The Paytm IPO has sparked a flurry of analysis, hot views, and insights on social media this week. And once the financial behemoth went public, most of it became fodder for memes as Paytm’s price dropped.
Paytm’s high pre-IPO value has come back to haunt the company, following a significant 20 percent reduction on the first day of trade. Paytm couldn’t last one full trading session on its market debut after the fanfare surrounding India’s largest initial public offering, when its stock struck the lower circuit and was yanked off the trading floor.
Naturally, more worries and questions have been raised about the Vijay Shekhar Sharma-led fintech behemoth’s high valuation, lack of profitability, and business strategy, which many argue lacks a competitive advantage. Given the paucity of earnings for Zomato, which had a much smoother IPO, it’s a bit of a wonder why Paytm has taken such a hit.
After hitting the lower circuit of INR 1,560, trades on Paytm were halted by the stock exchanges to prevent extreme price movements and protect existing investors, with INR 52,000 Cr of investor wealth being eroded. Paytm’s market cap went below its pre-IPO valuation of $16 Bn and stood at INR 1.01 Lakh Cr ($13.64 Bn).
Of course, in the run-up to the IPO, the topic of Paytm’s overvaluation was a major source of dispute for experts. According to pre-IPO reports, Paytm had set a target valuation of $35 billion, but later reduced it to $20 billion for the IPO.
Analysts had cautioned about investing in the stock, fearing a discount on listing. Macquarie Research said, “Paytm’s valuation, at 26x FY23E Price to Sales (P/S), is expensive, especially when profitability remains elusive for a long time.” Worryingly, it also said Paytm is only likely to generate positive free cash flow by FY30, saying that its business model lacks focus.
Another major problem for the fintech giant is the perceived lack of a competitive moat, even though Paytm does have one of the largest payments banks in the country, which it leverages to fulfil payments. But beyond this, the lack of a competitive edge is apparent.
For instance, other payments apps and fintech companies have also added the array of services that Paytm does — either directly or through partnerships — which does dent the company’s prospects in the long term.
However, the fintech major is seeing a bit of a comeback (as of 26th November), with this stock rising by more than 30% over just 3 trading days. Some put this down to Paytm’s October financial results, released over the previous weekend. However, in a market often ruled by sentimentality, one cannot rule out this being a surge fuelled by retail investors looking to buy the dip.
Paytm’s yo-yo debut raises the question: should a startup be judged on the same metrics as more traditional brick-and-mortar companies? With profits being elusive for startups, as they burn through mountains of cash, perhaps we need other measures of growth and success. After all, Rivian is a billion-dollar enterprise despite not having released a car till date.
Fintech business concepts, according to Paytm founder Sharma, are not well understood. Cross-selling across Paytm’s multiple businesses is a major strength, he insisted this week. “These models are simple to comprehend… If I sell a wallet or a phone, or if I can pick up food from a restaurant… then you know the business model in comparison to [payments]…” he was reported as saying.
Naturally, all eyes will be on Paytm related IPOs. PharmEasy, OYO, MobiKwik, Delhivery, ixigo, and others are preparing to enter the public markets, and Paytm’s lacklustre performance may give stock market investors pause. With Paytm’s lackluster debut, market attitude toward fintech businesses has already soured, resulting in an 11% drop in Mobikwik’s grey market stock price.
As Nithin Kamath, Zerodha’s Co-founder says, IPOs help early investors exit, more than growing the business. This is particularly true in Paytm’s case, , with INR 8,300 crores of the money raised in the IPO ploughed back into the business, with the remaining INR 10,000 crores being given back to exiting investors.
Regardless, it would seem that India Inc. is rather bullish on the possibilities presented by the IPOs. What about you? Are you in, or out? Let us know in the comments below.