Paytm, once anticipated to be India’s most successful IPO in corporate history, is currently grappling with a substantial downturn in its market performance. Today, on February 13, 2024, the fintech company’s stock declined 10%, reaching a historic low of Rs 380. The drop in Paytm shares appears to be more concerning when compared with its listing price of Rs 1,560.8 on November 18, 2021. It’s a massive 75.6% decrease!
The fall in the shares of One97 Communications Ltd (NSE: PAYTM), Paytm’s parent company, is a direct reflection of the market’s response to the recent ban on Paytm Payments Bank’s services. As a result, Macquarie, a prominent global brokerage firm, has adjusted its assessment of Paytm, downgrading its rating from “neutral” to “underperform,” along with a revised target price potentially as low as Rs 275. The firm cites a change in methodology, shifting from price/sales to fair value on normalized distribution business profits.
“We change our methodology from price/sales to fair value on normalised distribution business profits. We revise our target price to Rs 275 from Rs 650. Our valuation would have been Rs 225 under our earlier methodology,” said Macquarie’s Suresh Ganapathy.
Gloomy Outlook for Paytm
The ban on Paytm Payments Bank has triggered operational challenges, requiring the migration of customers and merchants to new third-party banks. The added complexity arises from the necessity for fresh KYC (Know Your Customer) procedures for all involved parties. This migration process must be accomplished within a tight deadline, February 29, 2024, set by the Reserve Bank of India (RBI). This could lead to widespread customer loss and a significant drop in revenue.
According to the Macquarie analysts, their channel checks revealed that some lending partners are reassessing their ties with Paytm. If they scale down or terminate partnerships, Paytm’s lending business revenue will drastically decline. This poses a substantial threat to Paytm’s monetization strategy and casts uncertainty on the fundamental viability of its business model.
It is important to note that AB Capital, a prominent lending partner of Paytm, has already decreased its involvement with Paytm’s Buy Now, Pay Later (BNPL) services. The exposure, which was once at a peak of Rs 20 billion, has now been reduced to just Rs 6 billion, and it is expected to decrease even more in the future.
The Macquarie analysts project a potential 60-65% decline in revenues for One97 Communications due to lower payments and distribution income, further fueling investor anxieties.
Adding to the fire, Macquarie also increased its loss estimates for Paytm’s Parent by a staggering 170%/40% over FY25/26.
A Bull vs Bear Battle: Who Will Win?
In an optimistic “bull-case scenario,” Paytm stocks are anticipated to experience a rally, potentially reaching up to Rs 540. This positive projection takes into account a relatively moderate decline of 25% in distribution revenues compared to the baseline scenario, which assumes a more significant 60-65% reduction.
On the other hand, in the more pessimistic “bear-case scenario,” the Paytm shares are predicted to plummet to as low as Rs 180. This substantial decline is contingent on a more severe decline in the company’s distribution revenues, estimated to be as much as 75%.
RBI Governor Shaktikanta Das’s recent statement, “hardly any room to review” the ban on Paytm Payments Bank, further dampens investors’ hopes. Paytm shares have already lost 50% of their value since the January 31st ban, leading market experts to advise retail investors to stay clear until the regulatory clouds disperse.
However, amidst the bleak outlook painted by Macquarie, a contrasting perspective surfaces from global broking firm Bernstein. Their “buy the dip” strategy suggests a glimmer of hope, urging investors to consider the current downturn as a potential buying opportunity. Their target price of Rs 600 expresses confidence in Paytm’s ability to recover, offering a stark contrast to Macquarie’s prediction of a potential crash.
What are your thoughts on the RBI’s ban on Paytm Payments Bank? Do you think One97 Communications, under the leadership of Vijay Shekhar Sharma, will successfully address all compliance issues, leading to a potential recovery in Paytm shares? Let us know in the comment section below!
