Buy Pine Labs Ltd for the Target Rs 190 by Emkay Global Financial Services Ltd
Pine Labs reported robust 19.6% yoy revenue growth, while contribution margin (CM) dipped by 100bps/560bps qoq/yoy, resulting in a meager 11.0% yoy growth in contribution profit. The company invested in technology and salespeople, resulting in a 340bps/230bps qoq/yoy dip in adj EBITDA margin. CM contraction was largely due to unfavorable business mix in IAP, and the management expects to recoup margins in coming quarters. While we largely maintain our revenue estimates, we build in conservative margin expansion, leading to 13.9%/11.1% cut to our FY27E/FY28E EBITDA. We believe at 19.3x FY28E EV/EBITDA, the stock is attractive, considering 20.8% revenue and 49.5% EBITDA CAGR over FY26-28E. We maintain BUY while lowering DCFbased TP by ~16% to Rs190 (from Rs225).
DITP: Upfront investments weigh on margins, despite solid deployments
DITP revenue growth accelerated to 14.9% yoy, from 13.7% in 4QFY26, aided by device additions (140k, vs 100k in 4QFY26) and ~20% yoy growth in flow-based service revenue. As the OMC deal is monetized via flow-based aggregation, Affordability, VAS, and Transaction Processing revenue surged 11.8% qoq and 19.7% yoy. Implied device ARPU dipped 4.1% qoq to Rs339 (Rs344 ex-OMC), reflecting stable device mix. The company has hired ~500 salespeople to drive growth in the mid-market segment and international geographies. With sales and technology investments, we remain confident of ~18% revenue CAGR over FY26-28E. Operating cash flow, including early settlement, at -Rs1.59bn, is seasonal (45-60-day settlement cycle), and the company expects the working capital for FY27 to remain at sub-15% of revenue.
IAP: Strong topline execution offset by severe CM contraction
IAP segment delivered an impressive 31.1% yoy revenue growth, with India/international revenue growing 24%/47% yoy. Segment CM dipped by 990bps/290bps yoy/qoq to 52.4% due to the shift toward lower-margin distribution business, leading to a meager 10.3% yoy growth in contribution profits. The company is leveraging distribution to deepen relationships and build stickiness, which will eventually secure high-margin processing contracts, and hence will recoup margins. We now build in higher growth and conservative margins, resulting in a ~3% cut to segmental contribution profits.
Outlook and valuations:
Near-term estimate cuts; operating leverage intact 1QFY27 was firmly positioned as an investment quarter, laying the groundwork across DCP upgrades, AI payment workflows, and international brand integrations. However, we build in higher direct and indirect costs, leading to 13.9%/11.1% cut in FY27E/FY28E EBITDA and 21.6%/13.7% cut in PAT. Despite our estimate cuts, the structural operating leverage story is intact, supporting an estimated FY26-29E revenue/EBITDA/PAT CAGR of 20.6%/45.5%/80.4%, respectively. We lower our DCF-based TP by ~16% to Rs190, implying FY28E/FY29E PER of 48.7x/33.1x.
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