On Wednesday, the Reserve Bank of India (RBI) barred Paytm Payments Bank from offering all forms of basic banking services and accepting deposits from end-February. It also asked Paytm and Paytm Payments Services, its payment gateway business, to terminate their nodal accounts with the bank.
According to Macquarie, the restrictions imposed on PPBL will significantly hamper Paytm’s ability to retain customers in its ecosystem and restrict it from selling payment and loan products. The move is expected to have direct significant implications on revenue and profitability of the firm, it said.
“We do not see any near term solution to these problems and this effectively means, in our view, that RBI is indirectly revoking the PPI (prepaid payment instrument) licence of Paytm … The bigger issue is Paytm has not been on the good books of the regulator and going forward, their lending partners also could possibly re-look at the relationships in our view,” said Macquarie.
Earlier in March 2022, the RBI had asked PPBL to stop onboarding new customers. The same year, in November, the regulator returned subsidiary Paytm Payments Services’ application for a payment aggregator licence and asked it to stop onboarding new merchants.
In December last year, Paytm said it will be scaling down its sub-Rs 50,000 loans vertical, with the regulator increasing risk weightages on unsecured consumer lending.
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“RBI’s actions directly impact the wallet business and profitability of merchant payments business, which can impact Ebitda (earnings before interest, taxes, depreciation and amortisation) by 20-30%. We see the impact being much larger due to reputational concerns around the group,” said Jefferies in its analyst commentary. “Lending business (roughly 20% of revenues) can be significantly hit if lending partners cut back or limit their exposure. These drive us to cut FY25-26 Ebitda estimates by 45%, which will also delay profitability,” the investment banking firm added.
Earnings impact
Jefferies has pegged Paytm’s compound annual growth rate (CAGR) at roughly 16% over FY24-FY26. With contribution margins expected to contract, it expects Paytm to turn profitable by FY26-end.
In a late night filing on Wednesday, Paytm said it expects a hit of around Rs 300-500 crore on its annual Ebitda after RBI ordered PPBL to halt its banking business from March 1.
The impact is largely felt on scaling down of its wallet business, and temporary pause of lending operations.
“Our key concern, unlike previous directives, is that the RBI has not, so far, made any comments around potential steps towards a resolution, suggesting to us that the directive could stay in place for the foreseeable future,” said Goldman Sachs in its brokerage report on the matter.
Morgan Stanley on the other end increased its bear-case weightage on Paytm’s share price. The investment banking company said it is likely to keep a close eye on the economics emerging for Paytm in the new environment, as it looks for new partners for its wallet and Unified Payments Interface (UPI) business lines.
“We believe the above measures imply potential scaling down of the wallet fastags business in the near term and will hurt payment revenues materially. Further, the convenience fees earned on wallet top-ups via cards will also move to zero in the near term,” said Morgan Stanley in its analyst report.