One 97 Communications Rating ‘Buy’; RBI directive to remain an overhang
May delay PPBL’s plan to apply for conversion into SFB; TP cut to Rs 1,285 from Rs 1,352 due to impact of move; ‘Buy’ maintained
RBI has directed Paytm Payments Bank (PPBL), an associate of One 97 Communications (OCL or Paytm), to temporarily halt onboarding of new customers, via a letter dated 11th Mar’22. The embargo will have an adverse impact on signing up users for new PPBL wallets or savings/current accounts, until further notice. Also, observing certain material supervisory concerns at PPBL, RBI’s directive will remain an overhang till concerns are appropriately addressed. PPBL is taking immediate steps, including appointment of a reputed external auditor, to conduct a comprehensive audit of its IT systems and remains committed to working with the regulator to address their concerns. However, in this context, we recall recent instances of embargo on a leading bank, which stayed in place for 8-15 months.
We were estimating Paytm’s consumer base to grow by 10% in FY23E and monthly transacting users to increase at >25% run-rate. The company will have to increase its efforts to enhance engagement with the existing user base to offset the adverse impact of embargo on new users. Now, expecting moderation in onboarding of new users and the adverse impact on incremental payment revenue, we revise our TP to Rs 1,285 (earlier Rs 1,352). Also, it may defer PPBL’s plan to apply for conversion into small finance bank (though eligible to apply from May’22). Maintain ‘Buy’.
RBI observes certain material supervisory concerns: The RBI letter states that it has observed certain material supervisory concerns at PPBL. PPBL remains committed to working with the regulator to address their concerns as quickly as possible, but believes the process will be time consuming.
Embargo pertains to signing up new users for PPBL wallets, savings or current accounts: Given the embargo, new users cannot sign up for new PPBL wallets or savings/current accounts, until further notice. New users can however sign up on the Paytm app, and transact by: a) creating UPI handles and linking them to their bank accounts, or b) by using third-party payment instruments for transactions on the Paytm app. Existing customers of PPBL can continue to use all banking and payment services without interruption. Existing users of Paytm UPI, Paytm Wallet, Paytm FASTag, and bank accounts can continue to use these instruments, including debit cards and net banking, for payments. Also, the RBI directive does not impact the services Paytm provides in partnership with other financial services institutions.