Paytm dips 4% intra-day as RBI asks arm not to onboard new online merchants

Shares of One 97 Communications, the operator of India’s largest digital-payments provider Paytm, dipped 4 per cent to Rs 444.35 on the BSE in Monday’s intra-day trade after the Reserve Bank of India (RBI) asked the company’s subsidiary — Paytm Payment Services Ltd (PPSL) — not to onboard new online merchants. This was in response to an application the company had filed for a payment aggregators license.

In a letter, the central bank has asked the company to seek necessary approval for past downward investments from Paytm to the company to comply with FDI guidelines. After complying with the two steps prescribed by the regulator, PPSL can apply for a payment aggregator’s license in the next 120 days.

“This has no material impact on our business and revenues, since the communication from RBI are applicable only to on boarding of new online merchants,” Paytm said in the exchange notification. CLICK HERE FOR STATEMENT

Meanwhile, the stock erased its entire intra-day losses and traded flat at Rs 465 at 10:21 AM. It hit an intra-day high of Rs 472.35 on the BSE. The stock had hit a record low of Rs 439.60 on November 24, 2022.

According to analysts at Citi, this stock falls under ‘High Risk’ category, based upon their quantitative model. “But its healthy net cash position and likely declining cash burn going forward do not support a High Risk rating,” they said in a report.

“We note that Paytm’s business in lending space is distribution (no b/s exposure) and therefore its revenue/cost-structure are commissions-based. Paytm is trading at 5x FY24E EV/Contribution Profits (4x EV/Gross Profits). We acknowledge overhang risks from further selling by existing pre-IPO shareholders and that fintech is a competitive space but at these valuations, those risks are overdone,” the foreign brokerage firm said in a report dated November 23, 2022 with a 12-month target price of Rs 1,055.

Key downside risks that could cause Paytm shares to trade below our target price include competition, Digital Payments is super competitive. PhonePe and Google Pay have gained market share ahead of Paytm on UPI payments (P2P). In addition to rival platforms, such as PhonePe, several merchant payments players like Razorpay, Pine Labs, etc., have built vertical specific platforms and command a head start, especially with the mid-market and large enterprise customers.

UPI is the fastest growing digital payment instrument and is zero-MDR for all participants, lending via distribution may not scale or front-end take-rate may substantially decline at higher scale and RBI may introduce new MDR related regulations across digital payment products, more regulator-driven interoperability may further reduce the relative data advantage of big platforms like Paytm. Incremental BNPL regulations may also affect Paytm shares, the brokerage firm said.