The public issue of One97 Communications was the country’s largest IPO. The parent company of fintech Paytm raised Rs 18,300 crore in November 2021 in the Rs 2,080-Rs 2,150 price band. However, since its listing, it has only been a free fall, which has continued over four months later.
On Thursday morning, the stock was trading at around Rs 620, down over 2 per cent from previous close. The current price is a staggering 70 per cent lower than its issue price of Rs 2,150. How much lower can it go from here? Investment bank Macquarie sees it falling below Rs 500. It has revised its target price to Rs 450 from earlier Rs 700. The new target price is a further 27 per cent drop from current levels.
Why has the stock fallen so much and why is Macquarie still bearish? There are multiple reasons. A key reason is that payments in India is a very crowded space with fintechs like Paytm, PhonePe and Google Pay and traditional commercial lenders like ICICI Bank and SBI fighting to gain market share.
So, competition is going to be intense in the foreseeable future. While Paytm, over time, has expanded into other areas like mutual funds and stock broking, there is yet no clarity on how and when it is going to turn profitable. This uncertainty led to investors selling the shares amid a broader market selloff this year. Globally, fintechs have corrected sharply in the last few weeks and Paytm has not been spared either.
Importantly, last week, RBI barred Paytm’s Payments Bank from taking on new customers, citing “certain material supervisory concerns observed in the bank,” and ordered it to conduct a comprehensive system audit of its IT system.
Later, a Bloomberg report said, citing unnamed people, that the company’s servers were sharing information with China-based entities that indirectly own a stake in Paytm Payments Bank. Paytm denied it, terming the report “completely false, inaccurate and unverified.”
“Paytm Payments Bank is proud to be a completely homegrown bank and is fully compliant with RBI’s directions on data localisation. All of the bank’s data resides within the country,” a spokesperson said.
The spokesperson further added that it was working with the regulator to address their concerns as quickly as possible.
Nevertheless, this will be another stumbling block in Paytm’s growth ambitions beyond payments, say analysts.
“We believe to gain scale and size, fintechs need to go beyond distribution and lend, for which they need licences. With the RBI recently raising issues with Paytm Payments Bank, and Chinese ownership being 25 per cent plus, we believe the probability of Paytm getting a banking licence is significantly lower now, thereby impending its ability to lend,” said Macquarie analysts Suresh Ganapathy and Param Subramanian.
In this backdrop and given competition from other fintechs in the payments space, the analysts are “sceptical” about Paytm’s longer-term ability to generate free cash flow.
There are additional headwinds for Paytm, which could “cloud its path” towards turning profitable, said Ganapathy and Subramanian.
“RBI’s regulations on digital payments and BNPL (buy now, pay later), and stricter KYC (know your customer) and compliance norms will all be adverse developments for fintech companies in general, potentially bringing down unit economics and/or growth,” they said.
Given the sharp correction that has happened, should investors start buying the stock?
“We think investors should avoid bottom fishing,” added Ganapathy and Subramanian.
They have an “underperform” rating on the stock.
