of 8.4 lakh stocks, while the market capitalisation (m-cap) climbed to ₹34,103.4 crore. In comparison, the BSE Sensex was trading 550 points lower at 62,734 levels at the time of reporting.

The digital payments major expects its blended net payment margin, difference between payment revenues and processing charges, to stabilise at 5 to 7 basis points (bps) due to increase in share of UPI in the payment business, its founder and CEO Vijay Shekhar Sharma said in an analysts meeting on Thursday.

In an analysts presentation, Sharma said the company currently earns a net payment margin of 7 to 9 bps of gross merchandise value (GMV) on processing. "Of which UPI gives us 3 to 4 bps and other instruments give us 15 to 18 bps. Since UPI is growing faster than other instruments, we expect blended margin to stabilise at 5 to 7 bps," he added.

Sharma further stated that the company will trend lower as percentage of GMV because of higher UPI in mix, as well as routing and rate optimizations. “From this quarter, postpaid charges will be in payment cost (was in promotional cashback and incentives earlier) which will have no impact on contribution margin,” he said.

The company’s key cost drivers are finance incurred in building the platform and capital spent on expanding the fintech platform. “We believe we will improve profitability despite investments in sales & marketing,” the management said in its presentation.

During the second quarter of the current fiscal (Q2 FY23), the company spent ₹401 crore on building platform (people), which is expected to increase 10-15% YoY on the current base, unless it enters a new area of business. Besides, it invested ₹309 crore on marketing and sales, which are directly driven by revenue opportunities in the market.

Paytm made this analyst presentation days after the Reserve Bank of India refused to grant payment aggregator licence to its subsidiary, Paytm Payments Services Limited (PPSL). The RBI has asked PPSL to re-submit its payment aggregator (PA) application within 120 calendar days. The central bank has also barred PPSL from onboarding new online merchants. 

Paytm, which made its market debut on November 18 last year, has emerged as the worst performer among recent large initial public offerings (IPOs), which has wiped off over 75% of investors' wealth (from its issue price of ₹2,150) since its listing. In the last one year, Paytm shares have delivered a negative return of 66% to its shareholders, while it has fallen 17% in the past six months. The stock hit an all-time low of ₹439.60 on November 24, 2022, while it touched a record high of ₹1,961.05 on its listing day.

The stock has gained over 14% in the last one week after some analysts turned bullish on the company. Post analyst meeting, JM Financial upgraded Paytm to “BUY” with an unchanged target price of ₹600 with upside risks possible if momentum in revenue continues along with cost moderation.

ICICI Securities has also maintained “BUY” with an unchanged target price of ₹1,285, citing management’s focus on improving profitability. “Management stated that the journey to attain operating profitability (EBITDA before ESOP cost) via consistent margin improvement has exceeded its expectations in the past few quarters. It further emphasised its target to become an FCF-generating company in the next 12-18 months,” it said in its report. 

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