Jefferies Downgrades Paytm After RBI Ban, Halves Target Price To INR 500

Hours after the Reserve Bank of India (RBI) directed Paytm Payments Bank to cease all its deposits and credit transactions or top-ups in any of its customer accounts after February 29, brokerage firm Jefferies has downgraded the payment aggregator to ‘underperform’ from a ‘buy’ call and reduced the price target (PT) for the stock by more than half to INR 500 from INR 1,050.

Jefferies’ new target price reflects a downside potential of over 34% for the Paytm stock.

“We cut EBITDA (ex-ESOP) by 46%/ 44% in FY25/26E led by a 7-10% cut to payments revenues and a 17-24% cut in lending revenues and compression in payments margins. Our sensitivity analysis shows that the impact of a 10% change in disbursements is low on revenues (2%), but high on EBITDA (15%). We adjust our DCF valuations to account for lower growth and margins. Our implied valuation multiple stands reduced by 30% to 15X FY26E EBITDA,” Jefferies said.

“RBI’s actions directly impact the wallet business and profitability of merchant payments business, which can impact EBITDA by 20-30%. We see the impact being much larger due to reputational concerns around the group. Lending business (~20% of revenues) can be significantly hit if lending partners cut back or limit their exposure. These drive us to cut FY25-26 EBITDA estimates by 45%, which will also delay profitability,” the brokerage firm added.

Shares of Paytm on Thursday (February 1) nosedived 20% to hit the lower circuit at INR 608.8 on the BSE.

Brokerage firm Macquarie said the implications of the RBI ban are quite serious but maintained its ‘neutral’ rating on the stock and a PT of INR 650.

“Given the severe restrictions imposed on PBPL, we believe it significantly hampers Paytm’s ability to retain customers in its ecosystem, and accordingly restricts it from selling payment products and loan products. We think revenue and profitability implications in the medium to long term could be significant and remain a key item to monitor,” said Macquarie’s Suresh Ganapathy.

Meanwhile, the banking arm of the listed fintech giant said it is working with the sector regulator to address concerns.

In an exchange filing on February 1, Paytm said that its wholly-owned banking subsidiary “is taking immediate steps to comply with RBI directions, including working with the regulator to address their concerns as quickly as possible.”

As per the filing, the latest RBI action will cost it INR 300-500 Cr in annual EBITDA going forward.

Paytm also informed the exchanges that the RBI notification does not impact user deposits in their savings accounts, wallets, FASTags and NCMC (National Common Mobility Cards) accounts, where they can continue to use the existing balances.

RBI, in a press statement yesterday (January 31), said, “No further deposits or credit transactions or top ups shall be allowed in any customer accounts, prepaid instruments, wallets, FASTags, NCMC cards (National Common Mobility Cards), etc. after February 29, 2024, other than any interest, cashbacks, or refunds which may be credited anytime.”

Under Section 35A of the Banking Regulation Act, 1949, the RBI said that the Nodal Accounts of One97 Communications Ltd and Paytm Payments Services Ltd. are to be terminated at the earliest, in any case by February 29, 2024.

The regulator has taken the step after Paytm Payments Bank’s “persistent non-compliances and continued material supervisory concerns”.

In March 2022, the RBI directed Paytm Payments Bank Ltd to stop onboarding new customers with immediate effect.

However, as per the central bank, the Comprehensive System Audit report and subsequent compliance validation report of the external auditors revealed non-compliance, warranting further supervisory action.

The RBI also said that withdrawal or utilisation of balances by Paytm Payments Bank’s customers from their accounts, including savings bank accounts, current accounts, prepaid instruments, FASTags, and NCMC, would be permitted till their available balance.

Motilal Oswal has also downgraded Paytm to a ‘neutral’ rating and cut its PT on the stock to INR 575.

“Paytm has recently announced its plan to downsize its BNPL operations and was working to mitigate the impact by scaling up higher-ticket personal and merchant loans. Against this backdrop, the latest measures raise serious concerns over its business outlook and dent overall investor confidence,” the brokerage said.

Paytm Payment Bank’s Frequent Run-Ins With The RBI

This is not the first time Paytm Payments Bank has come into the RBI’s crosshairs. 

In October last year, the central bank slapped the listed fintech giant’s subsidiary with an INR 5.39 Cr penalty for non-compliance with know-your-customer (KYC) norms. 

At the time, the RBI also flagged six major issues with the payments bank, including failure to identify beneficial owners in respect of onboarded entities for providing payout services, the failure to monitor payout transactions and carry out risk profiling of entities availing payout services, and failure to report cybersecurity incidents without delay.

In March 2022, the RBI directed Paytm Payments Bank to stop onboarding new customers, a restriction which is still ongoing. While the payments bank expressed hope in September 2023 that the restrictions might be lifted in March 2024, the latest RBI action might have thrown a spanner in the works on that front.