Buy Pine Labs Ltd for the Target Rs 220 by Emkay Global Financial Services Ltd
Pine Labs’ reported revenue was 2.4% above consensus, with both IAP (+30.9% yoy) and DITP (+20.8% yoy) contributing. While CM expanded by 54bps qoq to 72.8%, indirect costs climbed to Rs4.3bn from Rs4.0bn in 1Q as the company invested in marketing and platform, and are likely to increase on further investments. Adj EBITDA increased to Rs1.61bn from Rs1.32bn in 1QFY27, due to higher revenue, despite higher costs. Management disclosed monthly UPI GTV of ~Rs200bn (68% two-year CAGR), with 65% of it above Rs2,000, and it is targeting Rs330–340bn by FY28. However, unlike Paytm, there is no quantification of the revenue uplift. As we incorporate UPI MDR and higher indirect costs, our FY28E/FY29E EBITDA rises 7.6%/6.3%. Our earlier TP of Rs230 constituted discounted value of the UPI MDR revenue and core business separately. We now incorporate UPI MDR in the core business and adjust for higher cost and capex ramp-up. Thus, our TP drops by ~4% to Rs220. Risk-reward remains favorable at 16.9x FY28E EV/EBITDA; we retain BUY.
Broad-based growth as newer use-cases scale
Pine Labs reported Rs8.06bn revenue, up 24% yoy vs street estimate of 21.1% growth. DITP revenue grew 20.8% yoy to Rs5.32bn, with segment CM by up 32bps qoq to 82.1%. AVASTP revenue rose 24.6% yoy even with the festive season shifting into 3Q, as DCC, aggregation, VAS, and data and marketing services scaled alongside affordability; AVASTP GTV grew 52% yoy. ERP and billing integrations drove ~100k mid-market terminal deployments over the past 12 months, and mid-market DCPs grew 49% yoy. Implied rental per device dipped to Rs330 as subscriptions fell to 27% of revenue. IAP revenue grew 30.9% yoy (India +40%), and CM rose by 252bps qoq from a low base to 54.9%. Net take rate expanded to 84bps from 69bps on flat GTV of Rs180bn, after a large low-margin gift-card distribution contract in Singapore ended. Adjusted for this, 1H IAP GTV grew >20%. Management now expects FY27 revenue growth above 23.5% and adj EBITDA margin of at least 21%.
Cost and capex investments step up
We have seen a sharp increase in indirect costs over the last two quarters, and believe this cost would be sticky. Also, the productivity of investments will be back-ended, weighing on operating leverage. Indirect expenses rose 11.3% yoy, driven by ~675 net hires; management expects new salespeople to turn productive after ~9 months and will keep hiring through 2H. 1HFY27 capex rose 2.8x yoy to Rs2.4bn, due to Rs350–400mn of 4QFY26 spillover and Rs200– 250mn of advances, as device vendors now demand 80% upfront amid chip shortages. We are increasing FY28E/FY29E revenue by 5.1/5.2%, as we incorporate Rs1.27bn/Rs1.66bn UPI MDR revenue, and raise core business revenue estimates by 5.1%/5.2%. Also, we raise indirect cost estimates by ~4.5% across FY27–29; thus, FY28E/FY29E EBITDA rises by 7.6%/6.3%
Outlook and valuations:
Growth acceleration meets margin concerns While Pine Labs is seeing strong revenue growth momentum, increase in costs is impacting its profitability. Considering higher planned investments and the lag between investment and productivity, we may see muted margin expansion in FY27. However, with higher costs in the base and fructification of the investment, we may see greater operating leverage in FY28. The stock trades at 16.9x/12.4x FY28E/FY29E EV/EBITDA and 37.7x/26.2x PER. Given the attractive risk-reward, we retain BUY with a revised DCF-based TP of Rs220, implying 24.9x/18.3x FY28E/FY29E EV/EBITDA and 53.5x/37.2x PER.
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