Buy One 97 Communications Ltd For Target Rs. 1,055 - ICICI Securities Ltd
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One97 Communications’ (Paytm) Q1FY24 results yielded three key trends: (1) increase in margins on payments; (2) lower take rates in financial services, but continued improvement in asset quality; and (3) increase in fixed costs. The overarching strategy of growth in payments and credit distribution (without FLDG) remains intact and will only likely be boosted by partner addition and improving penetration within the ecosystem. Positive levers can come from expansion of credit partners (likely to add 3-4 partners in FY24) as well as launch of co-branded RuPay credit card (May’23). Maintain BUY with a target price of INR 1,055 (unchanged) based on the DCF methodology.
We expect profits in FY25E. The positive cycle of customer growth, retention and cross-sell as shown by the company is going to build confidence and valuation multiples.
Improving profit outlook is being helped by a combination of growth and operating leverage (FY21-FY23 revenue CAGR has been 32% vs operating cost {ex-ESOP} CAGR of 21%). Customer onboarding, increase in use cases and new advanced tech platform are helping growth. Soundbox (launched 4G-enabled Soundbox 3.0 offering fastest real-time payment alerts) and large employee base to service merchants (average number of sales employees as of Jun’23 stood at 30,148 vs 19,781 as at Jun’22) are helping in retention and cross-selling. This is evident from growth in financial services revenue (up 3.5x YoY to INR 15bn in FY23 from INR 4.3bn in FY22 and to INR 5.2bn in Q1FY24). The ability to grow, retain and cross-sell along with a strong balance sheet (INR 84bn as of Jun’23) should give confidence to the investor in the wake of changes in possible payment landscape. Increasing monetisation of the UPI platform and introduction of credit card in UPI could lead to positive surprises ahead.
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