It was a flash crash. Over two days, One97 Communications, the company that owns Paytm, the largest payment service in India, saw a 36% slump in the price. That is not a new thing for those who are shareholders of the company. The company does not have ‘regular’ financial metrics for investors to read. Usually, a company that offers financial services is evaluated based onthe net interest margins it generates (the difference between the cost of funds and lending). In the case of Paytm, it has multiple sources of income. The company has yet to report a net profit but continues to witness investor interest. A large foreign institutional investor was seen picking up shares at the bottom last Friday amidst the carnage.
For those of you not into active equity investing, you may find that strange. People are still buying into a company that will likely turn a net profit in only two or three years. A lot of the investing in the company is based on the hope of profitability in the future. The company’s biggest share price driver is the growing number of people using Paytm for payment services and financial transactions. The company is an e-commerce enabler and facilitates loans if you are a merchant or just an ordinary user. The use of technology in enabling quick e-commerce financial transactions makes it a formidable organisation.
Investors are betting that with 100m active monthly users and growing each quarter, the company will achieve economies of scale sooner rather than later. The Reserve Bank of India’s action is against Paytm Payment Bank, a sister concern of One97 Communications, parent of Paytm. RBI’s restrictions are likely to push merchants and users to other banks. There will be a dent in the pace of growth at Paytm. Investors are still staying with the company because the company may turn in a profit a year later than expected. The fundamental message is that Paytm is here to stay.
What it means
If you use the Paytm payment gateway, you have nothing to worry about. Your transactions are linked to your bank account and will continue beyond 29 February 2024. However, if you are using Paytm Payments Bank, you can only use the balance in your account. You cannot put any new money into it. RBI has restricted the bank from getting new customers, too. Media reports suggest findings that could take weeks or months to resolve.
Non-compliance issues are related to the ‘know your customer’ or KYC process. There are also mentions in a section of analyst reports about possible corporate governance concerns flagged. In a release, the company said it would impact annual earnings before interest, taxation, depreciation, amortisation, or EBITDA of up to Rs 500 crore. That has prompted most analysts to scale down future profit expectations of One97 Communications.
Some fear more losses than estimated. The next few days could see more market action. Yet, investors are picking up the shares at the bottom. That is typically called ‘bottom fishing’ in the stock market vocabulary. A primary reason for that is the long-term confidence of investors in digital banking and the ecosystem surrounding the financial services sector.
There is a structural growth story. A new working paper by the International Monetary Fund or IMF finds a direct correlation between the growth in Fintech businesses and economic growth in rich and middle-income economies. They boost overall lending in the economy and add to productivity.
You must talk to your financial advisor before jumping to buy Paytm shares. If you are already an investor, you must assess your risk appetite and decide the future course of action. Ask yourself questions about your tolerance level to stock market losses. If you invest through mutual funds, your fund manager will determine an appropriate action for your scheme that owns these shares. If you are new to investing, you must steer clear of direct investing in shares. Share prices are determined based on relative views. An attractive proposition for someone experienced may not be right for you.