Why Paytm Share Price is Falling

Sometimes, stocks get ahead of themselves.

Why? Maybe because of great expectations.

In these cases, investors get head over heels, looking at the bright future growth prospects without considering the second order thinking and what could go wrong "in the moment".

In early trade on 1 February 2024 (also the D-day when Budget 2024 will be presented), one of the biggest and most popular names in fintech space - Paytm crashed 20%.

Shares of the company fell to Rs 609, nearing its 52-week low of Rs 516 touched in February last year.

Is February really such a bad month for Paytm?

And why did shares crash 20% today?

Let's find out...

RBI Imposes Restrictions on Paytm Payments Bank

The Reserve Bank of India (RBI) on 31 January 2024 imposed major business restrictions on Paytm Payments Bank.

These restrictions include a ban on accepting fresh deposits and making credit transactions.

So effective 29 February 2024, Paytm Payments Bank will not be allowed to accept fresh deposits, undertake credit transactions, or top-ups in any customer accounts. This also includes prepaid instruments, wallets, FASTags, and NCMC cards, among others.

Note that RBI's action comes after the bank came under non-compliance and supervisory concerns.

In March 2022, the central bank had barred Paytm Payments Bank from onboarding new customers.

Following the latest restrictions, top brokerage houses have voiced serious concerns and suggest that this will significantly impact operations.

Just to put things into context, RBI had put a ban on HDFC Bank too some 2 years ago and it took over 15 months for the central bank to lift the ban. So now you be the judge and imagine how long it will take this time... RBI has conducted a comprehensive IT audit and continued to identify non-compliance against Paytm Payments Bank.

What Next?

One97 Communications Ltd, the parent company of Paytm expects a "worst case impact" of Rs 3 bn to Rs 5 bn on its annual EBITDA going forward after the RBI's latest directives on Paytm Payments Bank.

The company was quick enough to release this statement early morning today and give clarity to investors.

It also added that despite this hit, Paytm will continue on its trajectory to improve its profitability.

It recently reported Q3 numbers where EBITDA came in at Rs 2.2 bn while net loss narrowed to Rs 2.2 bn from Rs 3.9 bn.

Paytm also said that it will work with other banks and not with Paytm Payments Bank and that the next phase of its journey is to continue to expand its payments and financial services business, "only in partnerships with other banks."

The company has also clarified that founder Vijay Shekhar Sharma has not taken any margin loans or pledged any shares directly or indirectly owned by him.

In November last year, Warren Buffett offloaded his stake in Paytm via a large block deal.

Berkshire Hathaway sold 15.6 million shares or 2.5% of equity worth nearly Rs 13.7 billion (bn) at a share price of Rs 877.29.

Buffett had picked up a 2.6% stake in Paytm in 2018, putting nearly Rs 22 bn. During the Paytm IPO, Berkshire Hathaway sold shares worth Rs 2.2 bn.

As luck would have it, the investing legend completely exited Paytm with almost a 40% loss and did not have to worry about today's crash.

Note that Paytm is currently in a tough spot as several other multinational investment giants such as SoftBank and Antfin have also been offloading their stake since 2022.

This could be due to a combination of the environment getting tougher for private equity (PE) firms as well as the valuations that are available in the market today.

If a lot of experts are to be believed, the era of ultra-low interest rates seems to be behind us. With interest rates likely to stay structurally higher, the PE firms need to turn more judicious with respect to the deals they enter.

While all the forecast is grim for Paytm, the company recently said that it's seeing encouraging trends for credit card on UPI. It expects net payment margins to improve from UPI business.

Out take on Paytm? If you don't have the stock in your portfolio, it makes sense to track the fundamentals closely. Decide only after you are sufficiently convinced the company is not only on the path to profitable growth and positive cash flow, but also has a strong, long term competitive advantage.

How Paytm Share Price has Performed Recently

In early trade today, shares of Paytm crashed 20% to hit a low of Rs 516.

In the past one year, shares of the company are up 17%.

Paytm has a 52-week high of Rs 998 touched on 20 October 2023 and a 52-week low of Rs 516 touched on 1 February 2023.

About Paytm

Paytm is India's leading financial services company that offers payments and financial solutions to consumers.

It's an Indian-based mobile internet company and a subsidiary of One97 Communications Limited.

For more details about the company, you can have a look at Paytm's factsheet and quarterly result.

You can also compare Paytm with its peers.

Paytm vs Policy Bazaar

Paytm vs Zomato

Paytm vs Nykaa

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...