This Warren Buffett-owned Indian stock has been a wealth destroyer

In September 2018, Buffet's investment arm - BH International Holdings - invested $300 million, or Rs 2,179 crore, for 2.6 per cent stake in PayTM, which had valued the start-up at $10 billion then.

Things have gone south for PayTM ever since it listed at the bourses in November 2021 with its stock crashing around 71 per cent from its issue price. And if analysts are to be believed, there is more pain ahead and caution investor’s should not use the fall to bottom-fish in this counter.

In a recent note on the company, Macquarie has slashed PayTM’s target price to Rs 450 (36 per cent lower from where it trades currently on the BSE) from Rs 700 earlier.

“With the RBI recently raising issues with PayTM payments bank and Chinese ownership being over 25 per cent, the probability of PayTM getting a banking license is significantly lower now, thereby impeding its ability to lend. Given this, and competition from other fintechs in the payments space, we're skeptical about PayTM’s longer-term ability to generate free cash flow,” wrote wrote Suresh Ganapathy and Param Subramanian of Macquarie in their latest note on the company.

PSG-based valuations

The other regulatory headwinds, Macquarie said, include the digital payments paper potentially capping wallet charges and tougher BNPL and know your customer (KYC) regulations.

Warren Buffett's Berkshire Hathaway (BH International Holdings) was one of the early investors in Vijay Shekhar Sharma-controlled PayTM. In September 2018, Buffet’s investment arm – BH International Holdings – had invested $300 million, or Rs 2,179 crore, for 2.6 per cent stake in PayTM, which had valued the start-up at $10 billion then.



According to the latest shareholding data, BH International Holdings held 1.56 crore, or 2.41 per cent stake, in PayTM as of December 31, 2021.

RBI’s tap on the knuckles

Recently, the Reserve Bank of India (RBI) had barred PayTM Payments Bank (PPBL) from onboarding new customers with immediate effect due to certain supervisory concerns. The banking regulator had directed PayTM PB to appoint an IT audit firm for conducting a comprehensive system audit of its IT system. That apart, PayTM PB would need specific permission from the RBI to restart the onboarding of customers following a review of the audit.

On its part, PayTM has said it was taking immediate steps to comply with RBI directions, and was looking to appoint a reputed external auditor to conduct a comprehensive systems audit of its IT systems.

 

“RBI’s regulations on digital payments and BNPL, and stricter KYC and compliance norms will all be adverse developments for fintech companies in general, potentially bringing down unit economics and/or growth, in our view. We see these as additional headwinds for PayTM, which could cloud its path towards profitability,” Macquarie said.

Valuation is another sore point. When Macquarie had initiated on PayTM, fintechs globally traded at 0.3x-0.5x PSg (price to sales growth ratio), which now has dipped to 0.07x-0.35x. “Our benchmark valuation for PayTM has been the valuation of global fintechs. As a result, we now value it at 0.2x PSg vs the 0.35x PSg used earlier, thereby arriving at a fair price of Rs 450. We haven’t changed our earnings or revenue estimates for PayTM,” Ganapathy and Subramanian wrote. VIEW PEER VALUATIONS

Twitter: @Pun_ditry