Paytm shares primed for 'material earnings upgrade', Goldman Sachs says on MDR implementation

The Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) of One97 Communications, parent company of the payments aggregator Paytm, is poised for an upside potential between 40% to 70% from the announcement of the Merchant Discount Rate (MDR) by the government on UPI transactions, brokerage firm Goldman Sachs wrote in its note on Wednesday, September 16.

In a notification on Tuesday evening, the National Payments Council of India (NPCI), announced that there will be a 0.4% MDR on the person-to-merchant (P2M) transactions above

₹2,000, while the Person-to-Person (P2P) transactions remain free.

The MDR for transactions above ₹75,000 have been capped at ₹300, while those on railways, telecom, insurance, fuel and agri inputs will be at ₹5. For Mutual Funds, Securities and Stockbroker Payments, the MDR will be 0.02% and capped at ₹300 as well.

Goldman Sachs' calculations imply around ₹20,600 crore of potential revenue pool for the industry from the announced UPI MDR, even as some reports suggest a ₹16,000 crore pool.

"We conduct both top down and bottom up sensitivity analysis for Paytm and both suggest an incremental EBITDA of around ₹1,400 crore in financial year 2028 for the company in a high-end scenario, although competitive pressures could lead to a lower translation," Goldman Sachs wrote in its note.

Shares of Paytm have already risen by more than 30% since the start of the year when reports of MDR first began doing the rounds. Goldman Sachs notes upsides to Paytm's EBITDA due to the quantum of MDR and sharing ratio being higher than investor expectations.

The brokerage also acknowledges that a UPI market share cap implementation could turn out to be a blue sky scenario for Paytm, even as the company's underlying earnings growth and market share momentum remains strong, which, according to Goldman Sachs, will keep its multiples elevated.

None of the 24 analysts covering Paytm have a "sell" rating on the stock. 18 have a "buy" rating, while the rest say "hold". The consensus estimates of price targets is ₹1,730, which implies a downside potential of 2.6% from current levels.

Shares of Paytm ended 4.4% lower on Tuesday at ₹1,736. The stock is still up 10% over the last one month.