Nitin Aggarwal is bullish on Paytm, says buy on dips

Nitin Aggarwal, Head – BFSI Research, Institutional Equities, MOFSL, says In Wednesday’s call, Paytm indicated that there has been no change in the asset quality metrics. They all are going pretty steady and they will look to compensate for some impact of the reduced BNPL sourcing by going in the higher ticket segments of personal loans and merchant loans. A lot, therefore, will depend on how much they can compensate by growing in those segments and given that the ticket size that they are looking at there is significantly higher at between Rs 3 lakh and Rs 7 lakh.

You have one of the most aggressive target prices now on Paytm, above Rs 1,000. You are recommending the clients to buy this dip?

It is a very evolving situation at Paytm. Recently the regulator announced an increase in risk weight and banks and NBFCs therefore accordingly are trying to control their exposure to the unsecured loans, especially the lower ticket size and that has had impact on Paytm also wherein the company announced that they will want to scale down the postpaid business. I believe that this is a very evolving situation. You will want to see as to how this pans out over residual FY24 and then in FY25 because recovery can be fairly quick.

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It is like you do not know how long it will go on and what could be the asset quality implications from this. In Wednesday’s call the company indicated that there has been no change in the asset quality metrics. They all are going pretty steady and they will look to compensate for some impact of the reduced BNPL sourcing by going in the higher ticket segments of personal loans and merchant loans. So, a lot, therefore, will depend on how much they can compensate by growing in those segments and given that the ticket size that they are looking at there is significantly higher at between Rs 3 lakh and Rs 7 lakh.

That over a period of time can help them offset the impact on overall loan disbursements on the platform in the near term. In the short term, yes, there is uncertainty and which is why the stock has reacted in such a volatile way and one can only look at things to normalise over the medium term, which is where we have maintained our buy on the stock.

What about the second order impact? Of course, there is a ruboff impact on Thursday on AB Capital as well. Even other NBFCs which have high exposure to unsecured lending, the likes of Bajaj Finance, L&T Financial Holdings; small finance banks, the likes of Ujjivan, Bandhan, etc. Initially all of these banks and NBFCs had come up with clarifications that they are not going to be impacted to a huge extent. Do you expect a change in that commentary?

That is quite a possibility, yes, because a regulator clearly has a lot more data than what anybody else has and if RBI has taken this step, certainly the delinquencies in the small unsecured lending space has been seeing a rise and which is making regulators uncomfortable. While large banks in our recent interactions are guiding for a lot of steadiness and their portfolios are not looking at that much of risk but these mid-sized banks and the fintechs and NBFCs may report some stress in the coming quarters and which is where the stocks in general, wherein the exposures are there to these unsecured segments have taken a slight beating.

Would you want to clarify a bit more in terms of which are the stocks and companies which might get the most impacted if you have done any study around that?

The large banks generally give out unsecured loans to their own customers or to the customers who are working with the top-rated private corporates or the government sector which is like the case with SBI. But the mid-sized banks or the NBFCs, who are more active in unsecured and wherein the clientele is not so strong, they could be more impacted.

Within banks wherein the growth has been a lot more on the unsecured especially in the PL, credit cards and they are the spaces wherein one has to watch out for risk.

If we pull up LIC’s last seven-day chart, we will see the stock has managed to gain 20-30%. It is very close to the Rs 800-mark. What explains this move? Was it just undervaluation that people are waking up to or is this about new product that they launched?

LIC over a period of time, over the last one year, has got significantly degraded. Part of this re-rating was expected and which is one reason why we have also been writing 40% upside notes on LIC in our recent result notes. But a good part of it is also related to the performance of the overall insurance sector in general. If you look at the other insurers, they have all seen fairly good re-rating over the last few quarters and that is primarily because the return ratios for these companies still look to be quite strong.

While the year started on a weak note with the changes in the Budget announcements about the taxation that got imposed on the high-ticket policies but overall the insurers have still done comparatively better and are looking for a much steady growth in FY25. In that backdrop, LIC because of the entire positivity that has got built around the PSU space and with the new product that is coming wherein they are looking at a much better traction in the premium numbers and alongside the overall market tailwinds because a lot of the EV growth for LIC comes from the positive move in the market as they have a very high sensitivity to the market movement and which is where we are looking at a very steady EV growth for LIC for FY24.

That will likely continue in FY25 once we have the elections getting over. Even the margins, LIC has improved to 15% and this number can again move up because of the new product launches that they are doing along with the improved profit share that will come into force from FY25 will also give some support to margins further. All these metrics and the cheaper valuations have led to a 30% move in LIC in the last one month or so.

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