Why Did Paytm Fail To Impress Investors On Market Debut Day?

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.

Lack Of Guidance

“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 reports 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.

Bumpy Road Ahead

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.