Paytm Cut To 'Neutral' By Macquarie On Three Key Risks

Paytm's parent One97 Communications Ltd. was downgraded to 'neutral' by Macquarie Equity Research, citing rising competition, regulatory risks and high valuation.

The stock's outperformance is over, the brokerage said in a note on Tuesday. Shares of the company have surged 59% in 2023 so far compared to a 3% rise in the benchmark NSE Nifty 50.

Though the company has seen strong momentum with the loan distribution business, driving higher revenues and better-than-expected profitability, Macquarie remains sceptical about the sustainability of this business in the long run. The current valuation leaves little room for comfort. it said.

Paytm's stock is likely to see headwinds in the form of reputation, rising competition, and regulatory issues, Macquarie said. "Though Paytm does not carry any balance sheet risk on the loans originated, we think it carries significant business and reputation risk," it said. "A few months of bad performance could result in lenders withdrawing their credit lines, significantly affecting its ability to grow."

Rising Competition

The primary competition risk can be found in Jio Financial Services, Macquarie said. The upcoming annual general meeting of Reliance Industries Ltd. is expected to see an announcement on the new financial services player.

The Mukesh Ambani-led company is planning to spin off its financial services businesses and list them as Jio Financial Services. The demerged entity could include Reliance Retail Finance Ltd., Reliance Retail Insurance Broking Ltd., Reliance Petroleum Retail Ltd., Reliance Payment Solutions Ltd., and Jio Information Aggregator Services Ltd.

Regulatory Lapses

Macquarie cited ban by the Reserve Bank of India on Paytm Payments Bank in March 2022, prohibiting it from onboarding new customers due to lacunae in its technical systems.

The note stressed the need to do a lot more on corporate governance by getting an independent, non-executive chairperson, more independent board members, and other measures.

Analyst Views

Macquarie initiated coverage on Paytm in November 2021 with an 'underperform' rating, citing a lack of focus and direction. The brokerage turned 'positive' this February with an 'outperform' rating after Paytm posted encouraging results for the December quarter of the financial year 2023.

In its latest report, Macquarie retained its price target of Rs 800 for Paytm.

Continued momentum in the financial services business structurally over several years would cause the brokerage to revise these positively, it said. However, higher-than-expected losses in the medium term would lead to further downgrades.

As of 11.35 am, Paytm was trading 1.82% higher at Rs 853.95 as compared to a 0.28% rise in the benchmark S&P BSE Sensex.

Of the 13 analysts tracking the Paytm stock, 10 have a 'buy' rating and three recommend a 'hold', according to Bloomberg data. The average of analyst price targets suggest an upward return potential of 10.4%