Softbank Exits Paytm. Has Paytm’s Lure Faded, Or Is There Still A Ray Of Hope In The Dark?

Softbank Vision Fund, Softbank Japan’s investment arm, exited Paytm in the June quarter at a loss of around USD 150 million, or a 10-12% loss, according to persons familiar with the situation. Softbank invested around USD 1.5 billion in One97 Communications, the owner of the Paytm brand, in tranches in 2017.

Paytm has been under regulatory scrutiny after the RBI found compliance failures at its banking subsidiary and imposed harsh limitations on the company. Paytm, once the poster boy of fintech, known for pioneering cashless transactions in Indian market and known by the punchline’ Paytm karo’ has echoed problematic situations right from the beginning of this year, when in February 2024, RBI directed Paytm subsidiary Payments Bank (PPBL) to not accept further deposits, top-ups or credit transactions in any customer account, due to non-compliance and supervisory concerns.

The Masayoshi Son-led Japanese investment powerhouse, which invested over $1 billion in Paytm and owned an 18% stake in the firm at the time of its IPO in 2021, has been reducing its ownership stake in the company through a series of open market transactions. As of the end of March, SoftBank owned around 1.4% of the firm.

The firm disclosed larger losses of Rs 550.5 crore in Q4 FY24, stating that it anticipates the entire impact of the RBI’s intervention on the business to play out in the first quarter of FY25. During the reported quarter, the firm wrote off a Rs 227 crore investment for a 39% stake in PPBL due to future risks connected with its business activities, such as the unpredictability of any new regulatory developments. The company’s loss narrowed to Rs 1,422.4 crore in the fiscal year ending 31.03.2024. Paytm reported a loss of Rs 1,776.5 crore in FY23.

Billionaire Warren Buffet’s Berkshire Hathaway Inc. also quit the fintech roughly seven months ago by selling shares at a lower-than-acquired price.

The continuous quitting of foreign investors from Paytm, the fall of share prices and the compliance slap by RBI are hurting the business like anything. So does that mean that the poster boy of fintech, Paytm, has lost all its attractiveness and is not going to hold the same position in the market as it did earlier? 

Well, it is not done yet. How? Let’s read below.

Since RBI’s restriction, shares of One97 Communications have remained volatile, with little clarity on how the payments business would be handled. While this has created doubt about the firm, retail and even domestic institutional investors are buying the stock. One 97 Communications reported an increase in shareholding by domestic investors, including mutual funds and retail shareholders, in the first quarter of the current fiscal year. 

Why are mutual funds and retail investors backing Paytm?

Paytm has been underperforming in a bull market. The company has posted losses at operating profit levels for the preceding four quarters, with the exception of Q4 FY23, when it achieved INR1 crore operating profit. Otherwise, the company has been a loss-making entity. Despite this, mutual funds and retail investors have been buying the stock.

The fintech reported a growth in holdings by domestic investors, including mutual funds and retail shareholders, in the June quarter. “Retail investors grew their shareholding to 16.5% in Q1 FY25 from 15.3% in Q4 FY24, with Mirae Mutual Fund and Nippon India Mutual Fund leading the way. Therefore, domestic institutional investors increased their position by 0.29%, from 6.86% to 7.15%, indicating confidence in the company’s development potential,” Paytm stated.

What can Paytm’s aspects of hope be to the investors?

Paytm released a press statement on May 13, 2024, indicating that the firm is currently concentrating on the Unified Payments Interface (UPI) Lite wallet to attract consumers who prefer wallets for low-value daily transactions. According to the Worldline Report for H2 2023, UPI transaction volume has increased by 56% year on year. Mutual funds and retail investors have invested heavily in the company’s UPI business.

Paytm’s huge slide has turned the company into a possible deep-value bet for savvy investors. However, the company’s survival is dependent on its UPI Lite wallet innovation amid regulatory obstacles. Provided the data, Paytm emerged to be a high-risk, high-return stock, and hence, investors cautiously started entering these stocks with the notion that they would scale back to their previous glory. 

How did the share prices evolve, signalling that the game of Paytm is not yet over?

The stock lost almost 53% of its value between February and May of this year as a result of the RBI’s actions. Paytm shares were at a 52-week high of ₹998.30 on October 20, last year. On May 9, the stock reached a 52-week low of ₹310. However, there appears to be a June Bloom for Paytm. Paytm’s share price has been rising steadily since June of this year. Following a four-month selloff, the stock jumped more than 11% last month, and it has already gained more than 17% in July.

Why are Paytm shares skyrocketing?

According to experts, the renewed interest in Paytm’s share price might be due to value purchasing by investors after the company’s founder and MD, Vijay Shekhar Sharma, expressed optimism about the company’s development prospects. Commenting on the Paytm situation at the 7th JITO Incubation and Innovation Fund (JIIF) Foundation Day event on July 6, Sharma equated Paytm to a daughter who had an accident and is now in ICU. According to widespread media coverage, Sharma expressed optimism about the firm’s future prospects and stated that he wishes to see Paytm become a $100 billion business.

“At a professional level, I would rather say we should have done better; there is no secret about it. We should have understood better, and we had responsibilities, we should have fulfilled, a much better way, we learnt the lesson,” he said.

An analysis by domestic brokerages.

StoxBox claimed the stock had shown potential trend reversal patterns, making it an appealing buy at present prices. According to the brokerage firm, the fintech’s broad reach enables it to generate money from merchants and customers while also providing prospects for cross-selling. The brokerage expects that continuous improvement in operational leverage will continue to boost the firm’s profitability.

Technical experts said that the renewed interest in Paytm shares might be due to technical factors. Jigar S. Patel, Senior Manager of Equity Research at Anand Rathi Share and Stock Brokers, stated that the fintech stock this month showed a positive divergence on the weekly chart, indicating a possible reversal from a downtrend to an uptrend. This divergence is defined by price action climbing above the 21-day exponential moving average, which reinforces the trend shift signal. Patel further stated that a positive divergence happens when the price produces lower lows while the underlying indicator, such as the Relative Strength Index (RSI), forms higher lows. This suggests that the downward momentum is decreasing, and a reversal is possible.

An analysis by global brokerages.

Following the release of Paytm’s Q4 results in 2024, global brokerages Bernstein and Morgan Stanley observed positive signals of stabilisation and recovery in the company’s main core metrics. According to Bernstein, Paytm’s Gross Merchandise Value (GMV) in April increased by nearly 81% from January levels, demonstrating good momentum and a notable turnaround from recent lows. Similarly, Morgan Stanley saw a slowdown in GMV growth quarter-on-quarter, with a year-on-year increase of 30% vs 47% before. These good developments in key business measures should give the audience confidence in Paytm’s future prospects.

After all this, it sounds like Steam is still left with the poster boy of fintech.