Shares of One 97 Communications Ltd, the parent company of Paytm, have recovered from a recent low of ₹334 after it received approval from the National Payments Corporation of India (NPCI) on 14 March to continue its UPI business as a third-party application provider. The stock has now topped out ₹400.
This was more of a relief as the Reserve Bank of India (RBI) made it clear that its ban applied only to Paytm Payments Bank (PPBL) and not the fintech business. PPBL is a separate entity in which Paytm holds 49% stake and its promoter Vijay Shekhar Sharma holds 51% in his personal capacity.
It’s understandable if investors are worried about the extent of the stock’s recovery, given the threat from Jio Payments Bank. The well-capitalized newcomer could further shrink the already thin margins of Paytm’s bread-and-butter business. Jio Payments is reportedly testing a sound box product that can also function as a point-of-sale device. And a few days ago, Policy Bazaar’s parent company PB Fintech set up a new wholly owned subsidiary to enter the payment aggregation business.
Paytm is gradually losing market share on UPI, according to data from the NPCI website. While PhonePe and Google Pay grew their transaction value during January even though February has fewer days, Paytm’s customer-initiated transaction value declined from ₹1.64 trillion to ₹1.51 trillion. The UPI business is the mainstay of the company and accounts for 60% of total revenue. It has two key variables – gross merchandise value (GMV) and gross payment margin (GMP). The company’s revenues are sensitive to even small changes in the GMP.
For example, Paytm had a GMV of ₹5.1 trillion in the December quarter (Q3FY24) and a GMP of 33 basis points, including UPI incentives. If the GMP shrinks even by a few basis points, the reported adjusted Ebitda (before Esops) of ₹220 crore could fall drastically. While Paytm can hope to grow GMV in line with the rapidly growing digital payments industry, it has very little control over GMP.
Paytm’s management is aware of the challenges in online payments and has been looking to add new revenue streams. But just when these efforts began to show results, it faced a setback. The company’s financial-services business, dominated by loan distribution, doubled expenses to ₹46,600 crore in the nine months to December (9MFY24). During the same period, income from financial services grew almost 60% to ₹1,700 crore year on year. This was a key factor in clarifying the path to profitability and attracting the attention of investors.
But the business is likely to suffer as the Reserve Bank of India has increased the risk weights on unsecured loans, causing banks and NBFCs that Paytm has partnered with to slow down their lending. The market services segment (commerce and cloud) is doing well, but accounted for less than 20% of total revenue in 9MFY24.
While the PPBL ban does not have a major impact on Paytm’s finances, it does limit incremental business opportunities, with FASTag being the prime example. As a baby bank, there was additional money to be made from the float money or the bank balances held by customers above the full commission/exchange fee of 1%. After termination of the payment bank, Paytm can only earn a partial commission of less than 1% from FASTag because it will have to share the revenue as an agent of other banks.
Paytm’s cash pile of more than $1 billion offers a large cushion, limiting the stock’s downside. It could also be used for promotional rewards and other incentives to retain customers and keep competitors at bay. Against this backdrop, investors will watch whether the management can arrest the slide in UPI’s market share. The trajectory of the stock will depend on this to a large extent.