“I do not see a big market share attrition either, just given that the way the market is structured and therefore, I find this to be attractive valuation,” says Pranav Gundlapalle, Sr Research Analyst, Sanford C Bernstein.

Let me first actually quote a line that has come in in your particular note where you have mentioned that you are now going to be leaning towards the buy camp when it comes to Paytm. Do you think that the worst is already priced in for Paytm because remember there are a lot of rumours floating around on the license cancellation also that could be likely for Paytm. So, do you think that everything is priced in at these levels right now?
Yes, I think at these levels, you are almost at a point where even if you assume the entire payments bank gets shut down and all the business which were housed in that particular entity, which is your wallets and some of the prepaid instruments, go off and you still can see a significant upside to where the current valuation is. Secondly, we do not expect, assuming the required licenses come in, talking about the payments bank license, but they are able to continue with the UPI payments largely. I do not see a big market share attrition either, just given that the way the market is structured and therefore, I find this to be attractive valuation. So, the buy call is a combination of the extent of correction that the stock has seen and the limited impact that we see from the payments bank entity going away.

Unlock Leadership Excellence with a Range of CXO Courses

Offering College Course Website
IIM Lucknow IIML Chief Executive Officer Programme Visit
IIM Lucknow IIML Chief Operations Officer Programme Visit
IIM Kozhikode IIMK Chief Product Officer Programme Visit

Now, there could be further downside if you see this action spreading to other parts of the business and there is no reason to believe that is indeed the case at this point in time.

But in your SOTP calculation, how much value will you give to the wallets business versus the rest of the business and what do you make of these reports of the sales of the wallet business? Is it really possible?
There are two parts of this payments bank. I think there is one which is products that are housed in the payments bank. So, wallets is one, the savings and current accounts being the other. Some of the prepaid instruments, FASTag, etc, the other things that sit inside the payments bank business today, which are at risk.

So, now, whether they can be resumed or not is a question and probably will take time for it to play out. But we are assuming that that is broadly gone. I mean, there is no near term comeback for those products. Now, those components probably account for less than 10% of the payment GMVs and less than 20% of payment margins in itself.

I think that is a much smaller impact and if you look at bulk of the valuation for this business comes from the loan distribution business and if you look at EPS for the later years a lot of it comes from the lending business.

So, a portion of payments revenue going away should not be that negative in itself unless it has implications for the other businesses so which is where I talk about this spreading into, say, the lending business if partners choose not to work with Paytm or if the regulator continues this action in other segments, that is the downside scenario where the likelihood appears limited. I do not see a big reduction in the other components of the model.

What next do you think for Paytm now? Do you think that the trust deficit will continue to plague the growth, even post these issues are resolved, given the fact that they are really acting pretty fast on it and it has shaken a lot of consumer confidence as well and investors also?
See, investor confidence will take a while because if you are in the financial services business, the two things you do not want to see happening is asset quality issues and regulatory issues and those two will take a long time to be mended and therefore that becomes an overhang.

On the consumer and merchant side, see, I think the way the Indian payment space has evolved, I do not think there has ever been a massive amount of trust or a need for trust in these platforms because, see, the reason the adoption of Paytm or its competitors, PhonePe or Google Pay has happened at the pace it has happened because the consumers and merchants retain money in their bank accounts.

So, the trust remains with the bank accounts. So, I do not think that part is going to change and therefore, the trust discussion, in my view, is largely limited to the payments bank accounts where I do see them migrating to other banks but that should not be a material impact on the business itself. Yes, you will have a short-term disruption, but as long as this money is going to a merchant’s bank account that he knows and he trusts, I think all the others should be easily solvable.

We understand that the nodal banks are a bit sceptical before tying up with Paytm now. So how big an issue this can be?
Well, I think there we assume that most of these issues can be sorted by end of this month, which is the deadline they have. And the idea here is that or the reasons here for our view is that one, the business that Paytm does in terms of customers and merchant segments is not too different from what its peers do and therefore should eventually find a bank which is happy to run their nodal accounts, number one.

And number two, even from a system perspective they are a reasonably large component of the UPI payment system. So they are about 30% of the P2M transactions. So I think there would be enough efforts or enough assistance provided to make sure that the payments continuity is maintained, not just at a Paytm level, but across the overall UPI payment story.

You do not want that to get disrupted. So I think you will see some sort of a partnership emerging. Now that remains a risk. Like I said, the downside that I see here is if the UPI payments do not continue post Feb, it remains an outside chance, but if that does play out, then there is obviously going to be a lot more downside than where the stock is today.

So just to get your final word then on this, first, in the fintech space, will Paytm be one of your top recommendations at this point in time, given the correction that it has already witnessed? And also, what could be an upside target for Paytm? 600 is what you are pencilling as of now.
Yes, 600 is what I am pencilling in. I think the valuations make it really attractive and make it probably the top pick amongst the fintechs. If you compare them with the private market valuations for most of their peers, they remain extremely cheap. In terms of the catalyst and where I could see upside is I think you will see that the March 1st or the last quarter results come out I think we will quickly get to know how much of a disruption it has been to the business and any evidence that there has been minimal attrition in market shares or disruption to routine businesses should drive a significant upside from the current trends.

(You can now subscribe to our ETMarkets WhatsApp channel)


Source link