'Till news settles down': Jefferies stops Paytm coverage, first foreign brokerage to do so

Jefferies became the first major foreign brokerage to drop coverage on Paytm-operator One 97 Communications Ltd. until the news flow around the struggling Indian fintech major “settles down”.

The investment bank has moved the stock to “not rated”, weeks after lowering it to underperform after the Reserve Bank of India last month ordered Paytm Payments Bank to halt its key operations, citing non-compliance. 

"Without a banking license, Paytm's business model will now become similar to pure payment service providers like PhonePe, GPay, Pine Labs, etc. Paytm's focus will now move to ensure customer/merchant retention, and we believe it will dip into its Rs 8,500 crore cash reserves for spending on retaining users. While app customers may be retained by increasing cashbacks/discounts (Rs400 crore in FY24E), merchants using PAYTM devices can be provided discounts (or free usage) on monthly subscription rentals (Rs 1,200 crore income in FY24E)," Jefferies said in its note.

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The RBI last week granted Paytm an extension of deadline to wind down much of its business. The company has been given until March 15 to stop accepting new deposits, from February 29 earlier. 

"In case of no incremental regulatory clampdown, there could be multiple scenarios for the business depending on user/merchant retention. We see positive and 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 percent and a hit to net revenues (adj. for payments interchange) of 20-45 percent, valuation could vary widely. News on regulatory actions on other pending issues is still incoming" Jefferies wrote further.

Paytm has tied up with Axis Bank to replace affiliate Paytm Payments Bank to continue its merchant payments settlement operations, allowing it a shot to stay in business.