On Monday, Paytm share price was the center of attention as shares of One97 Communications, the parent company of Paytm, surged following a positive report from international brokerage Bernstein. The stock gained 8.87% to close at 1,568.75 and made a fresh 52-week high.
The recent rally was triggered following Bernstein sharply raised its Paytm share price target to 2,200 from 1,500 with an unchanged ‘Outperform’ rating. This new target was especially interesting as it crossed Paytm’s issue price of 2,150 for the very first time since listing on the stock exchange.
Why Is Paytm Stock Rising?
What has prompted the recent Paytm stock rally is Bernstein’s more bullish outlook on the company’s future potential profitability. The brokerage has factored in the prospective monetisation of Merchant Discount Rate (MDR) on UPI transactions into its base-case calculations starting FY28.
MDR is the merchant fee payable for processing digital transactions. Though UPI transactions were earlier free for consumers, there could be a new monetisation opportunity for the payment companies if the current monetisation roadmap changes.
Bernstein predicts UPI MDR to boost Paytm’s net payments margin by circa 3-4 basis points. This is estimated by the broker to lead to c.30% increase in its FY30 EPS estimate relative to its previous prediction.
Bernstein Raises Paytm Target Price to 2,200
The updated Paytm share price target of 2,200 given by Bernstein is a significant hike from the earlier target of 1,500. Taking into account Paytm’s previous closing price of 1,441, the target implied an upside of over 52%.
The broker feels that the UPI monetisation opportunity may turn out to be a significant earnings driver for Paytm. Its estimates imply that the potential rollout of MDR should not be viewed just as an optional opportunity, but might be incorporated into Paytm’s earnings framework from FY28.
This has increased investor confidence on One97 Communications stock.
Paytm Share Price Performance
The recent rise further consolidates Paytm stocks’ handsome rebound. As per market prices reported on 10 August, the share had increased approximately 40% in a year and 17% in a month prior to that. From its 52-week low of 947.10 recorded on 30 March, the share has appreciated about 66%.
The catch-up rally is all the more important given the counter-pressure on Paytm after the debut. The firm launched its IPO at an issue price of 2,150 in 2021, but the share did not revisit that level for many years. Bernstein’s 2,200 target is therefore getting a lot of traction from investors who have been monitoring Paytm’s decade-long recovery.
UPI MDR Could Become a Major Growth Driver
The key concern investors are focusing on is whether UPI transactions will be monetised.
Bernstein believes having India-focused MDR revenue will be positive for the evolution of Paytm’s payments economics. Even a slight increase in net payment margins can be highly accretive to earnings given the size of Paytm’s payments ecosystem.
Brokerage estimates that the addition to Paytm’s net payment margin will be around 3-4bp due to MDR, and its FY30 EPS estimate could increase by about 30% with these updated assumptions.
That said, investors should still bear in mind that the timing, design and deployment of any UPI MDR framework are all uncertain. As such, Bernstein’s target should not be interpreted as a future value, but rather analyst estimates.
What Investors Should Watch
For investors following the Paytm share price, the next key concern will be how well the company can continue to grow in payments and financial services – and improve profitability.
It is evidence of a substantial shift in market sentiment towards Paytm following the challenges post-regulation, that the stocks foray into the high teens was so swift. It also means that the valuation and future earnings expectations would still be key considerations.
The 2,200 target from Bernstein has certainly elevated optimism around Paytm but investors need to factor in the risks of regulatory changes, UPI monetisation and execution before deciding on investment.
Bottom Line
The recent Paytm share price rally is underlining how investor sentiment about the fintech firm is shifting. Having struck a new 52-week high and Bernstein boosting its target to 2,200, the stock is back in the limelight in the Indian stock space.
The monetisation of UPI through MDR is the primary thesis in Bernstein’s bullish view. If the envisaged rise in payment margins and earnings happens, Paytm could surprise on the upside. Investors should watch regulatory developments and the company’s earnings path before jumping to conclusions.
Disclaimer: This article is for informational purposes only and not financial advice. Readers should do their own research or seek the services of a qualified financial adviser.
