Jefferies Downgrades One 97 Communications, Slashes Target Price

Jefferies downgraded its rating on One 97 Communications Ltd. to Underperform from Buy and slashed its target price following the Reserve Bank of India’s (RBI) action against the company’s associate Paytm Payments Bank Ltd.

The brokerage reduced its base case target price on One 97 Communications, the parent of online fintech platform Paytm, to 500 rupees from 1,050 rupees. It has a target price of 350 rupees on the stock, based on its downside scenario assumptions.

The stock plunged 20% to 608.80 rupees on the BSE in opening trade today.

The development comes after the RBI on 31 January directed Paytm Payments Bank to stop all deposits and credit transactions after 29 February due to persistent non-compliances and continued material supervisory concerns in the bank.

“RBI's strongly worded restrictions on Paytm Payments Bank reflect concerns on persistent non-compliances,” Jefferies said in a note to investors.

The central bank’s actions directly impact the wallet business and profitability of merchant payments business, which can impact EBITDA by 20%-30%, the brokerage said. The lending business (around 20% of revenues) can be significantly hit if lending partners cut back or limit their exposure, it added.

“We see the impact being much larger due to reputational concerns around the group,” equity analysts Jayant Kharote and Prakhar Sharma said in the note.

Jefferies said Paytm's business impact will largely come from reputational concerns arising from governance/compliance and hence, the path to resolution will be from stronger compliance with regulations and revoking of RBI measures.

The brokerage reduced its EBITDA (ex-ESOP) estimates for One 97 Communications by 46%/44% in FY25/FY26, led by a 7%-10% cut to payments revenues and a 17%-24% reduction in lending revenues and compression in payments margins.

Jefferies, however, noted that Paytm has a strong moat in merchant network (39 million total merchants of which 10.6 million device merchants) that competition will take time to match.

“We expect revenue CAGR of around 16% over FY24-FY26E, led by payments business as lending business consolidates,” it said.

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