Is there any value remaining in Paytm’s stock?
After the latest developments, revenue growth is likely to decelerate, margins may come under pressure and losses can widen.
The Reserve Bank of India (RBI) released a list of frequently asked questions (FAQs) on Friday last week about the business restrictions imposed on Paytm Payments Bank.
While the FAQs addresses the concerns of the bank’s customers, the regulator hasn’t given any leeway to Paytm (CMP: Rs 342; Mcap: Rs 21,690 crore) except extending the previous deadline of February 29 to March 15.
Effectively, RBI granted 15 more days to Paytm. After this, the payments bank effectively ceases to operate, losing its deposit franchise, ability to issue FASTag and national common mobility cards or NCMCs—popular offerings that drove traffic on Paytm app.
Paytm will also lose its wallet business which has been the company’s key business. With 63 crore PPI (pre-paid instrument) wallets, as of December 2023, Paytm operated around 44 percent of the total PPI wallets in the country. Around 78 percent of all funds transferred via wallets and 57 percent of all goods and services purchased through wallets are from Paytm, as per RBI data.
However, Paytm has reassured that its mobile app, including the QR code, Soundbox and Card Machine will remain operational even after March 15. A change in the nodal account (from Paytm Payments Bank to Axis Bank) is expected to allow merchants to continue accepting digital payments through the Paytm QR code or card machine.
So now, the big question for investors: how to value Paytm?
A large part of Paytm’s valuation (Rs 139,000 crore) at the time of the IPO was drawn from the option value as it could apply for a small finance bank (SFB) licence after five years of operations of the payments bank that was launched in 2017.
But the option value declined over a period with a rise in regulatory actions against Paytm since March 2022. Now, after the RBI’s latest diktat, the option value has become zero.
But then, Paytm has the largest payment ecosystem in the country, with 10 crore monthly transacting users, 3.9 crore registered merchants and a gross merchandise value (GMV) of Rs 5.1 lakh crore, as at end of December. How much value can be ascribed to this?
The payment processing business, which is the bread and butter for Paytm, is a thin- margin business in a highly competitive set-up. Now, with Axis Bank coming into the picture, the margins in the payment business (7-9 bps) may decline further. Surely, Paytm enjoys the market-leading position in the payments business but its effort to monetise the payment ecosystem has met with limited success.
The financial services business, which generated 21 percent of the company’s revenue in the last quarter (Q3FY24), has been a value creator. The scaling-up of the financial services business helped in reducing losses in recent years. But now, Paytm’s loan distribution business is also facing headwinds. The RBI’s move to increase the risk-weights on unsecured loans of banks and NBFCs will put a brake on the runaway growth seen by Paytm in loans disbursement and will put a downward pressure on the fees earned from partners (banks/NBFCs).
All this means revenue growth will decelerate, margins will come under pressure and losses will only widen. At the current market price of Rs 342 per share, Paytm is trading at 2.7 times revenue estimated for FY25. Now, this isn’t a cheap valuation for a company which has no profit in sight.
Well, Paytm has around Rs 8,900 crore cash on books, as of December-end, which is around Rs 140 per share. But that may not be enough to salvage the company from reputational and business risks by pivoting into new growth areas.
Remember, Paytm pumped crores into becoming India’s payments leader. It had raised around Rs 18,600 crore till FY21 to fund its losses, capex and business operations and then raised Rs 8,300 crore of fresh capital through an IPO in November 2021.
Also, the higher interest rates globally and reduced liquidity has changed the world for technology startups and loss-making growth stocks, globally. The funding environment has not only led to a sobering of valuation in private markets but has also nudged investors about the right valuation metrics to be used for valuing publicly listed tech startups.
So, while Paytm’s valuation may look attractive based on revenue multiples, GMV multiples, user base multiples, the valuation has ‘reset’ on the basis of cash flows/profits, considering the environment.
Simply put, while the valuation has fallen significantly, business uncertainties have increased manifold, and the company has faltered miserably on corporate governance standards. There is a long list of business concerns that includes ambiguity of the business model, heightened competition, execution challenges, and last, but the most significant of all, regulatory risks.
With heightened business uncertainty and no profitability in sight, is difficult to turn decisively positive on the stock. Long-term investors should avoid catching this falling knife.
Bymoneycontrol
