Why are Indian digital payments company Paytm’s shares freefalling?

Investors and market intermediaries fear the latest regulatory action by RBI could seriously impair Paytm's business volumes and profitability

One97 Communications, the parent firm of Indian payments company Paytm, lost 205 billion rupees ($2.47 billion), or 42.4 per cent, in market capitalisation in the last three trading sessions. Reuters
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The share price of One97 Communications, the parent firm of Indian digital payments company Paytm, fell sharply on Monday morning, hitting the new lower circuit breaker, a price band, on the Bombay Stock Exchange.

The company's stock fell by 10 per cent to 438.50 rupees ($5.28), locking at the new lower circuit limit. The shares fell 20 per cent each on Thursday and Friday.

The BSE changed the daily lower circuit breaker of Paytm shares to 10 per cent from 20 per cent earlier after the stock of the FinTech company's shares hit a 20 per cent lower circuit limit for two consecutive sessions following the Reserve Bank of India’s regulatory action against its associate, Paytm Payments Bank Limited on January 31.

The country's central bank on Wednesday ordered PPBL to stop accepting fresh deposits in its accounts or digital wallets from March, saying that it found “persistent non-compliance and continued material supervisory concerns in the bank”.

Investors and market intermediaries fear that the latest regulatory action could seriously impair Paytm's business volumes and profitability.

In three straight trading sessions, following the RBI action, the company lost 205 billion rupees, or 42.4 per cent, in market capitalisation.

India's central bank has ordered PPBL to halt most of its business including taking further deposits, conducting credit transactions and carrying out top-ups on any customer accounts, prepaid instruments, wallets, and cards for paying road tolls after February 29.

Following the RBI action last week, several media reports have claimed that the company and its chief executive Vijay Shekhar Sharma are being investigated by the Enforcement Directorate, India’s federal investigating agency for financial crimes, for alleged money laundering.

However, Paytm, in a stock exchange filing, has categorically denied any such investigation by the ED.

“Neither the company nor its founder and chief executive are being investigated by the Enforcement Directorate regarding money laundering,” the company said.

What is next for Paytm?

One97 Communications holds a 49 per cent stake in PPBL but classifies it as an associate of the company and not as a subsidiary. Paytm founder and chairman Vijay Shekhar Sharma has a 51 per cent stake.

As per the RBI directive, customers will not be able to make deposits or add money to the Paytm Payments Bank savings, current account, debit card, Paytm wallet and the road toll payment system after February 29, 2024.

However, there is no restriction on the withdrawal of money from the existing balance even after February 29.

PPBL is staring at an uncertain future with the RBI’s decision to bar fresh deposits and top-ups and One97 Communications, which runs Paytm services, stopping all businesses with PPBL.

Paytm's management claims, that despite the restrictions on PPBL, the company will continue to operate its wallet and payments business by establishing new banking relations.

The company said the continuation of the existing business is about making sure that the people who had set up their mandates from the PPBL bank account switch to another bank account, for which work has already started.

“I think the disruption will be there for a couple of weeks. And to that extent, we will have an ebitda [earnings before interest, taxes, depreciation and amortisation] impact on our lending business. I don’t want to shy from saying that,” Paytm president and chief operating officer Bhavesh Gupta said.

In an attempt to calm the nerves of its app users and investors, Mr Sharma said in a post on X (formerly Twitter) on Friday: “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 serving our customers.”

Uncertainty weighs on shares

Despite the assurances by the management on resolving the current crisis, investors, market intermediaries and customers seem far from convinced.

Stock broker firm Jefferies said there was no clarity on RBI's actions after the company’s analysts call and added that the recent events would drag the company’s growth and elongate profitability timelines.

“RBI’s actions directly impact the wallet business and profitability of merchant payments business, which can impact ebitda by 20 per cent to 30 per cent. We see the impact being much larger due to reputational concerns around the group,” it said.

With uncertainty on its future, analysts said PPBL is likely to witness a decline in deposits and business following the RBI curbs.

Jefferies has downgraded the share to 'underperform' and cut its target price to 500 rupees per share.

“We cut ebitda by 46 per cent in 2025-26, led by a 7 per cent to 10 per cent cut to payments revenue and a 17 per cent to 24 per cent cut in lending revenue and compression in payments margins,” it said.

Stock brokers Macquarie said the implications of the RBI ban are quite serious but maintained its “neutral” rating on the stock and a target price of 650 rupees.

“Given the severe restrictions imposed on PPBL, we believe it significantly hampers Paytm’s ability to retain customers in its ecosystem,” Macquarie’s managing director Suresh Ganapathy said.

“We think revenue and profitability implications in the medium to long term could be significant and remain a key item to monitor.”

Indian stock broking company Motilal Oswal said it is having a “watchful stance” on the resilience of Paytm's business model. It suggested a target of 575 rupees on Paytm.

Analysts say the current crisis is also likely to hurt the market share of Paytm.

As per the latest available data from the National Payments Corporation of India, as of December 2023, PhonePe had a 46 per cent share in digital payment volumes, followed by Google Pay with 36 per cent and PPBL with 13 per cent.

Paytm's $2.5 billion initial public offering on the BSE in November 2021 was touted as a bellwether that the South Asian country's appeal to global capital was growing. However, the company lost over a quarter of its value on its trading debut.

The unprofitable company’s market value has fallen to about $3.4 billion – down about 80 per cent from its stock market listing.

Updated: February 06, 2024, 3:24 AM