Paytm cuts small-ticket loan portfolio: What that means for stock – explained


In an exchange filing on Wednesday, December 6, One97 Communications Limited (OCL) which owns the brand Paytm, said it will further “expand its business to offer higher ticket personal and merchant loans, which would be targeted at lower-risk and high-credit worthy customers, in partnership with large banks and NBFCs (non-bank financial companies).”

Besides, the company said it will cut down on smaller loans, keeping in mind the prevailing macro conditions and the Reserve Bank of India‘s rules on consumer lending.

“On the back of the recent macro development and regulatory guidance, in consultation with lending partners, in line with its continued focus on driving a healthy portfolio, the company has recalibrated the portfolio origination of less than 50,000, which is prominently the postpaid loan product and will now be a smaller part of its loan distribution business going forward,” One97 Communications said in its exchange filing.

Also Read: Paytm to cut down on small-ticket loans after RBI tightens consumer lending norms, set to expand higher-ticket ones

Paytm’s announcement on consumer lending triggered a sharp selloff in the stock as it cracked 20 per cent to hit its lower circuit of 650.65 in early trade on the BSE on Thursday.

Also Read: Paytm hits 20% lower circuit on brokerage downgrades as company decides to cut down on small ticket loans

Paytm share price has gained 53 per cent this year (as of December 6 close) against a 14.5 per cent gain in the equity benchmark Sensex.

Regulator’s nudge

Paytm’s decision on consumer lending has come after the Reserve Bank of India tightened consumer lending rules in October, noting a rise in small-size loans and raised the risk weights for lenders and NBFCs, or the capital that banks need to set aside for every loan, by 25 percentage points to 125 per cent on retail loans.

On credit card exposures, the RBI hiked the risk weights by 25 percentage points to 150 per cent and 125 per cent for banks and NBFCs, respectively.

Also Read: RBI tightens norms for personal loans and credit cards, raises capital requirements

As Mint reported earlier, the governor of the RBI, Shaktikanta Das, on October 6 said: “Certain components of personal loans are… recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress.”

On November 16, RBI announced that it was increasing the risk weights associated with retail loans and banks would now have to allocate more capital against the retail loans they give out. From this, the central bank left out housing loans, education loans, vehicle loans and loans against gold jewellery.

Read More: Can the RBI slow India’s retail lending binge?

Short-term pain?

Paytm’s post-paid loans account for a significant part of its total loans. Paytm’s move on consumer lending will cause a sharp drop in loan volume.

It will lead to a nearly 40-50 per cent drop in the volume of loans it issues through its post-paid product, but will have a minimal impact on revenue growth, Reuters reported Bhavesh Gupta, President and chief operating officer of Paytm, saying on a call with analysts.

“Paytm’s post-paid loans accounted for about 56 per cent of total loans in the July-September quarter,” Reuters’ reported, quoting the company’s data.

Also Read: Paytm eyes to bring 10 million merchants on ONDC platform in next two years: Vijay Shekhar Sharma

Brokerage firm Motilal Oswal Financial Services observed that Paytm’s strategy to move away from small ticket size BNPL (buy now pay later) loans will affect the total loan originations via the platform as the segment forms over 50 per cent of total disbursements.

“The company indicated the monthly postpaid loan sourcing run rate to moderate by 50 per cent from 3,000 crore to nearly 1,500 crore. As a result, the total disbursement run rate is expected to decline to around 4,500 crore per month from about 6,000 crore per month,” Motilal Oswal said.

Motilal pointed out that Paytm adds an average of 3.5-4 lakh customers every quarter, which is now expected to come down by 50 per cent.

“Take rates are expected to be marginally affected as BNPL as a product has lower take rates; however, a pick-up in higher ticket size personal loans should offset the overall impact,” Motilal said.

Most brokerages positive for long-term

The majority of brokerage firms maintained their previous views on Paytm stock, following the company’s announcement on cutting down on small-ticket loans.

“Brokerages, including Bank of America (BofA), JM Financial Services, Jefferies, Motilal Oswal Financial Services, and Dolat, have maintained a ‘buy’ rating on Paytm stock, expressing confidence in the company’s strategic moves,” reported ANI.

However, a few of them even downgraded the stock and some brokerage firms trimmed their target prices while retaining their earlier ratings.

Motilal Oswal has maintained a buy call on the stock with a target price of 1,025, implying a 26 per cent upside.

Motial believes Paytm’s asset quality metrics remain steady and the pick-up in high-ticket personal loans and merchant loans, along with the increase in the number of lending partners, should support steady growth in the medium term.

“While the longevity of these measures and the outlook in low-ticket unsecured loans remains under watch, we trim our FY24 and FY25 disbursement estimates by 15-18 per cent, resulting in an 11-16 per cent cut in our adjusted EBITDA over FY24E/FY25E,” Motilal said.

Brokerage firm JM Financial maintained a buy call on the stock but cut the target price to 1,120 from 1,325.

“We have revised Paytm’s FY24E EBITDA loss to 680 crore (-11 per cent and adjusted EBITDA to 760 crore) and FY25E EBITDA to 470 crore (-31 per cent and adjusted EBITDA to 1500 crore) and reduced our target price to 1,120,” JM Financial said.

According to CNBC-TV18, brokerage firm Jefferies maintained its ‘buy’ call on the stock but it cut its price target to 1,050 from 1,300 earlier. Morgan Stanley has maintained its ‘equal-weight’ rating on the stock with a price target of 830.

BofA remains bullish on Paytm, issuing a ‘buy’ rating and setting a target price of 1,165 per share while Dolat maintains a ‘buy’ rating on Paytm stock with a target price of 1,320, ANI reported.

“BofA sees the structural story of high take-rate lending and subscription-based soundbox revenue as intact. Paytm’s foray into higher ticket personal and merchant loans, particularly targeting lower-risk and high-credit-worthy customers in collaboration with large banks and NBFCs, aligns with BofA’s positive outlook,” ANI reported.

“Dolat remains optimistic about Paytm’s prospects, emphasizing the company’s commitment to portfolio quality and the continuous addition of new partners,” reported ANI. 

On the other hand, Goldman Sachs has downgraded One 97 Communications stock to ‘neutral’ from ‘buy’ and also cut the price target to 840 from 1,250, according to Reuters.

“Paytm’s plan to give out more higher ticket loans is not expected to fully offset a scale back of smaller-ticket loans,” Reuters quoted Goldman Sachs saying.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.


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Published: 07 Dec 2023, 12:52 PM IST

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