Why Paytm shares are in freefall

Hamsini Karthik |BL Research Bureau | Updated on: Mar 21, 2022

RBI curbs come just at a time when the bank is said to be exploring SFB license

The worst has probably happened for One97 Communications - holding company of Paytm. Down another 23 per cent week-over-week, at ₹597 apiece, shares of Paytm once again hit a fresh all-time low reacting very negatively to the curbs imposed by the Reserve Bank of India on its operations. On March 11 (post market closing), RBI directed Paytm Payments Bank (an associate company of One97) to stop onboarding of new customers.

The bank was also directed to appoint an IT audit firm for a comprehensive audit of its system. As the RBI directive came to force with immediate effect, Paytm Payments Bank will be able to onboard customers only upon specific clearance from the regulator. Since the move is based on material supervisory concerns, it sent chills to investors.

One of the key factors which impressed investors, especially the institutions, to buy into Paytm IPO was the possible elevation of its payments bank into a small finance bank (SFB) and eventually a full-fledged outfit. RBI curbs come just at a time when the bank is said to be exploring SFB license as it would complete five years of operations as a payments bank in June 2022. This has put the future of its payments bank on limbo. If Paytm doesn’t elevate to the next level, it may continue to be a distributor of banking products and remain dependent on fee income to grow its revenues instead of higher share of interest income if it turns into a bank. Being a technology led entity, RBI’s ban has sparked concerns around its processes particularly data storage and the scalability of the payments bank.

During its IPO, One97’s 12-months trailing price-to-sales ratio stood at 46 times, which has melted to 26 times FY23 estimated price-to-sales. Yet, seen against global benchmark (0.3 – 0.5 times price-to-sales), One97 shares remain expensive. With issues around scalability and earnings potential, downside risk is elevated.

Published on March 19, 2022
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