Zomato, Paytm, Nykaa: Analysts bet on new-age stocks

Investors are increasingly turning optimistic about shares of new-age companies.

From broad-based ‘sell’ calls, analysts are giving thumbs up to Zomato, Paytm, and FSN e-Commerce Ventures-owned Nykaa as these companies have shifted focus to sustainable profits.

The shares of Zomato hit a fresh 52-week high of Rs 126 apiece on the BSE on November 7, having rallied 15.4 per cent in one week.

Shares of Nykaa and PB Fintech also advanced 7 per cent and 21.7 per cent respectively in one week, as against the 1.6 per cent gain in the benchmark S&P BSE Sensex index.

Paytm was the only stock trading in the red during this period, falling 4.3 per cent.

Analysts believe these stocks could be good investment bets from a long-term perspective, and may be bought on dips.

“After a massive drubbing in the past 12-18 months, the sentiment has improved for new-age stocks.

"Most of these companies are focusing on profitability, which is visible from their quarterly results,” said Ambareesh Baliga, an independent market analyst.

FSN e-Commerce Ventures, for instance, reported a 50 per cent year-on-year (Y-o-Y) surge in net profit, at Rs 7.8 crore, for the July to September quarter of FY24 (Q2FY24).

This comes after it reported an 8-per cent Y-o-Y rise in net profit in Q1FY24, 72 per cent Y-o-Y decline in Q4FY23, and 68 per cent fall in Q3FY23.

Food delivery platform Zomato also delivered its second quarterly net profit in Q2FY24 at Rs 36 crore.

It reported a profit of Rs 2 crore in Q1FY24 and a loss of Rs 187.6 crore in Q4FY23.

Paytm, on the other hand, has been narrowing its losses.

In the September quarter, the fintech company reported a net loss of Rs 292 crore, down from Rs 571 crore loss incurred in Q2FY23 and Rs 358 crore incurred in Q1FY24.

Its earnings before interest, taxes, depreciation and amortization (Ebitda) gain, however, rose to Rs 153 crore in Q2FY24 from Rs 84 crore reported in Q1FY24.

“Paytm has accelerated monetisation of its large user and merchant base led by its credit offering.

"With around 5 per cent user penetration, loan disbursals have surged nearly 10x to less than $ 8 billion,” wrote Jayant Kharote and Prakhar Sharma of Jefferies in their coverage initiation report.

“In payments, revenues expanded Rs 2.5x with a ramp-up in merchant subscription business and margins jumped Rs 20 percentage points.

"In two years, Paytm's revenues have jumped nearly 3x, gross margins surged to 54 per cent (from 13 per cent), and placed the company on a path to profitability,” it said.

The brokerage has assigned a ‘buy’ rating to the stock and a target price of Rs 1,300, translating into a 48 per cent upside from current levels, as it believes the payment aggregator will turn profitable in the next year, enjoying strong growth, double-digit Ebitda margins, and stable profitability.

Analysts believe stable profit margins are also acting as tailwinds for the companies.

Interest rate pause-driven rally?

New-age companies use weighted average cost of capital (WACC) as a discounting factor while valuing their firms.

A rise in interest rate and, in effect, their respective WACCs reduces the current discounted value of their expected earnings.

“Recently, the US Federal Reserve laid out a dovish policy statement which signaled a possible rate hike pause going ahead.

"Other central banks, including the Reserve Bank of India, have stopped hiking rates.

"This bodes well for new-age stocks,” said Vinit Bolinjkar, head of research at Ventura Securities.

The massive rate hikes seen over the past year have helped cool off the exorbitant valuations these companies were once commanding.

Analysts suggest investors selectively buy new-age stocks on corrections while keeping a close eye on successive quarterly performances.

ICICI Securities has upgraded Nykaa to ‘buy’ with a target of Rs 185.

Nuvama Institutional Equities has increased the target of Zomato to Rs 140 while maintaining ‘buy’ rating.

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