Paytm Crisis | Macquarie Slashes Target Price By 57%

Paytm Crisis

Macquarie, a foreign broking firm, has reduced the target price of One 97 Communications, the parent company of Paytm, from Rs 650 to Rs 275 and downgraded the company to a “underperform” rating.

Following restrictions on its payments bank by the Reserve Bank of India, Paytm faces a significant risk of customer exodus, according to Macquarie analyst Suresh Ganapathy. This puts the company’s monetization and business model in grave danger.

The target price is 33 percent less than the previous closing price of Rs 416 for One 97 Communications. The stock opened 6% lower on the NSE on February 13 morning at Rs 396.

“We increase loss estimates by 170 percent/40 percent over FY25E/26E, factoring 60-65 percent decline in revenues due to lower payments and distribution revenue,” Ganapathy stated in the report.

After imposing restrictions on Paytm Payments Bank Ltd (PPB), a One97 Communications associate, in January, the RBI Reserve Bank said that the measures were necessary due to “persistent non-compliances and ongoing material supervisory concerns in the bank.” This is when Macquarie announced its target price reduction.

After February 29, PPB is to cease accepting deposits, credit transactions, or top-ups in customer accounts, prepaid devices, wallets, FASTags, and NCMC cards—aside from interest, cashbacks, or refunds—despite the RBI withholding specifics of the concerns. On March 15, the payments bank was also instructed to settle all pipeline transactions and nodal accounts.
According to Macquarie, Paytm currently has over 330 million users and 110 million monthly transacting users.

Based on our channel checks with partners, moving related merchant accounts to other bank accounts or moving payment bank customers to other bank accounts will require KYC (Know your customer) to be done again, indicating that migration within RBI’s deadline of February 29th will be a difficult task, Ganapathy said.

Although the PPB restrictions have no direct effect on the lending business, Macquarie’s channel checks indicate that some of Paytm’s lending partners are reconsidering their partnership because of concerns about the company’s reputation.

The biggest lending partner of Paytm, AB Capital, has already reduced its BNPL exposure to the platform from a peak of Rs 2,000 crore to Rs 600 crore at present, and we believe this reduction will continue, according to Macquarie.

Due to higher risk weights on unsecured consumer lending imposed by the RBI, Paytm is reducing its volume of low-ticket (less than Rs 50,000) loans and concentrating on higher ticket ones.

“We project that the distribution business will have a 50% cash burn and a 20x price-to-earnings multiple to normalized earnings. We’ve set our target price with the assumption that Paytm will continue to operate as is,” the company stated.

The target price was increased by 80% from Rs 450 to Rs 800 in February 2023 after Macquarie double upgraded Paytm’s rating from “underperform” to “outperform”.

The broking firm had noted at the time that “there is a very visible change in the approach of management to deliver profit.”

One 97 Communications had a “underperform” rating when Macquarie was one of the first firms to begin coverage. In relation to an issue price of Rs 2,150, its initial target for the stock was Rs 1,200 only.

Also Read: RBI Takes Action Against Paytm | Cause And Effects On Your Money

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