CLSA upgrades Paytm – Bravura, Bravery or Bravado?

Have you wondered about the difference between these 3 words; bravura, bravery and bravado. Bravura is skill or some unique ability in a person to identify or spot a trend that others cannot. Bravery does not need too much of an explanation. It is courage in a positive sense of the term and shows dynamism. Bravado is the worst of the lot. It shows unbridled courage, almost bordering on the brash and without worrying about consequences. The question is whether the latest decision of CLSA to upgrade the price target of Paytm a mark of bravura, bravery or bravado? Let us find out.

In a recent report, one of Asia’s largest and most respected investment specialists CLSA, upgraded its outlook on Paytm (One97 Communications Ltd) from a SELL call to a BUY call. The research report released by CLSA on Monday 28th November 2022, has set a price target of Rs. 650 on Paytm. That is nearly 40% above the current price levels, but even if the stock does touch Rs. 650 in price, the stock would be just about one-third of the issue price. In the last 1 year, the broker consistently bearish on Paytm has been Macquarie. Incidentally, it has been Macquarie that has been bang on target all along in last 1 year.

According to CLSA, the recent price correction in Paytm was due to a heavy bout of institutional selling by the pre-IPO investors, since the 10-year lock-in had just been completed. The risk-reward at these prices is favourable and a price target of Rs. 650 look more like betting on a dead cat bounce than betting on anything truly fundamental. After all, how much fundamentals can a stock with persistent losses and little visibility of future profits really have. To an extent, the target could still be met as investors who sold out higher would look to get in a buy at lower levels. But fundamental shifts are still doubtful.

There are other reasons why CLSA is turning positive on Paytm. It feels that Paytm's cash burn should end in another 4-6 quarters; that is a good one and a half years from now. It has set a price target of Rs. 650 for Paytm as it expects the pre-IPO selling in the stock to eventually abate, although it might continue to remain a near term risk factor for the stock. The pre-IPO investor selling on completion of one year has been so intense that the Paytm stock lost close to 32% just in the last one month since the pressure of pre-IPO investor selling starting on the stock. However, losses will continue for the foreseeable future.

The lock-in period ended on 15th November 2022 and led to a deluge of institutional selling. Some of the major pre-IPO investors who sold out on completion of lock-in included marquee names like SVF India Holdings (part of Softbank) as well as other key IPO investors like Ant Financial and Elevation Capital. However, most of them have retained a stake in the company and want to play the stock for the long haul. After all, as the digital footprint expands in India, companies like Paytm are the best positioned to capitalize on the trend.

CLSA uses the rather tricky word “comfortable” to describe the valuations of Paytm. Currently, Paytm has a market cap of $3.5 billion with $1 billion in cash, which means a little over one-third of the market cap can be attributed to the cash in the books. While its top line and its gross order value (GOV) have been consistently growing, the latest risk to Paytm (as highlighted by Macquarie) comes from the entry of Jio Financial. The Reliance BFSI arm, is almost about to launch its financial products foray in the Indian market with a strong digital footprint. That is likely to be the big immediate threat factor for Paytm.

The report by CLSA has underlined segments like loans and credit card distribution as the future revenue drivers for Paytm. Lending may face competition from Jio, but CLSA feels that the lending market is quite huge and there is a vast unmet demand. Hence market size is hardly an issue for Paytm, and it can easily build its book to Rs. 3,000 crore in 5 years. CLSA also expects its card sourcing and ad revenues to boost top line. For now, the report looks like a lot of bravado, a little bit of bravery and limited bravura.