JM Financial downgrades Paytm stock to sell amidst RBI restrictions

A day after the Reserve Bank of India (RBI) imposed restrictions on Paytm Payments Bank Limited, an associate company of One 97 Communications (OCL), investment banking firm JM Financial has downgraded the Paytm stock to sell. 

“Given the adverse developments, we downgrade the stock to sell with TP (take profit) of 590,” the report noted.

Paytm crashed 20% in early trade on Thursday. The Paytm stock initiated trading with a lower circuit at Rs 609 per share on the National Stock Exchange in comparison to the closing price of Rs 761.40 in the preceding session.

The RBI imposed restrictions that no further deposits or credit transactions or top-ups shall be allowed in any customer accounts, prepaid instruments, wallets, FASTags, NCMC cards, etc. after February 29, 2024, other than any interest, cashbacks, or refunds which may be credited anytime.

However, withdrawal or utilisation of existing balance is allowed without any restrictions, up to their available balance. 

In a report, the Indian investment banking firm highlighted that the overall combined impact of wallet and FASTag could be ~10% of gross merchandise value (GMV).

“Though profitability impact could be higher as wallet use cases tend to be higher yielding,” the report said.

“Wallet GMV is ~5% of the GMV of Paytm. In addition, FASTag could be another use case, which is likely to be impacted where industry run rate is at Rs 50 bn/month by value and Paytm is the 3rd largest player,” JM Financial explained.

The RBI order also noted that the nodal accounts of One97 Communications and Paytm Payments Services are to be terminated at the earliest, before February 29, 2024.

“If all nodal accounts of OCL are shut, it implies significant slowdown in payment throughput,” the report said.

OCL said it will pursue partnerships with various other banks to offer payment products to its customers. 

OCL also clarified that other financial services such as loan distribution, insurance distribution, and equity broking are not in any way related to Paytm Payments Bank Limited, and they are expected to be unaffected by the RBI directive.

“Depending on the nature of the resolution, the company expects this action to have a worst case impact of Rs. 300 to 500 crore on its annual EBITDA going forward. However, the company expects to continue on its trajectory to improve its profitability,” OCL said in a statement.

“In response to market rumours, our founder has reconfirmed to us that he has not taken any margin loans, or otherwise pledged any shares that are directly or indirectly owned by him,” it added.