Jefferies, a major foreign brokerage, has taken a significant step by discontinuing coverage on Paytm-operator One 97 Communications Ltd., marking the first time a major brokerage has done so in response to the ongoing regulatory challenges faced by the Indian fintech giant.
The investment bank has shifted the stock to a “not rated” status, following its previous downgrade to underperform after the Reserve Bank of India (RBI) ordered Paytm Payments Bank to suspend key operations due to non-compliance.
“Without a banking license, Paytm’s business model will now become similar to pure payment service providers like PhonePe, GPay, Pine Labs, etc. Paytm’s focus will now move to ensure customer/merchant retention, and we believe it will dip into its Rs 8,500 crore cash reserves for spending on retaining users,” stated Jefferies in its note.
The RBI recently granted Paytm an extension until March 15 to wind down much of its business, following the earlier order to stop accepting new deposits from February 29.
“In case of no incremental regulatory clampdown, there could be multiple scenarios for the business depending on user/merchant retention. We see positive and negative risks arising from user/merchant retention, revenue traction, and cost-controls. On the basis of merchant/user attrition to the tune of 10-30 percent and a hit to net revenues (adj. for payments interchange) of 20-45 percent, valuation could vary widely. News on regulatory actions on other pending issues is still incoming,” further noted Jefferies.
Paytm, in a bid to navigate the regulatory challenges, has partnered with Axis Bank to replace affiliate Paytm Payments Bank, allowing it to continue merchant payments settlement operations and attempt to sustain its business.
