Paytm Share Price: Paytm share price was locked at 5 per cent upper circuit in early trade on Monday after the stock received a ratings upgrade from Yes Securities.

The sharp rally comes as Yes Securities upgraded the payments company stock to “buy” from “neutral” and raised the target price to Rs 505 from Rs 350.

The brokerage house notes five key reasons behind the rating upgrade, including Paytm’s declining dependence on the wallet business for revenue, the NPCI nod to participate in UPI as a Third-Party Application Provider (TPAP) in the multi-bank model, well-contained client loss due to reputational damage, rising partner addition and the competitive DNA of the company.

Firstly, Yes Securities noted that the dependence of One 97 Communications, the parent company of the fintech giant Paytm, on the Wallet business for revenue had already declined materially to only about one-sixth of Payments revenue.

Wallet business is housed within Paytm Payments Bank (PPBL), which after the RBI ban, will see its revenue decline to near negligible. However, the brokerage firm noted that, out of the rough run rate of Rs 6,000 crore worth of revenue for the Payments business, the contribution of the Wallet had declined to about Rs 1,000 crore. Hence, the reset, while damaging for One 97 Communications (OCL), will not have a particularly outsized impact.

Recently, the National Payments Corporation of India (NPCI) had approved OCL to participate in UPI as a TPAP in the multibank model.

“It needs to be understood and appreciated that, had this approval not come, OCL’s UPI business would have, also, declined to nil. This is because OCL used to conduct its UPI transactions with PPBL as its Payment Service Provider (PSP) and with a unique UPI handle carrying “@paytm”. Under the multi-bank model, OCL has tied up with Axis Bank, HDFC Bank, SBI and YES Bank and the @paytm UPI handles move en masse to YES Bank, ensuring no disruption to the UPI business,” Shivaji Thapliyal, Head of Research & Lead Analyst, Yes Securities said in a report.

The analyst also believes that OCL’s client loss due to reputational damage and on-ground confusion will be well contained. It noted that OCL’s UPI transaction value has declined 14% MoM in February 2024, which, adjusted for a number of days, would be closer to ~10%.

Moreover, OCL’s loan distribution has undergone a reset but the brokerage expects structurally, growth will be driven by lending partner addition alongside same partner growth.

Lastly, while both the Wallet and BNPL businesses are now under a cloud, the past successes underline the competitive DNA of OCL as an organisation, said the analyst.

OCL was the runaway leader in the Wallet market with $19.1 billion worth of Wallet GMV in FY23. In comparison, Mobikwik was the distant second with $1.01 billion. Similarly, Paytm was the single largest player in the BNPL market with a market share of 44.2% in FY23, with Mobikwik in second place with a 9.3% share, the brokerage report noted.

“While both of these businesses are now under a cloud, the past successes underline the competitive DNA of OCL as an organisation. Having received feedback from the regulator and undergone a de-risking process, we now believe that a less volatile future lies ahead for OCL,” said Thapliyal.

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