Why is Macquarie bearish on Paytm and why are MFs dumping the stock?

One97 Communications Ltd, which operates digital payments platform Paytm, fell to its lowest level since its listing two months ago as investors dumped its shares anticipating more pain in the future.

Paytm’s shares were quoting at Rs 1,169.90 apiece in the afternoon trade on Monday, down 5% from the previous close. Earlier in the day, the stock slipped to its lowest level of Rs 1,165.20 apiece – a discount of 46% compared with its listing price of Rs 2,150 apiece mid-November.

More than 3.2 million shares exchanged hands on the BSE and NSE compared with the average daily volume of 2 million shares in the previous one month.

The shares received a fresh blow on Monday after Australian investment bank Macquarie slashed its earnings projections and predicted higher losses between FY22 and FY26.

The bank expects lower revenue for Paytm, higher employee costs and higher expenses for software and cloud services.

“There is competition for tech talent, and we see pressure on employee expenses to remain,” said Suresh Ganapathy, Macquarie Capital Securities’ Associate Director (research).

“Since we value on a price-to-sales growth (PSg) basis, using our 0.5x PSg target multiple methodology, we now arrive at a price to sales multiple of 11.5x versus 13.5x earlier, thereby resulting in a lower target price to Rs 900 (earlier Rs 1,200),” he added.

The new target price is nearly 25% discount to the current market price.

Macquarie listed several challenges that Paytm will have to face.

Regulatory challenges

Macquarie said the RBI’s proposed digital payments regulations could cap wallet charges. The payments business forms 70% of overall gross revenue for Paytm, and hence any regulations capping charges could hurt the company.

Add to that, Paytm’s foray into insurance was recently rejected by the insurance regulator IRDA. This may impact Paytm’s prospects of getting a banking licence.

Business challenges

Senior executives have been resigning from the company, Macquarie said, adding that this is a cause of concern and could impact business in its view if the current rate of attrition continues.

In the past 12 months, Paytm’s average ticket size for loans disbursed by it has been consistently coming down and stands below Rs 5,000. At this size, it may not be doing many merchant loans and most of the loans remain small value BNPL (buy now, pay later) loans. Hence, the eventual distribution fees realised by Paytm are likely to be much lower than Macquarie’s earlier estimates.

Sellers only

Last month, HDFC Mutual Fund’s Mid-Cap Opportunities Fund, which was among many of Paytm’s anchor investors during the IPO, sold its entire holding. The fund took a huge haircut, as per its monthly portfolio data released last month. HDFC MF’s another scheme – the Balanced Advantage Fund – also trimmed its exposure by 91%.

Macquarie previously assigned an ‘underperform’ rating on Paytm while JM Financial has a ‘sell’ rating on the stock.