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10 January 2022 India

EQUITIES One 97 Communications (PAYTM IN)

PAYTM IN Underperform No sign of headwinds abating
Price (at 08:51, 07 Jan 2022 GMT) Rs1,253.90

Valuation Rs 900.00 Key points

- 900
 Limited potential to scale distribution business for merchant loans.
12-month target
Upside/Downside
Rs
%
900.00
-28.2
 Cut EPS estimates (increase losses) by 16-27% due to lower revenues and
higher employee and software/cloud expenses.
12-month TSR % -28.2
Volatility Index Very High  Reduce FY21-26E revenue CAGR from 26% to 23%. Reduce TP by ~25%
to Rs900.
GICS sector Software & Services
Market cap Rsm 812,870
Market cap US$m 10,911 Cutting revenue estimates, raising loss projections
Free float % 13
• Since 18 November, PayTM’s stock price has fallen ~40% vs Sensex’s flat
30-day avg turnover US$m 36.5
performance. Post the various business updates and results (here and here),
Number shares on issue m 648.3
we believe our revenue projections, particularly on the distribution side, is at
Investment fundamentals risk and hence we pare down our revenue CAGR from 26% to 23% for FY21-
Year end 31 Mar 2022E 2023E 2024E 2025E 26E. We are roughly cutting revenue estimates for FY21-26E on an average
Revenue m 40,698 47,842 56,676 67,569 by 10% every year due to lower distribution and commerce/cloud revenues
EBITDA m -17944 -19616 -21030 -23674
offset partially by higher payment revenues. We cut our earnings (increase our
EBITDA growth % nmf -9.3 -7.2 -12.6
EBIT m -19231 -20865 -22544 -25000
loss projections) by 16-27% for FY22-25E owing to lower revenues and higher
EBIT growth % nmf -8.5 -8.0 -10.9 employee and software expenses. We cut our TP sharply by ~25% owing to
Reported profit m -14794 -10832 -12165 -11776 lower target multiple of 11.5x (Price to Sales ratio) (from 13.5x earlier) and
EPS rep Rs -23.68 -16.83 -18.90 -18.30
lower sales numbers. Maintain UP with a revised TP of Rs900.
EPS rep growth % nmf 28.9 -12.3 3.2
ROA % -11.5 -12.8 -14.6 -17.3
ROE % -11.1 -8.5 -10.4 -11.3
Several challenges exist – regulatory and business specific
EV/EBITDA x -39.9 -36.5 -34.1 -30.3 • Regulations – The elephant in the room: RBI’s proposed digital payments
P/BV x 6.0 6.6 7.3 8.2
regulations could cap wallet charges. Payments business still forms 70% of
PAYTM IN rel BSE Sensex performance, & rec overall gross revenues for PayTM and hence any regulations capping charges
history could impact revenues significantly. Add to that, PayTM’s foray into insurance
was recently rejected by the insurance regulator IRDA. We believe this could
impact PayTM’s prospects of getting a banking license.
• Senior management attrition – another cause of concern: Senior
executives have been resigning from PAYTM which is a cause of concern and
could impact business in our view if the current rate of attrition continues.
• Can it do lot of merchant loans? We aren’t sure: In the past 12 months,
PayTM’s average ticket size for loans disbursed by it has been consistently
Note: Recommendation timeline - if not a continuous line, then there was no
coming down and stands at sub Rs5,000 levels. At this size, we don’t think it is
Macquarie coverage at the time or there was an embargo period.
doing many merchant loans and most of the loans are small value BNPL
Source: FactSet, Macquarie Research, January 2022
(all figures in INR unless noted) loans. Hence the eventual distribution fees realised by them are likely to be
much lower than our earlier estimates.
Our initiation report on date of listing
Earnings and target price revision
• Reduction in EPS for FY22-25E by 16-27% driven by lower revenues and
higher expenses. Reducing TP by ~25% to Rs900 due to lower target multiple
as we cut our Price to Sales multiple from 13.5x to 11.5x.

Price catalyst
Analysts
• 12-month price target: Rs900.00 based on a DCF methodology.
Macquarie Capital Securities (India) Pvt. Ltd.
Suresh Ganapathy, CFA +91 22 6720 4078 • Catalyst: Rising losses and regulations capping payment charges
suresh.ganapathy@macquarie.com
Maintain underperform
Param Subramanian +91 22 6720 4099
param.subramanian2@macquarie.com • Stock trades at 17x FY23E sales which we believe is expensive. Maintain UP
with revised TP of Rs900.

Please refer to page 6 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
Macquarie Research One 97 Communications (PAYTM IN)

What has changed? – We have reduced our revenue projections

We cut our revenue projections for FY22-26E and hence our CAGR reduces from 26% to 23%. The main
reason is that we have pared down our commerce and particularly distribution business revenues.
Competition will limit commerce revenue growth and distribution business will continue to be led by small
ticket BNPL loans there by limiting revenue potential in our view.

Fig 1 We have seen cuts in commerce and distribution revenues offset by higher payment
revenues
FY21-26E Now Earlier

Total Revenue CAGR 23% 26%

Payment and financial services CAGR 15% 4%

Commerce and cloud services CAGR 26% 42%
Distribution business revenue CAGR 68% 82%
Source: Company data, Macquarie Research, January 2022

Fig 2 PayTM: Average ticket size of loans disbursed over the quarters has been coming down

20,000

18,000 17,391

16,000

14,000

12,000

10,000

8,000
6,017
6,000 5,335 4,996
4,396 4,435
4,000

2,000

-
1Q 2Q 3Q 4Q 1Q 2Q
FY21 FY22

Ticket size (Rs)

Source: Company data, Macquarie Research, January 2022

Fig 3 Consequently, in absolute terms, value of loans disbursed has been much lower than our
expectations…

14 12.6
12
10
8 6.9 6.3
6 4.7
4
2.1
2 0.4
0
1Q 2Q 3Q 4Q 1Q 2Q
FY21 FY22
Value of loans disbursed (Rs bn)

Source: Company data, Macquarie Research, January 2022

10 January 2022 2
Macquarie Research One 97 Communications (PAYTM IN)

Fig 4 …And we cut our distribution revenue projections on an average by ~50% over FY22-26E
Current Projections FY2022E FY2023E FY2024E FY2025E FY2026E

Total loans consumer plus merchant (mn) 16 22 30 42 58

Weighted average ticket size (Rs) 5,645 6,573 7,685 9,049 10,286
Total loans sourced (Rs mn) 87,500 141,813 230,813 378,773 600,565
Distribution Revenue 2,985 4,653 7,219 11,247 17,182

Earlier Projections FY2022E FY2023E FY2024E FY2025E FY2026E

Total loans consumer plus merchant (mn) 17 22 28 34 42
Weighted average ticket size (Rs) 13,235 15,120 17,184 19,822 22,348
Total loans sourced (Rs mn) 225,000 329,625 479,103 683,271 932,344
Distribution Revenue 7,110 10,099 14,171 19,469 25,941

Reduction in distribution revenues -58% -54% -49% -42% -34%

Source: Company data, Macquarie Research, January 2022

10 January 2022 3
Macquarie Research One 97 Communications (PAYTM IN)

Reasons for our earnings and TP cut

We cut our earnings projections or increase losses for FY22-26E driven by lower revenues and higher
employee and software and cloud expenses. There is competition for tech talent, and we see pressure on
employee expenses to remain. Key risks to our UP call are a change in regulations which allow
monetisation of UPI and receipt of a banking license.

Fig 5 We have shown increasing losses due to revenue cuts and rise in employee and software/cloud expenses
INR mn Revised/Current Earlier Changes
FY22E FY23E FY24E FY25E FY26E FY22E FY23E FY24E FY25E FY26E FY22E FY23E FY24E FY25E FY26E

Payment revenues 28,785 31,885 35,140 38,654 40,411 21,589 22,668 22,314 23,430 24,601 33% 41% 57% 65% 64%
Commerce and cloud 8,928 11,304 14,317 17,667 21,834 16,176 20,257 25,689 31,839 40,056 -45% -44% -44% -45% -45%
Distribution revenues 2,985 4,653 7,219 11,247 17,182 7,110 10,099 14,171 19,469 25,941 -58% -54% -49% -42% -34%
Net sales 40,698 47,842 56,676 67,569 79,426 44,875 53,025 62,174 74,738 90,598 -9% -10% -9% -10% -12%
Employee and 19,184 22,061 25,220 28,133 30,823 16,707 18,846 21,287 24,075 27,261 15% 17% 18% 17% 13%
software, cloud
expenses
EBITDA -17,944 -19,616 -21,030 -23,674 -22,388 -15,670 -16,555 -17,161 -18,808 -19,287 15% 18% 23% 26% 16%
EBIT -19,231 -20,865 -22,544 -25,000 -23,471 -16,957 -17,855 -18,772 -20,232 -20,463 13% 17% 20% 24% 15%
PBT -14,837 -10,863 -12,200 -15,747 -15,264 -12,795 -8,701 -10,064 -12,426 -13,138 16% 25% 21% 27% 16%
PAT -14,837 -10,863 -12,200 -11,810 -11,448 -12,795 -8,701 -10,064 -9,319 -9,853 16% 25% 21% 27% 16%
EPS -23.7 -16.8 -18.9 -18.3 -17.7 -20.4) -13.5 -15.6 -14.4) -15.3 16% 25% 21% 27% 16%
Source: Company data, Macquarie Research, January 2022
Note: The PAT changes are positive because we have shown an increase in loss estimates which tantamount to earnings cut

Fig 6 Target price: PayTM PSg (Price to sales growth) based valuation
CAGR sales growth (FY21-26) 23.2%
Dec-23 annualised sales (Rs m) 50,050
Target PSg multiple (x) 0.5x
Valuation based on PSg (Rs m) 579,703
No. of shares (m) 644
Target price (Rs) (rounded off) 900
Target multiple used - Price to Sales 11.5x
Source: Company data, Macquarie Research, January 2022

Since we value on a PSg basis, using our 0.5x PSg target multiple methodology, we now arrive at a target
price to sales multiple of 11.5x vs 13.5x earlier thereby resulting in a lower target price.

Fig 7 PayTM: Changes in our target price

1400

1200
200
1000
100
800

600 1200

900
400

200

0
Previous TP Reduction in Multiple from Reduction in sales Current TP
13.5x to 11.5x

Source: Company data, Macquarie Research, January 2022

10 January 2022 4
Macquarie Research One 97 Communications (PAYTM IN)
One 97 Communications (PAYTM IN, Underperform, Target Price: Rs900.00)
Quarterly Results 3Q/22E 4Q/22E 1Q/23E 2Q/23E Profit & Loss 2022E 2023E 2024E 2025E

Revenue m 10,175 10,175 11,960 11,960 Revenue m 40,698 47,842 56,676 67,569
Gross Profit m 3,732 3,732 4,777 4,777 Gross Profit m 14,930 19,110 25,326 27,888
Cost of Goods Sold m 6,442 6,442 7,183 7,183 Cost of Goods Sold m 25,768 28,732 31,350 39,681
EBITDA m -4,486 -4,486 -4,904 -4,904 EBITDA m -17,944 -19,616 -21,030 -23,674
Depreciation m 322 322 312 312 Depreciation m 1,287 1,250 1,515 1,325
Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0
Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0
EBIT m -4,808 -4,808 -5,216 -5,216 EBIT m -19,231 -20,865 -22,544 -25,000
Net Interest Income m 1,099 1,099 2,500 2,500 Net Interest Income m 4,394 10,002 10,344 9,253
Associates m 0 0 0 0 Associates m 0 0 0 0
Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0
Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0
Other Pre-Tax Income m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0
Pre-Tax Profit m -3,709 -3,709 -2,716 -2,716 Pre-Tax Profit m -14,837 -10,863 -12,200 -15,747
Tax Expense m 0 0 0 0 Tax Expense m 0 0 0 3,937
Net Profit m -3,709 -3,709 -2,716 -2,716 Net Profit m -14,837 -10,863 -12,200 -11,810
Minority Interests m 11 11 8 8 Minority Interests m 43 31 35 34

Reported Earnings m -3,699 -3,699 -2,708 -2,708 Reported Earnings m -14,794 -10,832 -12,165 -11,776
Adjusted Earnings m -3,699 -3,699 -2,708 -2,708 Adjusted Earnings m -14,794 -10,832 -12,165 -11,776

EPS (rep) -5.92 -5.92 -4.21 -4.21 EPS (rep) -23.68 -16.83 -18.90 -18.30
EPS (adj) -5.92 -5.92 -4.21 -4.21 EPS (adj) -23.68 -16.83 -18.90 -18.30
EPS Growth yoy (adj) % nmf nmf 28.9 28.9 EPS Growth (adj) % nmf 28.9 -12.3 3.2
PE (rep) x nmf nmf nmf nmf
PE (adj) x nmf nmf nmf nmf

EBITDA Margin % -44.1 -44.1 -41.0 -41.0 Total DPS 0.00 0.00 0.00 0.00
EBIT Margin % -47.3 -47.3 -43.6 -43.6 Total Div Yield % 0.0 0.0 0.0 0.0
Earnings Split % 25.0 25.0 25.0 25.0 Basic Shares Outstanding m 644 644 644 644
Revenue Growth % nmf nmf 17.6 17.6 Diluted Shares Outstanding m 625 644 644 644
EBIT Growth % nmf nmf -8.5 -8.5

Profit and Loss Ratios 2022E 2023E 2024E 2025E Cashflow Analysis 2022E 2023E 2024E 2025E

Revenue Growth % nmf 17.6 18.5 19.2 EBITDA m -17,944 -19,616 -21,030 -23,674
EBITDA Growth % nmf -9.3 -7.2 -12.6 Tax Paid m 0 0 0 -3,937
EBIT Growth % nmf -8.5 -8.0 -10.9 Chgs in Working Cap m -6,162 -803 -993 -1,225
Gross Profit Margin % 36.7 39.9 44.7 41.3 Net Interest Paid m -4,394 -10,002 -10,344 -9,253
EBITDA Margin % -44.1 -41.0 -37.1 -35.0 Other m 15,789 10,654 11,350 18,567
EBIT Margin % -47.3 -43.6 -39.8 -37.0 Operating Cashflow m -12,711 -19,767 -21,017 -19,521
Net Profit Margin % -36.4 -22.6 -21.5 -17.4 Acquisitions m -87 -87 -87 -87
Payout Ratio % nmf nmf nmf nmf Capex m -2,442 -2,631 -2,834 -3,378
EV/EBITDA x -39.9 -36.5 -34.1 -30.3 Asset Sales m 56 56 56 56
EV/EBIT x -37.3 -34.3 -31.8 -28.7 Other m -737 -39,591 14,939 13,640
Investing Cashflow m -3,209 -42,254 12,074 10,230
Balance Sheet Ratios Dividend (Ordinary) m 0 0 0 0
ROE % -11.1 -8.5 -10.4 -11.3 Equity Raised m 83,000 0 0 0
ROA % -11.5 -12.8 -14.6 -17.3 Debt Movements m 0 0 0 0
ROIC % nmf -48.6 -24.0 -20.8 Other m 240 252 265 278
Net Debt/Equity % -67.8 -23.4 -18.1 -11.1 Financing Cashflow m 83,240 252 265 278
Interest Cover x nmf nmf nmf nmf
Price/Book x 6.0 6.6 7.3 8.2 Net Chg in Cash/Debt m 67,319 -61,769 -8,678 -9,013
Book Value per Share 207.5 190.7 171.8 153.5
Free Cashflow m -15,153 -22,398 -23,851 -22,900

Balance Sheet 2022E 2023E 2024E 2025E

Cash m 96,083 34,315 25,636 16,623

Receivables m 3,972 4,669 5,531 6,594
Inventories m 0 0 0 0
Investments m 33,347 83,367 79,199 75,239
Fixed Assets m 6,248 7,573 8,837 10,833
Intangibles m 0 0 0 0
Other Assets m 27,200 30,315 28,380 31,772
Total Assets m 166,849 160,238 147,582 141,061
Payables m 8,548 10,048 11,904 14,192
Short Term Debt m 5,693 5,693 5,693 5,693
Long Term Debt m 0 0 0 0
Provisions m 2,849 3,349 2,834 3,378
Other Liabilities m 16,434 18,687 16,891 19,347
Total Liabilities m 33,524 37,777 37,321 42,610
Shareholders' Funds m 133,554 122,722 110,556 98,780
Minority Interests m -229 -260 -295 -329
Other m 0 0 0 0
Total S/H Equity m 133,325 122,462 110,261 98,451
Total Liab & S/H Funds m 166,849 160,238 147,582 141,061

All figures in INR unless noted.

Source: Company data, Macquarie Research, January 2022

10 January 2022 5
Macquarie Research One 97 Communications (PAYTM IN)
Important disclosures:
Recommendation definitions Volatility index definition* Financial definitions
Macquarie – Asia and USA This is calculated from the volatility of historical All "Adjusted" data items have had the following
Outperform – expected return >10% price movements. adjustments made:
Neutral – expected return from -10% to +10% Added back: goodwill amortisation, provision for
Underperform – expected return <-10% Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging,
expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense
Macquarie – Australia/New Zealand – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property
Outperform – expected return >10% speculative. revals, appraisal value uplift, preference dividends &
Neutral – expected return from 0% to 10% minority interests
Underperform – expected return <0% High – stock should be expected to move up or
down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa*
Note: expected return is reflective of a Medium Volatility be aware this stock could be speculative. ROA = adjusted ebit / average total assets
stock and should be assumed to adjust proportionately ROA Banks/Insurance = adjusted net profit /average
with volatility risk Medium – stock should be expected to move up total assets
or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds
Gross cashflow = adjusted net profit + depreciation
Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average
move up or down at least 25–30% in a year. number of shares

Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks
down at least 15–25% in a year. are modelled under IFRS (International Financial
* Applicable to select stocks in Asia/Australia/NZ Reporting Standards).

Recommendations – 12 months
Note: Quant recommendations may differ from
Fundamental Analyst recommendations

Recommendation proportions – For quarter ending 31 Dec 2021

AU/NZ Asia USA
Outperform 67.47% 65.68% 78.49% (for global coverage by Macquarie, 7.30% of stocks followed are investment banking clients)
Neutral 27.05% 22.88% 20.43% (for global coverage by Macquarie, 3.57% of stocks followed are investment banking clients)
Underperform 5.48% 11.44% 1.08% (for global coverage by Macquarie, 1.06% of stocks followed are investment banking clients)

PAYTM IN vs BSE Sensex, & rec history

(all figures in INR currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.
Source: FactSet, Macquarie Research, January 2022

12-month target price methodology

PAYTM IN: Rs900.00 based on a DCF methodology

Company-specific disclosures:

Important disclosure information regarding the subject companies covered in this report is available publicly at
www.macquarie.com/research/disclosures. Clients receiving this report can additionally access previous recommendations (from the year prior to
publication of this report) issued by this report’s author at https://www.macquarieinsights.com.

Date Stock Code (BBG code) Recommendation Target Price

08-Jan-2022 PAYTM IN Underperform Rs900.00
18-Nov-2021 PAYTM IN Underperform Rs1200.00
Target price risk disclosures:
PAYTM IN: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include
geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global
economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates,
foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to
manage certain of these exposures.
Sensitivity analysis:
Clients receiving this report can request access to a model which allows for further in-depth analysis of the assumptions used, and recommendations
made, by the author relating to the subject companies covered. To request access please contact insights@macquarie.com.
Analyst certification:
We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or
their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views
expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors
including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities.
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10 January 2022 6
Macquarie Research One 97 Communications (PAYTM IN)
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This publication was disseminated on 10 January 2022 at 02:34 UTC.