Macquarie Upgrades Paytm, Favors Select NBFCs and Insurers on Profitability
Overview
Macquarie Capital's Suresh Ganapathy shifts focus to profitability and valuation for Indian financials. The brokerage upgrades Paytm, citing a clear path to profitability, and favors mid-sized NBFCs over larger peers. Ganapathy also sees significant upside in insurance, particularly from the protection segment, while advocating for a tactical shift in banking towards cheaper valuation stocks like Axis Bank.
Stocks Mentioned
Macquarie Capital is adopting a constructive stance on select Indian financial stocks, prioritizing profitability and valuation discipline over pure growth. Suresh Ganapathy, Head of Financial Services Research-India, has upgraded One 97 Communications (Paytm), reversing a previous bearish view. This decision hinges on Paytm's clear path to profitability and improving operating leverage, with the brokerage noting the company's strengthened financial profile.
Fintech Focus Shifts to Profitability
Macquarie now anchors its assessment on clean earnings quality. Both Paytm and PB Fintech are reporting earnings before interest, taxes, depreciation, and amortization (EBITDA) inclusive of employee stock ownership plan (ESOP) costs and one-off items. Ganapathy believes Paytm's valuations could further re-rate as profitability becomes embedded.
NBFCs: Quality Over Size
Beyond fintech, Macquarie advises investors to recalibrate their non-banking financial company (NBFC) exposure. The brokerage suggests moving away from large, fully priced entities towards mid-sized and smaller players offering a better balance between growth and returns. Ganapathy noted that sustaining high growth and high return on assets simultaneously becomes increasingly difficult for large NBFCs. Bajaj Finance was cited as an example, where maintaining a ~5.5-6% return on assets on its non-mortgage portfolio alongside 25-30% growth is challenging.
Insurance: Margin Upside Potential
Macquarie has turned increasingly bullish on the insurance sector, driven by robust growth in the protection segment and underestimated margin potential. Ganapathy highlighted that protection business margins, at 80-90%, are significantly higher than unit-linked product margins, which stand at around 10%. The firm has raised price targets for SBI Life Insurance Company and HDFC Life Insurance Company, anticipating margin accretion from protection-led growth through FY27.
Banking: Tactical Valuation Play
Within banking, Macquarie advocates a tactical shift towards stocks with cheaper valuations. While acknowledging HDFC Bank's long-term growth potential, concerns over deposit growth and loan-to-deposit ratios are noted. ICICI Bank faces uncertainty regarding its CEO's tenure. Macquarie sees a valuation catch-up opportunity in Axis Bank, supported by projected earnings growth exceeding 30% for FY27 and more attractive valuations, alongside State Bank of India.
