Paytm stock crashes 11% to end at all-time low of Rs 477 a share

Macquarie report says the fintech firm could face headwinds with the entry of Jio Financial Services, which may focus on consumer and merchant lending, the mainstay of Paytm's business

Shares of Paytm crashed 11 per cent to finish at their all-time low of Rs 477 on Tuesday. The stock was already under selling pressure following the end of one-year lock-in period for pre-IPO investors. This was further exacerbated by a Macquarie report that said the fintech firm could potentially face headwinds with the entry of Jio Financial Services (JFS), which will likely focus on consumer and merchant lending, the mainstay of Paytm's business. 

At the last close, Paytm was valued at Rs 30,971 crore. In the IPO, it had sought valuations of Rs 1.39 trillion. The stock is now down 79 per cent from its IPO price of Rs 2,150, and has come off nearly 27 per cent this month. Last week, global tech investor SoftBank sold 4.5 per cent stake in Paytm at Rs 555.67 a share to mop up Rs 1,631 crore.

“While it is too early to take understand the exact customer segments and target markets that Jio Financial plans to cater to, it seems clear that it will be focused on consumer and merchant lending, which is the mainstay of NBFCs like Bajaj Finance and fintechs like Paytm,” Macquarie said in its report. “Among NBFCs/fintech, Bajaj Finance and Paytm could be the most at risk,” the report said.

According to the report, JFS owned by Reliance Industries and set for demerger and listing, could become India’s fifth largest financial services firm in terms of networth, which will give it significant headroom to expand its balance sheet.  

HDFC Bank, State Bank of India, ICICI Bank, and Axis Bank are the four top companies in the business.

“Assuming 6.1 per cent stake in Reliance Industries Ltd realised over time, with a Rs one trillion net worth JFS could be the fifth largest financial services firm in the country,” said Suresh Ganapathy, Aditya Suresh, and Param Subramanian in the report.

“This shows the ammunition it has to scale up its lending, insurance, broking and many other verticals that it desires to achieve”.

The report has not assumed any haircut Reliance India Ltd (RIL) shares and assumed the entire holding is taken as networth. “We assume that JFS eventually would dispose off the stake in RIL to meet regulatory capital norms and shore up the balance sheet. As per RBI rules and regulations, MTM gains cannot be taken as a part of capital adequacy calculations. Also, any investments in associates will have to be deducted from Tier-1 capital to arrive at capital ratios. Hence, JFS has to book gains from stake sale and shore up the capital base”, the report said.

Reliance, in its Q2 earnings last month, said it will demerge its financial services business to create a new entity that will be listed on the exchanges. They have laid out plans, wherein, JFS will acquire liquid assets to provide adequate regulatory capital for lending. It will incubate financial services verticals such as insurance, payments, digital broking, and asset management for at least the next three years. The regulatory licenses for key businesses are in place, said Reliance Industries. JFS and its subsidiaries plan to launch a consumer- and merchant-lending business based on proprietary data analytics to complement the traditional credit bureau-based underwriting.

The Macquarie Research report said that JFS will perhaps not be able to secure a banking licence as the regulator is averse to allowing corporate groups. Reliance already has a Non-Banking Financial Company (NBFC) licence, so JFS can leverage that for consumer and merchant lending.

With the insurance regulator being open to give licences, the company can get into manufacturing in insurance verticals. JFS could also explore the inorganic route to get scale and strength.

“With RIL (Reliance) group as the main sponsoring entity, JFS will also likely be AAA rated entity which can borrow at attractive rates like the rates at which LIC housing finance borrows. JFS can not only offer attractive rates in the merchant lending and digital unsecured lending market, but they could also be reasonably competitive in the secured lending market eventually in our view”, the report said.

“With a network of more than 15,000 stores across several formats (supermarket, digital stores etc) and a vast customer base of 400mn+ in telecom and 200 million-plus in retail (there could be overlaps here), JFS can leverage on network effects and in concept be a formidable threat for incumbents especially NBFCs and Fintechs in our view”, the report said.

Earlier this month, Reliance appointed veteran banker K V Kamath as an independent director and non-executive chairman of Reliance Strategic Investments Ltd (RISL), which will be renamed as Jio Financial Services. Kamath will continue as independent director and non-executive chairman of JFS upon consummation of the scheme and the company’s listing.