While the dark clouds have not yet receded, investors have found reasons to begin raising bets on troubled fintech One 97 Communications, which runs Paytm. After ending Friday’s session locked in a 5% upper circuit, the stock was again locked in a 5% circuit at Rs 358.55 on the BSE on Monday morning following a series of positive news flows.

The rally comes even as Jefferies moved the stock from “underperform” rating to “not rated” till the time the news flow settles down. Citi has also maintained ‘sell’ with a target price of Rs 550 per share.

Also Read | Jefferies temporarily suspends rating on Paytm but falls short of stopping coverage

Here are 4 key reasons behind the rally in Paytm shares on Monday:

1) RBI extension

RBI has extended the deadline for Paytm Payments Bank by 15 days from February 29 to March 15, giving Paytm a slightly longer window to execute the changes required to ensure a smooth transition out of PPBL.

2) Axis Bank tie-up

Paytm has announced a partnership with Axis Bank under which nodal accounts or escrow accounts will be shifted to the private sector lender. This arrangement is expected to seamlessly replace the nodal account that One 97 was using with Paytm Payments Bank. Paytm is also in discussions with other banks to evaluate a second partner for escrow services.The move ensures continuity of settlements for merchants and minimal disruption for customers.

3) Clarity on non-PPBL merchants

RBI has clarified that merchants using Paytm QR/Soundbox linked to another bank account can continue to use the set-up even after March 15, 2024. “This should be positive given an environment in which merchant/customer leakage is the largest concern for the parent entity,” Jefferies said.

4) ED finds no FEMA violation

The Enforcement Directorate (ED) has not found any violation under the Foreign Exchange Management Act (FEMA) during the inquiry of Paytm Payments Bank Limited transactions, according to reports.

Also read | At $365 billion, Tata Group grows bigger in size than entire Pakistan economy

What should investors do?

Following the latest news flow, Jefferies has taken a safer stance of not fishing in troubled waters.

“In case of no incremental regulatory clampdown, there could be multiple scenarios for the business depending on user/merchant retention. We see positive & negative risks arising from user/merchant retention, revenue traction and cost-controls. On the basis of merchant/user attrition to the tune of 10-30% and a hit to net revenues (adj. for payments interchange) of 20-45%, valuation could vary widely. News on regulatory actions on other pending issues is still incoming,” said Jayant Kharote of Jefferies.

In the medium term, he said government approval for payment aggregator licence to subsidiary PPSL will be key to monitor.

Bernstein finds the RBI’s update on action against Paytm as incrementally positive though still short on the finer details. The brokerage, which has an outperform rating with a target price of Rs 600 on Paytm, said RBI’s actions appear to be limited to PPBL and not intended at disrupting the UPI payments and other functions of Paytm.

Citi has, however, maintained a ‘sell’ rating with a target price of Rs 550 per share, saying that the fintech may see elevated user and merchant churn in the near term.

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