Investec backs Paytm’s digital ‘toll road’, sees 23% upside despite 15% fall. Key reasons here
The brokerage’s bullish view on the Paytm parent is driven by three key triggers, led by India’s rapidly expanding digital payments ecosystem, where the fintech operates like a “toll road”. Strong merchant leadership and rising operating leverage are expected to provide sustained tailwinds to the stock, Investec added.
Here are three reasons:
1) Digital payments as a toll roadPaytm’s core payment processing business functions like a toll road on India’s rapidly expanding digital payments ecosystem, earning a small fee on every transaction routed through its platform, Investec said. The brokerage expects payment gross merchandise value (GMV) to grow at a 25% CAGR over FY25–28E, supported by rising adoption of credit cards, RuPay credit cards on UPI, and credit lines linked to UPI.
Increasing credit penetration is likely to lift net payment margins to 4.6 basis points by FY28 from 3.8 basis points in FY25, translating into a strong 32% CAGR in net payment processing revenue over FY25–28E.
The brokerage added that although the company faced a major regulatory setback in FY25, when the RBI curtailed Paytm Payments Bank operations, swift and proactive mitigation measures helped safeguard its core payments franchise.
2) Merchant leadership
Paytm’s strong merchant footprint remains a key growth lever, with over 50% market share offline and about 10% share in soundbox/POS devices, and a 15–20% share in online merchant payments.
This scale supports steady, recurring device subscription revenue, which is projected to grow at a 22% CAGR over FY25–28E.The large merchant base also enables meaningful cross-selling of credit products, with financial services distribution revenue expected to grow at a 31% CAGR and account for 42% of net revenue by FY28E.
3) Operating leverage
Heavy investments in merchant acquisition pushed employee costs—around 60% of indirect expenses—to grow at a 23% CAGR over FY21–25.
With the bulk of merchant acquisition now behind it, employee cost growth is expected to moderate sharply.
As a digital-first platform, Paytm is also likely to benefit from technology-led scale efficiencies, with indirect expenses (excluding ESOPs) projected to grow at an 11% CAGR over FY26–28E, well below the expected 23% revenue CAGR.
This operating leverage is forecast to drive EBITDA margin expansion to 24% of net revenue by FY28, compared with about 8% in H1FY26.
Valuation and outlook
The target price of Rs 1,550 is based on a discounted cash flow (DCF) valuation, implying 37X FY28E EV/EBITDA.
Paytm share price performance
Paytm’s most recent setback comes amid market concerns around the Payment Infrastructure Development Fund, or PIDF— a scheme aimed at incentivising the deployment of digital payment infrastructure.
While there is no clarity on the extension of the scheme, Paytm, in an exchange filing on Friday, said that the amount of incentive was Rs 128 crore for the six months ended September 30, 2025. It said that there is no announcement by the Reserve Bank of India (RBI) or other authorities on extension or replacement of this scheme at present, and so the current scheme is not extended or replaced.
“We expect to significantly offset the impact over time through a combination of higher revenues and more targeted sales efforts,” the filing added.
Paytm shares have been in a consolidation phase and are down 13% over the past three months. The stock is down 20% from its 52-week peak of Rs 1,381.80 and is currently at Rs 1,155.
The stock has slipped below its 50-day simple moving average (SMA) of Rs 1,301.6 while holding its 200-day SMA of Rs 1,115.8. Despite the fall, its one-year returns stand at 41, an outperformance over Nifty’s 8% and BSE Sensex’s 7% returns in the same period.
Risks
Investec said that key risks to its investment thesis include unforeseen regulatory developments, heightened competitive intensity, and asset quality pressures in merchant and consumer lending.
Disclaimer: (Disclaimer: The recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times.)
