Foreign broking firm Macquarie has downgraded beleaguered Paytm parent One 97 Communications to an "underperform" rating and cut the target price to Rs 275 from Rs 650.
Macquarie analyst Suresh Ganapathy said Paytm faces a serious risk of customer exodus after the Reserve Bank of India curbs on its payments bank, which significantly jeopardises its monetisation and business model.
The target price is 33 percent lower than One 97 Communications' previous closing price of Rs 416. On February 13 morning, the stock opened another 6 percent lower at Rs 396 on the NSE.
"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 wrote in his report.
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Macquarie's target price cut comes after the RBI Reserve Bank in January placed restrictions on Paytm Payments Bank Ltd (PPB), an associate company of One97 Communications, saying the actions were warranted by “persistent non-compliances and continued material supervisory concerns in the bank”.
While the RBI did not provide details of the concerns, it directed PPB to stop accepting deposits, credit transactions or top ups in customer accounts, prepaid instruments, wallets, FASTags, and NCMC cards after February 29, other than any interest, cashbacks, or refunds. It also ordered the payments bank to settle all pipeline transactions and nodal accounts by March 15.
At present, Paytm has over 330 million customers and 110 million monthly transacting users, Macquarie said.
"Moving payment bank customers to another bank accounts or moving related merchant accounts to other bank accounts will require KYC (Know your customer) to be done again based on our channel checks with partners, indicating that migration within RBI's Feb 29th deadline will be an arduous task," Ganapathy said.
Lending partners wary
While the restrictions on PPB do not directly impact the lending business, Macquarie's channel checks suggest that some lending partners of Paytm are re-looking at their relationship with the company due to reputational concerns.
"AB Capital, one of Paytm's largest lending partners, has already pared down their BNPL exposure to Paytm from a peak level of Rs 2,000 crore to Rs 600 crore currently and is expected to go down further in our view," Macquarie said.
Also Read: Slowdown in unsecured lending compounds problems for Paytm, will make business harder to come by
Paytm itself is cutting down on low-ticket (below Rs 50,000) loans and focusing on higher ticket ones, as the RBI has increased risk weights on unsecured consumer lending.
"We assume a 50 percent cash burn and 20x price-to-earnings multiple to normalised earnings from the distribution business. Our target price is based on assumption that Paytm remains a going concern," the firm said.
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In February 2023, Macquarie had double upgraded the rating on Paytm to "outperform" from "underperform", and raised the target price by 80 percent from Rs 450 to Rs 800.
"There is very visible change in approach of management to deliver profit", the broking firm had noted at the time.
Macquarie was among the first firms to initiate coverage on One 97 Communications with an "underperform" rating. Its initial target on the stock was Rs 1,200 against an issue price of Rs 2,150.
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