It isn’t often that the stock of a prominent company loses nearly 40% in value in two days. Paytm enjoys this rare distinction.
This follows RBI’s stricture barring Paytm Payments Bank from accepting any further customer deposits or allowing credit transactions after February 29 but allowing customers to drawdown their existing deposits or wallet balances. The central bank has also called for settlement of all pipeline transactions by March 15, virtually shutting down the payments banking arm for all practical purposes.
What’s more worrying, is that the move follows a direction in March 2022 asking the payments bank to stop onboarding customers and the observations regarding this. The RBI release says: “The Comprehensive System Audit report and subsequent compliance validation report of the external auditors revealed persistent non-compliances and continued material supervisory concerns in the bank, warranting further supervisory action.” Key in this observation is “persistence non-compliance” and suggests why the central bank has been compelled to take the recent action.
This isn’t good news for Paytm or its investors, as it puts a question mark on the quality of governance.
Paytm's cup of woes
The RBI action against Paytm Payments Bank is just the latest of several developments that have plagued Paytm. The first big blow was the launch of UPI in April 2016. I recall a venture investor saying: “The digital payments business story in India is over”. This exclamation was from a venture capitalists’ standpoint after UPI upended all earlier business models in this segment.
Ever since, incumbents have been trying new ways to make a sustainable business of their ventures, as has Paytm. The second recent setback came from the RBI clamping down on small ticket loans and bank-NBFC relationships, just as Paytm was starting to show some promising growth in its lending business.
The Paytm Payments Bank virtually shuts down Paytm’s wallets business, which the company has called out could have an annual EBIDTA impact of ₹300 to ₹500 crore, no mean change. To put that in context, last fiscal the company had a negative EBIDTA before ESOP expenses of ₹176 crore and in the first nine months of FY24, the EBIDTA before ESOPs stands at ₹456 crore. Hence, the number isn’t a trifle.
The business question
Paytm was incorporated in 2000. It has been well over 20 years and the company is still to show any meaningful profit, especially given its market valuation. Even after the recent 40% erosion in share price, the stocks trades at over 3x its trailing 12 months revenue. It currently has a cash balance of a little over Rs 8,000 crore. But it raised Rs 8,300 crore via fresh issue of shares when it went public, so there has been little accretion on that count. Besides, Paytm seems to be stumbling from one problem to the next and trying to figure ways to remain relevant and in business, which isn’t inspiring from an investors’ perspective.
What’s more, with each regulatory change in the financial sector, Paytm’s scope of business seems to be getting constricted. This isn’t a very flattering prospect for investors.
Add to this the blustering by the management in recent and earlier analyst and media interactions only raise the spectre of doubt about its future prospects. In fact, the comments from the management often spark more questions than provide answers. Take the recent analyst interaction for instance. Here are some extracts from the management commentary.
Vijay Shekhar Sharma: Overall, I can say that it is — on behalf of Paytm, I can say that it is more of a big speed bump, but it is something that we believe that with partnership of other banks and capabilities that we have already developed, we'll be able to see through in next few days or quarters as the case would be. So thank you so much. And with this, we'll take the question and answers.
So, what is it, a few days or a few quarters?
Vijay Shekhar Sharma: As you saw the letter that is publicly sent there, there is another letter that the bank has received. But based on that, I cannot foresee what we did not see or not see. There are obviously RBI beliefs, and we totally are believing of the fact that there is something that RBI would have seen. Have they sent us details? Answer is no. They have not sent us any details. So something that is based on over the period, what different audits they would have done and their solutions based on that is the opinion that has come based on. So we don't know the exact nuances, what triggered or any one line item...
Does the management have no clue about what the reason for RBI’s action is? Of course they do. Vijay Shekhar Sharma is part-time Chairman of the payments bank. What’s more, RBI’s recent directive follows the earlier action of March 22 stopping onboarding of customers. And such an answer leaves investors no wiser than before.
Vijay Shekhar Sharma: Actually, the key word here is that it is in discussion with Payment Bank and Payment Bank cannot share these facts with, let's say, the parent or shareholders out there. So that's also one of the reasons that we can't discuss this. This is an interaction between the bank and Payment Bank, central bank and payments bank.
The reason for non-disclosure is confidentiality of regulatory matters. That is hardly comforting.
The governance implication
The fact that the RBI has taken such stern action against Paytm Payments Bank is reason enough for Paytm shareholders to be concerned about the quality of governance. Even if the business is shifted to other banks over time from the payments bank, this blot won’t go away. Add to that a business that is still floundering and valuations that aren’t particularly cheap, and you have a perfect cocktail for introspection by investors on whether they want to remain invested in a company that once captured the nation’s imagination with its Paytm karo line.
It will take a lot from the management to restore confidence in a brand that was once synonymous with digital payments.
(Edited by : Shloka Badkar)
