Why Paytm crashed to yet another record low and what analysts are saying

Paytm chief Vijay Shekhar Sharma’s troubles don’t seem to be ending, as is evident from two separate and unrelated news developments that came to light over the weekend.

First, local media reported that Sharma was briefly arrested in February after he hit the car of a senior police official in Delhi, before being granted bail. Second, the Reserve Bank of India late on Friday barred Paytm Payments Bank from onboarding new customers until it completes a comprehensive audit of its information technology system.

The second development, in particular, worried Paytm’s investors as its stock price crashed as much as 13% to touch a new low of Rs 672.10 apiece on the BSE, before slightly paring the losses. This means Paytm’s shares are now worth less than a third of their initial public offering price of Rs 2,150. As a result, the company’s market valuation is now around Rs 45,300 crore, or about $5.9 billion, compared with more than $18 billion it sought in the IPO.

So, what has gone wrong now?

The RBI has banned Paytm Payments Bank from getting new customers on board until it undertakes a comprehensive audit of its information technology system. The central bank the action was based on certain “material supervisory concerns".

The RBI also said that onboarding of new customers by Paytm Payments Bank will be subject to specific permission to be granted by the central bank after reviewing the report of the information technology auditors.

But why is it worrying Paytm’s stock market investors?

One97 Communications, the publicly listed company that operates under the flagship Paytm brand, holds a 49% stake in Paytm Payments Bank while founder Sharma owns 51%. This means any impact on the payments bank would also have affect the listed company. 

Paytm Payments Bank started in 2017 after getting a licence in 2015. It aimed to convert Paytm’s digital wallet customers without access to the formal banking sector open bank accounts.

Paytm also had ambitions to expand its banking services and had been planning to seek a licence to covert the payments bank into a small finance bank. But the latest RBI action means that’s unlikely to happen anytime soon.

How has Paytm responded to the RBI action?

Paytm Payments Bank in a tweet said that it was taking all required steps to comply with the RBI orders and sought to assure its existing users. “Our existing customers can continue to seamlessly use all our banking services,” it said.

What are analysts saying about the RBI move and its possible impact?

Some analysts expect the RBI’s decision to make a significant impact on Paytm’s brand and customer loyalty. Analysts also say Paytm would have to increase engagement with its existing user base to offset the adverse impact of the ban on adding new users.

ICICI Securities has also cut its target price on Paytm stock, to Rs 1,285 from Rs 1,352 due to the difficulties in adding new users and its impact on revenue growth.

Brokerage firm Macquarie, which has been bearing on Paytm ever since the IPO, has for now maintained its target price of Rs 700 with an ‘underperform’ rating.

However, Morgan Stanley has downgraded Paytm to ‘equal weight’ from ‘overweight’ and reduced its price target to Rs 935 from Rs 1,425. Interestingly, Morgan Stanley was one of the bankers to the Paytm IPO.

Paytm had mopped up Rs 18,300 crore in India’s biggest IPO till date. The stock plunged 27% on its debut and has been falling ever since.