What’s Up With Paytm Stock As RBI Repeals Unicorn’s Horn

One of the first unicorns of the Indian startup ecosystem, Paytm, which operates under the umbrella brand One97 Communication, was hit by an unexpected whip from the country’s central bank, Reserve Bank of India (RBI), on 31 January. In its public issue, RBI directed Paytm Payment Banks (PPB) to cease its operation after 29 February, citing compliance issues.

What’s Up
The RBI has restricted PPB from taking any further deposits or credit transactions. “No top ups shall be allowed in any customer accounts, prepaid instruments, wallets, FASTags, NCMC cards, etc. after 29 February 2024, other than any interest, cashbacks, or refunds which may be credited anytime,” the central bank stated.  

Thousands of KYCs on a single identity were found, Paytm's ambition to increase financial inclusion in remote parts of the country at such a scale, created apprehensions for the Central Bank.

Stock Stumbles
RBI whip resulted in the heinous treatment of the Paytm stock in the Indian stock market. The central bank’s declaration wreaked havoc as two consecutive lower circuits of 20 per cent welcomed the stock on the Indian bourses on 1 February and 2 February respectively. 

Subsequently, the circuit was reduced to 10 per cent, a level achieved on 5 February. The stock took a breather due to a 0.8 per cent block deal by the global brokerage firm, Morgan Stanley; however, it tanked again in the latter sessions.

The RBI action resulted in nearly a 55 per cent loss for the stock in its 10 choppy trading sessions. The initial public offering (IPO), priced at Rs 2150 per share with a market value of Rs 18,300 crore, currently trades with an almost 84 per cent loss at Rs 344 on the National Stock Exchange (NSE).

Before RBI action the stock was also dumped by Warren Buffet backed Berkshire Hathaway, Alibaba and SoftBank. Navneet Govil, Managing Partner, Chief Financial Officer, SoftBank Vision Fund said, “ We felt it was prudent to start monetising. We’re glad we did a good portion of Paytm before the recent stock correction.” 

Analysts Note
“As of now many mutual funds, and institutional investors and individuals own a part of it and such a big drop in prices probably means some serious problem in the business model which has to be addressed by Paytm management as soon as possible. Hence there is ‘No rush to buy the dips’ as an opportunity and we recommend a wait and watch approach for better lower levels to take risk,” recommended Prashanth Tapse, Senior VP Research (Research Analyst) Mehta Equities.

From a technical perspective, Paytm is trading below its support zone of Rs 438 to 450. The overall technical structure indicates a downtrend to continue in the stock. Major support now lies at Rs 395 on a closing basis below which the stock can drift down further towards Rs 350 and 300 odd levels. Immediate Resistance is at the Rs 528 mark and as the stock continues to remain in a downtrend, we expect it to drift down further towards lower levels, added Tapse.

The firm needs to strengthen its position and operations on many fronts which includes market sentiments, investor relations and regulatory reforms. The further actions would determine the firm’s position in the fintech space.  

“On the business front, the company could survive without the payments bank licence, relying on third-party banks will impact business performance and a loss of control. The digital vendor's profitability path might get stretched, and the stock might only find a few buyers until it can show a clear path for growth ahead and do away with all the negative sentiment. Investors should be careful with the stock and not be tempted to buy at a bargain till they understand the future outlook,” suggested Sonam Srivastava, Founder and Fund Manager, Wright Research.

Company’s Measure
Vijay Shekhar Sharma, CEO of Paytm, has made multiple attempts to resolve matters. The interaction with Finance Minister Nirmala Sitharaman and RBI failed to mitigate the crisis. Sharma also declined to provide any information about the 'compliance issues' cited by RBI.

In its conference call, the company expected a loss of Rs 300 to Rs 500 crore on EBITDA. It also shared the cumbersome exercise the firm has to undergo: 'Now that QR has a VPA (Virtual Payment Admin) of the Paytm Payment Bank, the QRs will have to be changed, and the VPA will have to be changed to any other sponsor bank. We have multiple sponsor banks working with us,' said the company.

During this crisis, certain rumors emerged, namely Reliance acquiring Paytm’s digital wallet business and the firm’s independent director, Manju Agarwal, resigning from the board after the RBI restrictions. The former has been clarified by the firm; however, the latter turned out to be true, as stated in the exchange.

In its latest exchange filing, the company said, 'The Board announces the formation of a Group Advisory Committee chaired by former SEBI Chairman M. Damodaran to work with the Board in further strengthening compliance and regulatory matters.' The committee also includes veteran professionals like M.M. Chitale, R. Ramachandran, and Meleveetil Damodaran.

Subsequently, the stock initially traded 2.54 per cent higher at Rs 430. However, it could not retain the gains and settled at Rs 422 on the National Stock Exchange (NSE). In subsequent trading sessions, the stock continued to plunge and currently trades at Rs 341 after multiple ups and downs.