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Paytm's buyback plan shows management confidence on business, profitability: Analysts
New Delhi: India's leading fintech giant Paytm on Thursday announced that its board of directors will hold a meeting on December 13 to consider a proposal for a share buyback.
Optimistic about its growth prospects and reasserting its guidance on turning profitable at an operating level next year, top brokerage firm Dolat Capital has said that the buyback will clear the cloud on the looming concern. Brokerage ICICI Securities also echoed the same by saying that the company remains "ahead of the guided timeline to achieve operating profitability". Analysis and research firm Dolat Capital has also reiterated its stock rating to 'Buy' and continued to maintain Paytm's stock at a target price of Rs 1,400, with an upside of 175 per cent.
Dolat Capital added that Paytm has 649 million shares outstanding, and has net cash and investment balance of Rs 92 billion as of September 22. "Buyback at current valuation makes lots of sense given the declining need for organic capital allocation and very compelling valuation for the Paytm business. We view this move to be very positive and would enhance business confidence," it said.
Dolat further added: "We believe the following factors would have led to this decision - business traction both on growth and profitability is trending faster than what was anticipated at the time of IPO (initial public offering). Annualised burn rate at the current rate is less than $75 million. To turn FCF (free cashflow) positive by H1FY24 (first half of fiscal 2023-24) and Ebitda (operating profit) positive ideally by H2FY23 (accumulated 30 per cent of incremental revenues into incremental Ebitda on LTM (last twelve months) basis, while the contribution margins stand at 44 per cent, suggesting further room for improvement)."
The research firm said, "We believe the buyback announcement would take away multiple investor concerns around profitability and cash generation roadmap of the business, any further pressure from potential supply from large investors in near future, and would boost confidence on management's optimal capital allocation practice and potential for further earnings accretion in future through buyback route."
Dolat has also mentioned: "We believe the optimal size of the buyback would be around Rs 8-10 billion through open market purchase route. In this way, the company would be able to relinquish 2.5 per cent of its equity base that too at a significant discount from the IPO price. This would also mean that a significant part of the incremental supply (if any) in near future would get absorbed."
Kunal Shah of ICICI Securities has mentioned: "The management was confident about becoming an FCF-generating company (net of capital expenditure) in the next 12-18 months, driven collectively by improved profitability across payment and financial services distribution, cloud, etc. So it seems to be ahead of time and will be a surprise to the market."
Recently, after the analyst meeting, he said: "Paytm has exceeded expectations in the past few quarters and added that the company remains "ahead of the guided timeline to achieve operating profitability". It also said that the company should start generating free cash flow (FCF) in the next 12-18 months. It also maintained a 'Buy' rating for the Paytm stock at a target price of Rs 1,285.
Paytm's board of directors is scheduled to meet on Tuesday, December 13, 2022, to consider a proposal for buyback, given the prevailing liquidity/ financial position.
During the analyst meeting, when a question was asked regarding the utilisation of liquidity and buyback question was asked as an option, the management didn't comment at that time, according to ICICI Securities.
"We had highlighted in our update as well that while Paytm currently has high cash reserves of around Rs 92 billion as of September 22, the company does not plan to do any buyback of shares," ICICI Securities said.
The management was confident about becoming an FCF-generating company (net of capex) in the next 12-18 months, driven collectively by improved profitability across payment and financial services distribution, cloud, etc. (ANI)