India’s leading digital payments company One97 Communications, known for the Paytm brand, has been in limelight since its IPO launch, mainly because of its poor show on listing. The IPO got listed at a discount of 9 per cent and finally closed 27.40 per cent below the offer price.
It is back in news again after its share slid 13 per cent on the back the Reserve Bank of India (RBI) directing Paytm Payments Bank, an associate of One 97 Communications, to temporarily halt onboarding new customers. Post this directive, in the last two trading sessions, the stock is down by over 25 per cent. The stock touched an all-time low of Rs 584.66 on March 15, 2022. The share has been on the slide path since its IPO in November 2021, but the latest development has dealt it another blow.
To give you an idea, investors have lost over 72 per cent so far per share since listing. So, what should you do in this scenario?
Investors have already been on the losing end. Investors who have invested at the time of IPO and others who bought the share from the secondary market, both their portfolios are in the red. IPO investors’ investments are down by over 70 per cent. The lot size for One97 Communication’s IPO was minimum six shares. In order to apply for one lot, investors paid Rs 12,900 at the higher price band of Rs 2,150. A retail individual investor can apply for up to 15 lots (90 shares or Rs 1,93,500). Assuming that the investor got 90 shares, the current value of his portfolio would stand at Rs 55,980. This means the investors has lost Rs 1,37,250 or 71 per cent of his capital.
The new directive from the RBI is expected to have a further adverse impact.
“The RBI embargo (on onboarding) will have an adverse impact on signing up users for new PPBL (Paytm Payments Bank) wallets or savings/current accounts, until further notice. Also, observing certain material supervisory concerns at PPBL, RBI’s directive will remain an overhang till concerns are appropriately addressed,” states ICICI Securities in its report.
The report, without citing any company’s name, mentions, “We recall recent instances of embargo on a leading bank, which stayed in place for 8-15 months.” The company was HDFC Bank. It is also a coincidence that RBI lifted all curbs on HDFC Bank on March 12, one day after put an embargo on Paytm Payments Bank.
Downward Journey: From Rs 2,150 to Rs 592
One97 Communications’ IPO was launched on November 8, 2021 with a price band of Rs 2,080-Rs 2,150 apiece. The IPO got listed on November 18, 2021 at 9 per cent discount and closed at a price of Rs 1,560, which is 27.40 per cent below the offer price.
In its research report, Too Many Fingers In Too Many Pies, which Macquarie Capital released on Paytm’s listing day, the financial services firm stated, “Paytm’s business model lacks focus and direction.” The report termed the company “a cash guzzler” and raised doubts on its scale and profitability. The price target given was Rs 1,200.
Macquarie again came up with a report in January 2022, titled Sign Of Headwinds Abating, in which it further lowered the target price to Rs 900. This price is around 25 per cent below the earlier target price of Rs 1,200. Within two months of listing, the company’s share price was down by over 40 per cent as on January 10, 2022. Some of the anchor investors such fund houses offloaded the shares from their portfolio. For instance, HDFC Mutual Fund sold all Paytm shares in its schemes HDFC Mid-Cap Opportunities Fund while HDFC Balanced Advantage fund reduced exposure to the company significantly.
A person associated with a leading institutional broking firm, on condition of anonymity, said, “The majority of our clients pressed the exit button when the stock started falling below Rs 1,200. This led to further fall. Then in its February report, Macquarie reduced its price target from Rs 900 to Rs 700. The stock is following the same pattern of price.”
As volatility gripped the Indian equity market, the stock fell in tandem with the market. And just as the stock was struggling to survive the market volatility caused by the geopolitical scenario, the RBI passed a directive barring the company from onboarding new clients to its associate bank. This added fuel to the fire. The stock touched a new low of Rs 584.55 today (March 15, 2022). It settled below Rs 600 for the first time at Rs 592.45.
Investors are now in a dilemma whether they should catch the falling knife? Experts are still raising questions on the company’s roadmap to profitability. They believe it is very unlikely that the company will get a small finance bank licence considering the recent RBI directive. “We need to see potential implications of the IT audit, and this may take time to get resolved. We expect the regulatory developments to weigh on valuation, as also seen in the cases of other banks facing negative regulatory strictures, despite management guidance to no significant earnings impact," writes Morgan Stanley in its report.
“It is a falling knife; avoid catching it,” advises the head of research at a broking house, on condition of anonymity.
The jury is still out on whether one should go for averaging now or wait till the dust settles. However, one thing is clear: Paytm’s parent company One97 Communications is the worst performing IPO. The numbers don’t lie.