PB Fintech, Paytm, Nykaa & Delhivery: Here's what JM Financial says on internet cos

5 days ago 13

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Investors across the globe recently shunned loss-making companies amid a deteriorating macroeconomic environment. This feedback, said JM Financial, has been well received by the company managements and that Indian internet companies not just prioritising profitability, but also communicating the path forward explicitly, the domestic brokerage said in a note.

JM Financial said One 97 Communications (Paytm), PB Fintech and Zomato have guided towards adjusted Ebitda level profitability between Q4FY23 and Q2FY24. It said Delhivery should also be able to tide over SpotOn integration issues and breakeven by Q4FY23.

Nykaa, it said, is taking a disciplined approach to its investments in Fashion and eB2B segments while CarTrade has been referencing towards the high operating leverage in its business.

"We believe that demonstrating profitable growth is the need of the hour but the companies should simultaneously take a meticulous approach to planting seeds for non-linear growth in the future. We believe that investor conviction on potential profitability and timeline could cause a re-rating event for these companies as profit margins are expected to rise exponentially post break-even," it said.

PB Fintech | Target: Rs 910

JM Fnancial said PB Fintech is probably the one where management has been most outspoken about their adjusted Ebitda breakeven anticipated in Q4FY23. As of Q2FY23, the company already has adjusted EBitda level profitability in its core online Insurance business with Paisabazaar expected to become profitable in Q4FY23.

JM Financial said the company has already demonstrated a favourable trend with adjusted Ebitda margin reaching minus 9 epr cent in Q2FY23. It expects PB Fintech to achieve profitability in Q4FY23 as Q4 is seasonally a very strong quarter for insurance. "However, we are expecting losses again in H1FY24 with large enough profits in H2FY24 to ensure that the company generates," it said.

Nykaa | Target: Rs 280

The domestic brokerage said that even as Nykaa's Beauty and Personal Care (BPC) segment continues to do well with contribution margin improving to 24.1 per cent in Q2FY23, questions are raised about the investments that the company has been making in Fashion and Others segment.

While Fashion is contribution positive, the company lost Rs  71.40 crore at Ebitda level in this segment with Others segment also losing Rs 44.70 crore. The company expects BPC Ebitda margin to improve 200-250bps YoY from 8.3 per cent in FY22 and sees Fashion segment to breakeven by FY25.

"We expect BPC to potentially surprise positively to reach 11 per cent Ebitda margin in FY23 with further scope for improvement but Fashion might just stumble to Ebitda break-even in FY25 and Others segment reaching positive

EBitda only by FY27. This margin improvement in BPC will be a result of operating leverage on Employee expenses as well as Marketing expenses getting rationalised with Nykaa already becoming a household name for online BPC purchases," JM Financial said.

The brokerage forecast the company to deliver growth of 40 per cent in GMV, 38 per cent in revenue and 82 per cent in Ebitda over FY22-25E.

Paytm | Target: Rs 600

JM Financial said it expects Paytm revenue to grow at a strong CAGR of 32 per cent over FY22-26E, primarily aided by scale in financial services business. This is even as it sees  risks to the current take rates. The brokerage has a target of Rs 600 on Paytm stock.

"While financial services business for Paytm is relatively new, we see strong growth runway going ahead given the large untapped opportunity. Further, we believe incremental path to profitability remains primarily contingent on continued improvement in overall revenue, coupled with reduction in marketing and cash back spends and ESOP costs for Paytm," it said.

JM Financial said while payment processing charges have seen moderation in recent times leading to improvement in profitability, it expects incremental reduction on payment processing charges is difficult.

"We like management’s approach to improve efficiencies and focus on profitability and expect Paytm Ebitda breakeven by FY26E. Simultaneously, we expect djusted Ebitda breakeven by FY24, as guided by the management. We forecast GMV and revenue CAGR of 34 per cent and 32 per cent over FY22-26E," it said.

Delhivery | Target: Not rated

JM Financial said Delhivery managed a strong and successful IPO in May 2022 when most internet stocks were struggling to raise funds. A big driver of the successful listing, JM Financial said, was that the company showcased pro forma profitability for FY22 while also growing revenue by 63 per cent YoY.

However, SpotOn has not been an easy integration and has resulted in the company losing adjusted Ebitda of Rs 342 crore in H1FY23 against Rs 7.2 crore profit in FY22. With the company claiming that integration is now complete and gross margin on incremental revenue of 50 per cent, JM Financial expects Delhivery to become profitable by the end of the current fiscal year.

"However, we anticipate margins to improve only with simultaneous improvement in scale as the company can benefit from amortising the fixed costs," it said.

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