Paytm Stock Rally: What Makes Retail Investors Bet On Parent Of Company Hit By Regulatory Action

While most institutional investors remain averse, retail investors, including high net worth investors, are snapping up the stock.

<div class="paragraphs"><p>Paytm scanner is displayed at  vegetable stall in Mumbai. (Source: Usha Kunji/NDTVProfit)</p></div>
Paytm scanner is displayed at vegetable stall in Mumbai. (Source: Usha Kunji/NDTVProfit)

Retail investors have continued to flock towards Paytm shares, despite several restrictions placed on its NBFC subsidiary by the Reserve Bank of India.

Shares of One97 Communications Ltd., the parent company of Paytm, have jumped nearly 35% in the last 10 days since they touched their lowest price.

The RBI restricted the functions of Paytm Payments Bank on Jan. 31 due to persistent non-compliance and major supervisory concerns.

While most institutional investors remain averse to the idea of buying at this juncture, retail investors, including high-net-worth investors, are snapping up the stock.

“Most of the HNI and short-term trader investors are participating in this,” said Rajesh Palviya, senior vice president, technical and derivatives research at Axis Securities Ltd.

Investors who bought Paytm stock at elevated levels are looking for short-term trades to cover their losses, according to him.

“I think everybody is waiting for a pullback, and that's why pressure is there on the higher side as well, as those who have bought at a lower price are exiting.”

Shares of Paytm rose to nearly Rs 1,000 apiece in October 2023 and dropped to nearly Rs 600 apiece in December. The shares touched the lowest this month at Rs 318 per share, following RBI action.

When such uncertainty ensues, institutional investors tend to stay away from such stocks. However, that's not the case with retail and HNI investors.

“Many retail investors would think it's down by 50%. So maybe that's a good entry point,” said Aamar Deo Singh, senior vice president, equity, commodity and currency, Angel One Ltd.

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Regulatory Action A Buying Opportunity?

With the increase in the risk appetite of retail investors, regulatory action on a company doesn’t seem to fizzle out the steam in such stocks.

It's all about risk appetite, Singh said. Investors believe that the stock is going to bounce back, and maybe the worst is over, he said.

While the regulatory action on Paytm is much more severe—leading to the shutdown of certain operations by the banking arm—in other cases, that hasn't been the case.

Shares of Polycab Ltd. tanked nearly 21% in January, following searches by the Income Tax Department in the previous month. The stock has risen from the lowest levels of nearly Rs 3,878 to over Rs 4,700 within a month.

The income tax department had alleged unaccounted cash sales of Rs 1,000 crore and Rs 400 crore in cash payments made by a distributor on behalf of the flagship company.

The company has denied tax evasion claims.

Similarly, shares of Shree Cement Ltd. and Mankind Pharma Ltd. have risen 19% and 33%, respectively, within six months of Income Tax raids.

In August 2023, the enforcement directorate conducted raids against Hero MotoCorp Ltd. Chairman Pawan Munjal and his companies. The action was based on a Prevention of Money Laundering Act case filed in response to the Directorate of Revenue Intelligence's charge sheet, accusing Munjal of unlawfully taking foreign exchange out of India.

Shares of Hero MotoCorp fell and touched a bottom of Rs 2,889 before gaining nearly 32% in the next six months. The stock has gained nearly 51% till now, since hitting bottom levels.

However, market experts have echoed caution against such bets. That's never a good idea when looking at stocks because they can still fall significantly, according to Singh.

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