RBI curbs on Patym to have major impact but valuation remains attractive

The recent Reserve Bank of India (RBI) diktat gives Paytm Payments Bank (PPBL) time till February 29 to wind down its operations. This will have a substantial impact on One97 Communications (OCL), which is the listed Paytm entity. The stock has taken a hammering with two successive lower circuits.

The fintech firm said it will compensate by expanding existing relationships with third-party banks to distribute payments, financial services and products.

The Paytm app and its services will remain operational. There will be no impact on user deposits in savings.

The RBI directives won't affect Paytm Money (PML) operations or customers' investments in equity, mutual funds, or NPS.

PML is Sebi-regulated and fully compliant.

Paytm’s other financial services such as loan distribution, and insurance distribution are not related to PPBL, and are unaffected.

The Paytm Payment Gateway business (online merchants) will continue to offer payment solutions to existing merchants.

Paytm’s offline merchant payment network offerings like Paytm QR, Paytm Soundbox, Paytm Card Machine, will continue, and can onboard new offline merchants as well.

The filing also said Paytm’s offline merchant payment network offerings like Paytm QR, Paytm Soundbox, Paytm Card Machine, will continue as usual. Mobile recharges, subscriptions and other recurring payments will continue to operate.

Yet, there is a significant impact.

The payment bank houses all 330 million-plus wallet accounts. Since the current MTU (monthly transacting users) is 100 million, Paytm could continue leveraging PBPLs customer base for selling payments and financial products.

Existing customers are prohibited from carrying out basic banking operations like credit, deposits, fund transfers, UPI transactions, FASTag toll payments (Paytm has 17 per cent market share and about 60 million users), bill payments, and use wallets.

The restrictions on PPBL will make it hard for OCL to retain customers and it will find it hard to sell products.

Revenue implications are significant. OCL will find it hard to negotiate favourable terms in the circumstances. The business will experience disruption in Q4FY24 for sure.

About 10-15 per cent of PPBL merchants will need to shift their settlement accounts to other banks.

On the customer side, less than 15 per cent of those with mandates through PPBL must transfer mandates to other partner banks.

Paytm is currently in discussions with three banks to shift nodal accounts.

It has also initiated discussions with NPCI to migrate to other bank accounts.

Given the 40 million merchants, the company awaits feedback from NPCI and RBI to begin the migration process.

The company stated the regulatory measures may have an annual impact of Rs 300-500 crore on its Adjusted Ebitda (post Esops) in the worst-case scenario.

QR codes will remain functional, with only the settlement account transitioning for merchants. Since the existing PPI license for wallets belongs to PPBL, Paytm will offer wallet services through other banks. In the UPI incentive, which the company usually receives in Q4, OCL expects an impact of 5-10 per cent due to change in payment bank.

The Wallet is not significant in terms of GMV (gross merchandise value), where UPI share is 75 per cent and Credit card is 15 per cent. A no-data-sharing agreement was already in place between OCL and PPBL.

The RBI ban lengthens the timeline to profitability.

Investors must make a call on valuations with the stock price down to Rs 487. According to Bloomberg, only 2 out of 9 analysts polled over Thursday-Friday have a buy rating, another 2 are neutral/equal weight, and 5 have a sell/underweight/underperform rating.

However, their average target price is Rs 638.33, which means there could be an upside for the long-term investor.