The Paytm IPO was under the spotlight for months. The company was blowing the conch of a blitzkrieg opening at the Indian stock market, pitting itself as the exceptional startup of the century. Even the listing was the highest ever in the history of the Indian stock exchange.
However, it failed to live up to the hype on its listing day and as the stock tanked after facing the share market’s harsh reality, all that was music blown turned into a cacophony as the company gasped for air on the opening day itself.
One97 Communications, the parent company of the country’s largest digital payments startup, made an underwhelming debut on Indian bourses on November 18. Its share price crashed by up to 26 percent to as low as 1,603.92 rupees ($21.62) in the morning, from the issue price of INR 2,150. The downward journey has continued since till the time this story was being filed. Here are the five reasons experts think led to this debacle.
Being over-optimistic
Market experts believe that an inflated valuation and large float were mainly responsible for the shares falling on an opening day. Even before the listing, institutional investors have flagged concerns with the company’s growth prospects, considering the absence of a license to enter the lending business — one of the most lucrative verticals in the fintech space.
Macquarie Research noted that Paytm’s valuation was “expensive” — 26 times its estimated price-to-sales ratio for 2022-23 when the global benchmark is 0.3-0.5 times the price-to-sales growth ratio for fintech firms.
Stock analysts pointed out that the company’s valuation has traditionally been decided by foreign investors having a higher risk appetite. In contrast, Indian public markets decide based on conventional profitability and earnings metrics and Paytm has failed to impress in these sectors.
The business model failed to impress investors
Paytm’s heavily cash-burning business model, no clear path to profitability, large regulatory risks to the business and questionable corporate governance always cast a shadow of doubt on its high valuation and its failure to perform at the stock market only bolstered these presumptions.
The company’s challenge will be to build scale with profitability. According to Macquarie, the consumer and loan distribution, at best, is only a roughly $350 million opportunity.
Paytm has to lend, i.e., use its balance sheet to make loans and do that profitably. It needs a banking license, credit underwriting experience, and collection infrastructure, all of which are presently lacking.
Valuation failed to initiate confidence among investors
Analysts cited the expensive valuations for a company that had not made profits for the past eight consecutive years. It was only in this fiscal that Paytm lowered its expenses and reported a considerably narrower loss at INR 1,596 crore compared to a year ago. Profitability, though, is still not on the horizon.
Besides, the company spread itself too thin over the years, diversifying into payments, financial services, travel, movie ticketing, fantasy sports, and e-commerce. This, too, did not reap desired revenues.
Dabbling in multiple business lines inhibits Paytm from being a category leader in any business except wallets, which are becoming inconsequential with the meteoric rise in UPI payments. Therefore, the question is rising on its ability to achieve scale with profitability.
Failed to take the bull by its horn
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.
In the last month of Paytm listings, 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 were playing safe.
Even Indian bond markets were showing a sign of a rate hike. The Overnight Index Swap (OIS) was trading at 35 to 40 basis points above the Reverse Repo rate of 3.4 percent. So, bond markets were anticipating rate hikes in India too. Generally, interest rate hikes are considered a bad omen for buoyant equity markets.
Paytm’s weak listing happened amid tepid sentiment in the broader equities market; the benchmark Sensex fell 372 points to close at 59,636.01 on November 18.
Challenge faced by 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 consumers and merchants. UPI now accounts for 65 percent of Paytm’s GMV (gross merchandise value), which is expected to increase to 85 percent by FY26. Hence, Paytm’s take-rates should continue to decline, said a report by Macquarie.
