Paytm’s IPO disappointment is a testament to the fact that the law of averages finally catches up with you. Without a doubt, Paytm has been one of the success stories of the previous decade that was marked by an unprecedented rate of digitization of people’s lives. Paytm was at the right place at the right time to gain from this, scale up and diversify its business. Venture capitalists and private equity funds saw potential in the group’s future, they came in droves—helped by easy liquidity available globally then—to fund the company and took its valuations to newer heights.
He had everything going for him when he started his fintech company Paytm NSE -3.79 % a little over a decade back: A modest background, a brilliant idea and an insatiable hunger to disrupt.
Along the way, as top people like Jack Ma and Warren Buffet hitched their wagon to the company, Sharma became a star. And then a lightning rod.
India’s largest IPO thus far has tanked despite the best efforts of the management, its heavyweight bankers and even some of the blue-blooded institutional investors Blackrock, the world’s largest asset manager, CPPIB or the sovereign wealth funds of Abu Dhabi and Singapore who lent their support as anchor investors. But when $5 billion was shaved off its $20 billion valuation, the stock market has once again proven why it is the best leveller.
While there were always questions raised on valuations these start-ups command, they rarely come under scrutiny as long as only VC and PE funds money is involved. But once you offer equities to the public, you open yourself up to all kinds of scrutiny—regulatory as well as investor. Every number and every performance metric is analysed threadbare. All possible future scenarios—competition, outlook and cash flow—are looked into. The more noise you make, the more you come under the radar. The same happened to Paytm. Analysts and investors do not see eye to eye with Paytm on the valuation of its IPO. The issue price of Rs 2,150 turned out to be a big spoiler for the fintech company that expected a mega subscription. At a time when ‘rightly’ priced IPO issues were getting subscribed 200-300 times followed by listings at 50-100% premium, Paytm IPO failed on both counts. While it got a tepid 1.8 times subscription, the share got pummelled on its debut on the exchanges as it closed day one with an around 27% fall.
Paytm-owner One97 Communications, a digital firm, made a disappointing stock market debut, unlike other tech-oriented companies such as Zomato, PB fintech and Nykaa, which stole the listing show.
Paytm, India’s biggest IPO with a size of Rs 18,300 crore, got listed on the bourses at 9 per cent discount to its offer price and the share touched the lower circuit on its market debut day. It closed at a price of Rs 1,560, 27.40 per cent below the offer price. Out of the total issue, the fresh issue was worth Rs 8,300 crore and the offer for sale was for Rs 10,000 crore.
Experts believe that extremely expensive valuation and no clear guidance from the management on when the company will start making profit are the reasons for the poor show. Reasons for the same are listed below:
Lack Of Guidance
Paytm Shares Down 26% After Making Market Debut.
“Paytm is not a secular growth story. One has to wait for a very long time for them to make profit as big people are entering the field. Also, it is expensively priced,” says A.K. Prabhakar, head of research, IDBI Capital.
Macquarie Capital in its research report, Too Many Fingers In Too Many Pies, released on Paytm’s listing day, writes, “Paytm’s business model lacks focus and direction.” The report has termed the company “a cash guzzler” and has raised doubts on its scale and profitability.
“Paytm has been a cash burning machine, spinning off several business lines with no visibility on achieving profitability. Paytm has drawn in equity capital of Rs 190 billion since inception, of which 70 per cent (Rs 132 billion) has gone towards funding losses. The business generates very low revenues for every dollar invested or spent towards marketing. This is especially problematic for a low-margin consumer-facing business where competition across each vertical is only increasing,” says the report.
Pricing Issue
Some analysts have been pointing out the hefty pricing of the IPO since the beginning. The grey market pricing of the IPO was at a steep discount owing to higher valuation of the company.
Siji Philip, senior research analyst, Axis Securities, a broking firm, says, “Globally, profit-making payment companies are trading at median nine-times of future earnings, whereas One97 Communication, a loss-making company, is valued at 49.7-times its FY21 revenues.”
The Macquarie report says that Paytm’s valuation, at around 26-times FY23 estimated price-to-sales, is expensive especially when profitability remains elusive for a long time. Most fintech players globally trade around 0.3-0.5-times price-to-sales, adds the report.
Competition From UPI Apps
Paytm will find it challenging to expand its business going ahead. “Paytm’s payments-based business model has been disrupted by Unified Payment Interface (UPI), a real-time retail payment system developed by government-backed National Payments Corporation of India (NPCI).
UPI was launched in December 2019 for both the consumers and merchants. “UPI now accounts for 65 per cent of Paytm’s GMV (gross merchandise value), which we expect to increase further to 85 per cent by FY26E. Hence, Paytm’s take-rates should continue to decline,” says the Macquarie reports.
Experts advise investors to stay away. “If it comes down in the range of Rs 1,100-1,200 then only investors, that too with a very high-risk appetite, can invest with a longer-term view or else stay away,” says Prabhakar of IDBI Capital. Macquarie has given a price target of Rs 1,200.
Receding Liquidity
Another perspective on the disappointing listing of the mother of all IPOs is the bad timing to list the company. Marquee names like Mirae Asset, Aditya Birla and HDFC Mutual fund would have never invested money in a company with a flawed business model. As per company data, 18 schemes from four mutual funds poured Rs 1,050 crore in Paytm during Anchor Book building.
So, it led us to ask then what could lead to such a disappointing performance on its first day of listing?
One could be the draining of liquidity from the capital markets. In the last one month, Nifty fell 840 points and on most of these days, Foreign Institutional Investors were sellers. In anticipation of a rate hike by the federal reserve in the coming months, FIIs are playing safe. Even Indian bond markets are showing a sign of rate hike. The Overnight Index Swap (OIS) is trading at 35 to 40 basis point above the Reverse Repo rate of 3.4 percent. So, bond markets are anticipating rate hikes in India too. Generally, interest rate hikes are considered as bad omen for buoyant equity markets.
Another reason for the lacklustre response to Paytm IPO was its huge size. The company raised Rs 18,300 crore and the market does not have an appetite for such a large listing. Even fund flows in equity mutual fund schemes have also declined for the past three months. So with FIIs on cautious stance and DIIs liquidity tap slowly and steadily declining, tepid response for such a large scale IPO was much expected from market veterans.
According to Value Research data, year to date, in this calendar year, 49 IPOs had raised Rs 1,01,053 crore, in which Rs 62,077 crore was Offer For Sale (OFS). Paytm IPO alone has Rs 10,000 crore as an OFS component translating into 16.66 percent of the entire OFS segment of all listed companies.
Speaking on the condition of anonymity, one market participant viewed that a flawed business model is an excuse to hide a slowdown in liquidity flows.
“Neither Zomato nor Paytm is making money then why is it that Zomato got an excellent response on listing day, while Paytm flopped?” he asked. It’s all about receding liquidity flow, he added.
The battle In the payments app space now rests upon who offers the best user experience with seamless, feature-rich platforms. But it also translates to a fragmented market with no customer loyalty and churns depending on freebies and cash backs. Further with zero MDR, wallets on a standalone basis are unlikely to make money thereby forcing them to use payments to hook users and then offer a portfolio of services like insurance, wealth management, lending to monetize them, much like the Ant playbook.
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