Jefferies discontinues rating on Paytm amid regulatory challenges, revenue concerns

Jefferies India has discontinued its rating on Paytm until the “news flow settles down” around the Indian fintech major that has been hit by regulatory action by the Reserve Bank of India.

The brokerage said it has moved to ‘not rated’ from underperform and now see a 28% year on year decline in FY25E revenues that pushes Paytm into cash burns.

Read: Paytm gains 5% on partnership with Axis Bank, RBI’s deadline extension

The reason for cutting revenue was as factoring direct and indirect impact after RBI’s FAQs reiterate wind-up of PPBL’s business (deposit A/Cs, wallets etc), but platforms outside PPBL (PAYTM app, UPI transfers, merchant payment & loan originations) can continue.

“Still, +ve & -ve risks arise from user/merchant retention, revenue traction & cost-controls,” Jefferies said in a recent note.

“In case of no incremental regulatory clampdown, there could be multiple scenarios for the business depending on user/merchant retention. We see +ve & -ve risks arising from user/merchant retention, revenue traction and cost-controls. On the basis of merchant/user attrition to the tune of 10-30% and a hit to net revenues (adj. for payments interchange) of 20-45%, valuation could vary widely. News on regulatory actions on other pending issues is still incoming” it said.

RBI extended PPBL account usage by 15 days but offered no relief for wallet/FASTag transition to a buyer. This eliminates the option for a sale/transfer, signaling the closure of the wallet business (including FASTags) and impacting FY25E EBITDA by around 20%, Jefferies said.

RBI confirmed that merchants (around 80% as per management) using Paytm QR/Soundbox linked to another bank account can continue beyond March 15, 2024, addressing concerns of merchant/customer leakage.

Read: What the RBI FAQs mean for Paytm and its users: Said and Unsaid

While Paytm has shifted its nodal account from PPBL to Axis Bank, the move makes its business model similar to that offered by pure payment service providers like PhonePe, GPay, Pine Labs, etc.

Jefferies said Paytm’s shifts focus to retain customers and merchants could lead to it using its Rs 8500 crore cash reserves. Customer retention may involve increased cashbacks/discounts (Rs400 crore in FY24E), while merchants using Paytm devices could receive discounts or free usage on monthly subscription rentals (Rs1200 crore income in FY24E).

Jefferies further said regulatory actions are unfolding, awaiting clarity on two key issues: RBI’s stance on the transition method for VPA handling of Paytm users and the outcome of Enforcement Directorate investigations. In the medium term, government approval for the payment aggregator license to subsidiary PPSL will be crucial, it added.

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