Paytm to benefit from wallet interoperability; Morgan Stanley, Citi bullish on stock

After the NPCI's wallet interoperability guidelines, Paytm has announced that its homegrown payments bank said full KYC wallet customers will be able to make payments on every UPI QR code and online merchant where UPI payments are accepted. With the new interoperability norms soon to be live, Paytm Payments Bank is in for a treat. The payments are expected to see additional revenue and higher wallet-loading charges. That being said, brokerages are optimistic about Paytm's stock price and have recommended buying.

On Tuesday, Paytm stock closed at ₹617.50 apiece marginally down on BSE compared to the previous closing. Its market cap is over ₹39,136 crore. Paytm is the largest fintech offering digital payments and financial services.

In its regulatory filing, on Monday, Paytm said, from now on, Paytm Payments Bank will earn 1.1% interchange revenue when Paytm Wallet customers make payments on merchants acquired by other payment aggregators or banks.

Also, the bank will pay 15 bps of charges for adding more than ₹2,000 using UPI, and in turn, will also earn 15 bps when any other wallets use the bank to add more than ₹2,000 using UPI.

Paytm Payments Bank Spokesperson said, “We welcome NPCI’s interoperability guidelines that allow Paytm Wallet to be used in every nook and corner of the country. This is in line with our mission to bring mobile payments to every Indian everywhere. As the pioneer of mobile payments and QR-based payments, this move presents incredible growth opportunities for India’s payment ecosystem."

At present, Paytm Payments Bank is the leader in acquiring UPI payment merchants. It is also the top UPI beneficiary bank for 21 months in a row and has registered 1,657.41 million transactions in February 2023.

Also, the bank is the first payment bank to introduce UPI LITE.

On March 24, NPCI declared full interoperability of KYC wallets (PPIs). Further, it announced the interchange for using PPIs on UPI at up to 1.1% of transaction value above Rs2,000. The new guidelines will come into effect from April 1st, 2023.

Following this, Morgan Stanley sees additional revenues for Paytm Payments Bank (49% owned by OCL) when PAYTM's full KYC wallet customers transact using their wallets on merchants acquired by other service providers.

In its latest note, Stanley said that the exact revenue benefit will be a function of PAYTM wallet usage on non-PAYTM QRs/online merchants and respective MDRs. If well adopted by PAYTM wallet users/merchants, the benefit could be meaningful, as Paytm Payments Bank is the largest issuer of KYC wallets with >100mn users.

On the other hand, Stanley's note said the cost of wallet loading service charges that Paytm Payments Bank would have to pay to the remitter bank would be 15bps (for transactions above Rs2,000 that are done via UPI), as opposed to nil now.

Further, Stanley believes that One 97 Communications should also benefit as the interchange paid to Paytm Payments Bank would be lower, in line with the lower standardized interchange. However, this would imply lower revenues for Paytm Payments Bank.

But Morgan Stanley also awaits clarity from management on the net positive impact of the above guidelines.

On One 97's valuation, Stanley's note said, "CF, probability-weighted 70% base,25% bear,5% bull. Skew reflects regulatory uncertainty. The RBI banned new customer onboarding at Paytm Payments Bank & is yet to clarify changes to digital payment charges."

Its note further added, "we apply adj.F26e EV/sales multiples of 3.5x base,2.3x bear, and 3.6x bull & derive F25e EV, which we discount to Dec-24 at a 13.9% WACC. We then add net cash to arrive at PT. Relative valuation based on US payment firms." Stanley has given 'equal weight' to Paytm stock with a target price of ₹695.

Meanwhile, as per Citi's note, new guidelines of NPCI will have two major implications for Paytm.

Firstly, there will be universal acceptance of wallets (Paytm has an estimated c60% market share in wallets) across all UPI QRs & Devices increases the salience/relevance of wallets. Secondly, regulator-defined interchange commercials on wallet-over-UPI versus extant bilaterally-agreed commercials between Paytm and PPBL is a positive from a governance point of view.

In regards to valuation, Citi said, "we value Paytm on a SoTP basis, assigning different multiples to the three key verticals. We value the Payments business on an EV/GP basis at 13.5x Sep’24E (at par with global payment companies on EV/GP basis; EV/S: 4x) resulting in Rs454/sh. We value the Financials Services business on EV/S at 12x (we expect higher profitability in the financial services vertical and in-line with global fintech offering similar services; multiple at 20% premium to global peers ) – Rs388/sh. We value the commerce and cloud vertical at 3x EV/S at the lower end of global ecommerce valuations – Rs85 per share. Overall, this approach (+ net cash and investments) yields a TP of Rs1,061 per share."

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