Paytm stock takes a big hit as it pulls back on small loans

These are primarily postpaid loans or buy-now-pay-later products, which comprised 56% of total loan disbursements during the September quarter (Q2 FY24) in terms of value. Postpaid loan disbursement is expected to halve in the coming months. Investors were visibly upset, dragging the stock down almost 19% on Thursday.

Paytm’s move follows the Reserve Bank of India’s (RBI) decision to increase risk weights in unsecured retail lending. News reports have also said that ZestMoney, a fintech lending startup focussed on buy-now-pay-later products, is likely to be shut down as lending partners have been ditching the company.

During a call with analysts Paytm executives said the company's decision to reduce its focus on postpaid loans is aimed at avoiding asset-quality issues. In any case, the expected credit loss in Paytm’s postpaid lending business has improved to 0.65%-0.85% in Q2 from 1.1%-1.3% a year ago.

To offset the impact from reduction in postpaid loans, Paytm aims to scale up higher ticket personal and merchant loans, where the risk is lower. The company noted good demand for loans of ₹3 lakh to ₹7 lakh. These loans are likely to be given to well-tested and premium customers.

Shivaji Thapliyal, head of research, institutional equities at Yes Securities, said Paytm’s commentary now questions the broad thesis that it was fast transforming from a payments-focused company to a loan distribution-focused firm.

“The key question to ask is what proportion of its overall customer base Paytm will ultimately be able to convert into loan customers in the long-run," Thapliyal added.

However, there is a silver lining. According to Paytm’s management, postpaid products fetch relatively low margins, and this means the impact on profitability could be lower than the impact on revenue. Even so, growth would take a beating.

“While we expected some moderation in loan disbursals following RBI’s measures, the quantum is ahead of our estimates," analysts at Jefferies India said in a report on 6 December. They now expect overall loan disbursal to grow at 65%, 5% and 27% in FY24, FY25 and FY26 from their earlier estimate of 98%, 49% and 43%.

All said, the financial services segment, which includes lending, comprised nearly 23% of Paytm’s consolidated revenue in Q2. Against this backdrop, investors’ initial reaction appears harsh. “The stock’s reaction seems overdone. But for investors who view the lending business as one of the biggest growth engines for Paytm, the news is quite disappointing as the resultant drop in disbursals casts a shadow on the company’s growth prospects," said Rahul Jain, an analyst at Dolat Capital Market.

Despite Thursday’s losses, Paytm’s shares are up almost 30% in the past year thanks to a robust increase in loan-distribution revenues and operational efficiencies. Investors will follow the impact of the changes closely. Q4 should reveal the full impact as postpaid loans are 30-day products.

It would help if bigger loans perform well. Paytm is also looking to expand its lender-partner base, which could improve its earnings outlook. “Given the slightly abrupt pullback on a key growth lever, we expect stock price to react negatively until growth trends stabilize and the new strategy plays out," said analysts from JM Financial Institutional Securities.