Paytm stock searches for a new bottom despite assurances by the management

• Paytm said that it will work with third party banks after RBI’s restrictions on its payments bank.
• Brokerages fear that lending partners might re-evaluate their engagement after the RBI move.
• Analysts see an immediate impact on consumer payments business, with spillovers on aggregation and lending.
• Retail, and MF holdings in the company have gone up in the last one year, as foreign investor holdings reduced.

The restrictions placed on Paytm Payments Banks (PPBL) by the regulator has triggered a sharp selloff in the stock, which is locked in a lower circuit for the second day straight. The stock crashed by 20% yet again on Friday morning to ₹487, even as the benchmark indices zoomed ahead.

The Reserve Bank Of India has ordered its payments bank subsidiary to stop accepting fresh deposits in its accounts or popular wallets from March onwards on Wednesday. PayTM has a 49% stake in Paytm Payment Bank whose future is now uncertain.

“Our key concern, unlike previous directives, is that the RBI has not, so far, made any comments around potential steps towards a resolution, suggesting to us that the directive could stay in place for the foreseeable future,” said Goldman Sachs.

Will third-party banks come on-board?

Paytm assured the investors that it does impact user deposits in savings accounts, wallets, FASTags etc. "Your favourite app is working, will keep working beyond 29 February as usual. For every challenge, there is a solution and we are sincerely committed to serve our nation in full compliance,” said Paytm Founder Shri Vijay Shekhar Sharma in a tweet.

The company also said that they have started working with various banks on various payment products, but the markets remained spooked. With RBI restrictions at play, analysts believe that it won’t be easy to bring in new banks.

“While Paytm expects a minimal impact on its lending business, we differ. We think that some of the lending partners might re-evaluate the extent of their engagement with the company given the restrictions placed by RBI on PPBL. Paytm has a significant dependency on PPBL for nodal accounts used for merchant payment settlements,” said Axis Capital.

The transition from its payments bank to third party banks won’t be so easy either. As much as 34% of all payments for Paytm has been channelized through PPBL in FY23. It has been running as an integrated business for a long time now.

Even if they bring in third-party banks easily, it will face challenges of shifting the nodal accounts to other banks. It will also have to replace the QR codes, powered by PPBL, for offline merchants

Analysts see an immediate earnings impact on its payments business. “We have now assumed a 10% decline in its Consumer Payments business (21% of total revenue) in FY25 and thus would impact the overall revenue impact of 4% cut in our overall revenue estimates for FY25 and FY26 respectively,” said Dolat Capital.

They also fear long-reaching consequences, with a spillover impact on other businesses such like payment aggregation and lending. Lending is one of its fastest growing businesses, and disbursements could be impacted.

Retail investors, MFs increased holdings in the last one year

PayTM shareholding pattern
Source: Groww

The Paytm stock has been on a rollercoaster ride in the last one year, with stock price hitting a high of ₹998 last October. Investors like Alibaba, Softbank and Morgan Stanley Investment Management have pared their holdings in the company too. Investors sold off as much as ₹5,880 crore in four large block deals in 2023.

Consequently, on a year on year basis, the foreign investor holdings in the tech major came down to 63.7% as of December 2023 end. They stood at 72.8% as of December 2022. Yet, they continue to remain the largest shareholders in the company with investors like SAIF Partners, Resilient Asset Management B V and others holding significant stake in the company.

Domestic and retail investor holdings in the company had gone up in the same period. Mutual funds and other domestic institutional holdings almost doubled in the last one year to 5.39% as compared to 1.79% in the same time a year ago. Nippon Mutual Funds and Mirae Mutual Funds hold 1.05% and 2.51%, respectively.