PAYTM Rollercoaster: From Payments Hero to an Uncertain Future
One97 Communications Ltd has been facing market heat since November thanks to RBI's crackdown on unsecured PL and Paytm Payments Bank.
One97 Communications Ltd (NSE: PAYTM) is India's leading digital payments company running several inter related businesses like a) Payment Services: via Wallet, Paytm Postpaid, QR Code to customers and Paytm Soundbox and POS to merchants b) Commerce and Cloud Services c) Financial Services: lending, insurance, and wealth management for consumers and merchants. PAYTM’s Gross Merchandise Value (GMV) for 9MFY24 stood at INR 13.6 lakh crore vs INR 9.7 lakh crore in 9MFY23 (up 40% YoY).
Since November 2023, PAYTM has been in the news owing to RBI's crackdown on unsecured personal loans and Paytm Payments Bank (PPBL) due to the latter’s alleged non-compliance and continued material supervisory concerns.
The Paytm Payments Bank Saga
PPBL is barred from accepting deposits or top-ups in any customer account, wallets, or FASTags under section 35A of the Banking Regulation Act, 1949. Henceforth PAYTM has been compelled to shift its nodal account with PPBL to third party banks. These moves would have a significant impact on PAYTM’s revenue and profitability in the medium to long term.
Strategic moves to mitigate damage thus far
PAYTM has partnered with various banks to shift its nodal/escrow accounts, transitioning from its previous collaborator, PPBL. This partnership aims to stabilize PAYTM's merchant payments settlement business. Moreover, RBI has clarified that PAYTM’s Soundbox, QR code, and POS terminals deployed would continue to operate even after March 15, 2024. PAYTM has secured third-party payment app (TPAP) status and has acquired five handles in partnership with four banks (HDFC bank, Axis Bank, Yes Bank, SBI) to continue UPI transactions through a multi-bank model, including company's existing handle @paytm.
Business Impact
RBI ban will significantly hinder PAYTM’s ability to retain customers within its ecosystem and restrict its capacity to sell payment and loan products accordingly. The primary impact could be in the lending business (21% of revenues in Q3FY24) if lending partners curtail business due to operational / governance risks. Additionally, PAYTM’s wallet business (5% of GMV) and saving and current accounts are wound down. Merchants utilising PPBL services may also be impacted and the FASTag GMV, where PAYTM is the third largest player (market share of 17%) is expected to suffer a major blow. The company acknowledged that the regulatory challenges may impact EBITDA by INR 300-500 crore, c. 20-30% of FY25 earnings. Merchants who have relationships with PPBL may shift to other providers. The Soundbox subscription revenues, one of the growing businesses (106 lakhs subscriptions in Q3FY24 vs 58 lakhs in Q3FY23, up 84% YoY) may experience a significant decline. PAYTM will now focus on customer retention including merchants, which will take a hit on the company’s cash reserves.
Valuation
We estimate FY25E revenue to shrink by -6.5% at INR10,152cr vs. FY24P, with EBITDA margins compressing to -9.3% vs. -5.2%. PAYTM is trading at a forward EV/ Sales multiple of 2.35x for FY25E. Albeit management is enforcing swift countermeasures to minimise operational disruptions and the stock appears like a bargain in comparison to its IPO price, the company’s history of skirting regulatory issues still exposes it to potentially undiscovered corporate misgovernance risk…exercise caution!
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