On RBI's crackdown, and what next for Paytm
Paytm said it will work with other banks and not with Paytm Payments Bank, and that it will expand its payments and financial services business “only in partnerships with other banks”
Sometimes, stocks get ahead of themselves. Sometimes investors get head over heels anticipating bright prospects for a company without considering second-order thinking and what could go wrong in the moment.
In early trade on 1 February, the stock of Paytm, one of the biggest and most popular names in the fintech space, crashed 20%. Shares of the company fell to ₹609 apiece, nearing its 52-week low of ₹516 that it touched in February last year.
Is February really such a bad month for Paytm?
And why did the shares crash 20% today?
Let’s find out.
RBI imposes restrictions on Paytm Payments Bank
The Reserve Bank of India on 31 January imposed major business restrictions on Paytm Payments Bank Ltd, including a ban on accepting fresh deposits and making credit transactions.
Effective 29 February, Paytm Payments Bank will not be allowed to accept fresh deposits, undertake credit transactions, or top-ups in any customer accounts. This also includes prepaid instruments, digital wallets, FASTags, and NCMC cards.
RBI’s action came after the bank came under non-compliance and supervisory concerns. In March 2022, the central bank had barred Paytm Payments Bank from onboarding new customers.
Following the latest restrictions, top brokerage houses have voiced serious concerns and suggested that RBI's action will significantly impact Paytm's operations.
To put things in context, RBI had imposed a ban on HDFC Bank too about two years ago, and it took over 15 months for the central bank to lift the ban.
What next for Paytm?
One97 Communications Ltd, the parent company of Paytm, expects a "worst case impact" of ₹300-500 crore on its annual Ebidta following RBI’s restrictions on Paytm Payments Bank.
The company said on Thursday that despite this Paytm will continue on its trajectory to improve its profitability.
The company third-quarter Ebitda came in at ₹220 crore while net loss narrowed to ₹220 crore from ₹390 crore earlier.
Paytm also said it will work with other banks and not with Paytm Payments Bank, and that the next phase of its journey is to expand its payments and financial services business "only in partnerships with other banks".
The company also clarified that founder Vijay Shekhar Sharma had not taken any margin loans or pledged any shares directly or indirectly owned by him.
In November, Warren Buffett offloaded his stake in Paytm via a large block deal.
Buffett's Berkshire Hathaway sold 15.6 million shares, or 2.5% of equity worth nearly ₹1,370 crore at a share price of ₹877.29.
Buffett had picked up a 2.6% stake in Paytm in 2018, investing nearly ₹2,200 crore. During the Paytm IPO, Berkshire Hathaway sold shares worth ₹220 crore.
As luck would have it, the investing legend completely exited Paytm with almost a 40% loss and did not have to worry about today’s crash.
Paytm is currently in a tough spot as several other multinational investment giants such as SoftBank Group and Ant Group have also been offloading their stakes in the company since 2022.
This could be due to a combination of the environment getting tougher for private equity firms as well as the valuations available in the market today.
If experts are to be believed, the era of ultra-low interest rates seems to be behind us. With interest rates likely to stay structurally higher, PE firms need to turn more judicious with respect to the deals they enter.
While the forecast is grim for Paytm, the company recently said that it’s seeing encouraging trends for credit card on UPI. It expects net payment margins to improve from UPI business.
Out take on Paytm? If you don't have the stock in your portfolio, it makes sense to track the fundamentals closely. Decide only after you are sufficiently convinced the company is not only on the path to profitable growth and positive cash flow, but also has a strong, long term competitive advantage.
Paytm's share price performance
In early trade on Thursday, shares of Paytm crashed 20% to hit a low of ₹516.
Over the past year, shares of the company are up 17%.
Paytm hit a 52-week high of ₹998 a share on 20 October, and a 52-week low of ₹516 on 1 February last year.
Happy investing!
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
