36% down in 2 days! Is this Stock a Value Pick now?

In an unprecedented move, shares of One97 Communications, the parent company of digital payments platform PayTm, plummeted by a shocking 36% in just two days. The dramatic fall came after the Reserve Bank of India (RBI) imposed stringent restrictions on its lending business, including a prohibition on accepting new deposits and executing credit transactions post-February 29, 2024.

The RBI's directive left no room for ambiguity: Post February 29, 2024, customers of PayTm will no longer be able to undertake deposit or credit transactions, including account top-ups, through their prepaid instruments, wallets, FASTags, or NCMC cards, barring interest, cashback, or refunds. This action followed a validation report by external auditors that highlighted "persistent non-compliance and continued material supervisory concerns" within PayTm Payments Bank, prompting the RBI to take such a decisive stance. 

The Ripple Effect: Impact on PayTm's Lending Business

The fallout from the RBI’s circular is expected to severely impact PayTm’s lending operations. The firm’s ability to attract lending partners could diminish significantly due to operational or governance challenges, essentially putting a halt to a crucial segment of PayTm’s business amidst an already challenging market.

The repercussions of the RBI’s restrictions extend beyond operational limitations, with PayTm estimating a potential adverse effect of Rs 300-500 crore on its annual EBITDA. This development has also led fund managers and analysts to predict a 5-15% impact on the company’s earnings per share (EPS), raising alarms about the company’s path to profitability, especially with anticipations of reaching an EBITDA breakeven by FY25.

In response to the RBI’s findings, PayTm momentarily paused its lending platform operations, taking a reflective period to engage with banking partners to reassess and strategize the future course of action. Bhavesh Gupta, COO of PayTm, conveyed the company’s proactive engagement with lenders to address their concerns and assess the potential impact on their portfolio.

What Next for PayTm?

Despite the setback, PayTm has no immediate resolution to the compliance issues flagged by the RBI. The continual identification of non-compliance, coupled with a prior ban in March 2022, underscores the gravity of the regulatory challenges faced by PayTm, potentially marking an end to the operations of PayTm Payments Bank as we know it.

However, in an effort to adapt and mitigate the impact, PayTm had already begun reshaping its business model, focusing on scaling higher-ticket personal and merchant loans while planning to downsize its Buy Now, Pay Later (BNPL) operations. The recent regulatory measures, however, cast a shadow over the company’s future business outlook and investor confidence.

The path ahead for PayTm is fraught with uncertainties, with limited visibility on the long-term viability of the business in the face of such significant regulatory headwinds.

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