Paytm Shares Plunge 20% To Hit Lower Circuit After RBI Ban

Shares of One97 Communications Limited, the parent entity of Paytm, slumped 20% in early trade on Thursday (February 1) hours after the Reserve Bank of India (RBI) barred the fintech giant’s lending business from any deposits or credit transactions, or top-ups in any of its customer accounts.

Paytm stock opened at a lower circuit, at INR 609 apiece, down 20% on the NSE compared to the previous session’s closing price. On Wednesday, the company settled at INR 761 per share.

Meanwhile, brokerage firm Jefferies has downgraded the payment aggregator to ‘underperform’ from a ‘buy’ call and reduced the target price 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.

Brokerage firm Macquarie said the implications of the RBI ban are quite serious.

“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.

Motilal Oswal, a domestic brokerage, has also downgraded Paytm’s rating to neutral, revising the target price to INR 575. Expressing serious concerns over its business outlook and the impact on investor confidence, Motilal Oswal remains vigilant about Paytm’s adaptability in the face of the uncertain regulatory and macro environment.

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

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

This is not the first time Paytm Payments Bank has come into RBI’s crosshairs. According to the January 31 RBI press note, the action comes after Paytm Payments Bank’s “persistent non-compliance and continued material supervisory concerns”.

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.