Paytm stock to see sharp cut as institutions may dump stock; reputational risk greater than earnings impact

Customer leakage; users to shift to other banks

The RBI action follows the regulator’s earlier directive barring onboarding of new customers to Paytm Payments Bank platform. RBI had issues with the bank for non-compliance on doing full know your customer (KYC) of customers, not doing full KYC of accounts older than one year, and keeping more money than allowed by the regulator in a payment bank account.

Since no customer will be able to deposit money in their account and only be able to withdraw, they will be forced to shift to other banks. In the process of transitioning customers to other banks, Paytm may lose customers. This will hurt the topline and the bottomline of the consolidated business, however, not significantly.

Jayant Kharote, Equity Analyst at Jefferies India, said that Paytm’s wallet business, which is 5 percent of GMV, may need to be wound down. Also, Fastag GMV, where Paytm is the third largest player with 17 percent market share, will be majorly affected. All these customers will now likely migrate to other players in the market.

Reputation loss to hit key lending business

What is more worrisome for Paytm is the reputational risk, which may make its partners wary of doing business with the fintech giant. “Key impact can be on lending business (more than 20 percent of revenues) if lending partners limit business due to operational/governance risks,” said Kharote.

Though clarity on the issue is yet to emerge, the impact on lending business, if any, will likely be minimal, fund managers believe.

However, for investors’ sentiment, this is bad news especially after the company had started cutting down on low ticket loans (less than Rs 50,000), which are usually availed by small merchants.

EPS cut likely

All-in-all, fund managers and analysts are expecting a 5-15 percent earnings per share (EPS) impact. This will deepen the worry as the company has been going extra lengths to become profitable. There were expectations that the company would likely report breakeven on EBITDA in FY25.

In the nine months ended December 2024, Paytm reported a loss of Rs 14 per share, merely half of losses sustained in the same period, previous fiscal.

The improving business performance led to a rally in Paytm share price as buyers returned even as some pre-IPO shareholders exited the stock. The stock is up 19 percent in the last one month and 43 percent in the last one year.

Now, some leading fund managers told Moneycontrol on condition of anonymity that they will ‘wait and watch’. Some others said that there may be no point holding the stock as the RBI move casts a long shadow on the way ahead. Besides, it was highly unlikely for any institution or strategic player to buy big blocks to support the stock considering the threat to business and lack of visibility.

The company management was huddled in a meeting and analysts and managers were waiting to hear from the company’s response with specifics on the possible extent of business loss, and strategy going ahead.