What Went Wrong With Paytm’s IPO?

It was the biggest stock listing India had ever seen – and also the biggest trading flop in the country’s primary market history.

Fintech major Paytm’s initial public offering (IPO) had promised to turn investors’ dreams into reality, but it ended up being a nightmare.

Paytm listed last Thursday with an IPO price of 2,150 rupees (close to $29) a share. It has slumped a stunning 40% since then and analysts have been trying to figure out why.

Up until Wednesday last week, Paytm, which is backed by names including Warren Buffet, Softbank and Alibaba, had been one of the country’s great success stories.

Paytm was in the right place at the right moment, according to its backers, to profit from the unprecedented rate of digitisation in India. It was seen as a company riding the crest of a wave, with the capacity to scale up from it, reap wealth, and diversify.

Venture capitalists and private equity funds saw potential in the company’s future, and came in droves to invest in it, aided by the abundant liquidity currently accessible around the world to fund and lift the latest fintech ‘star’ to newer heights.

Yet, the shares of One 97 Communications Ltd, the parent company of Paytm, ended its debut trading day on November 18 falling 27% on the issue price. On the following trading day, Monday November 22, the stock fell another 13%, cutting its market value to about $12 billion.

Despite the stock’s 10% recovery Tuesday, individual investors and global institutions such as BlackRock and the Canada Pension Plan Investment Board, which had bought up shares as anchor IPO investors, are scrambling to find out what went wrong.

Here are some of the key reasons it flopped:

Greed!

And, perhaps not surprisingly, many observers and investors attribute the dismal debut listing simply to “greed.”

Analysts say that Paytm’s valuation – at about 26 times its estimated price-to-sales ratio for the financial year 2023 – was inflated and unrealistic, given that the fintech group had projected that profitability would remain elusive for a long time.

“Most fintech players globally trade around 0.3-0.5 times price to sales growth ratio,” wrote Suresh Ganapathy, associate director at Macquarie Capital in a report released on the day of the listing. He said Paytm didn’t deserve the rich valuation.

Girish Vanvari, founder of Mumbai-based tax advisory firm Transaction Square told Asia Financial: “The lessons from this debacle is that the pricing has to be right and not optimal. Going forward, I expect that there will be more rationalisation in startup and IPO valuations, as IPOs promoters will have to leave more money on the table for investors.”

Tepid Big Investor Interest

The inflated valuation did not go down well with big investors, who ended up with a “half-hearted” response to the IPO, analysts have also said.

While the retail component of the IPO was fully subscribed, the portion allocated for Qualified Institutional Investors and for non-institutional and high net-worth investors (HNIs) was under 10%, according to market sources.

“Paytm’s IPO investors had been very mature and far more cautious, which is evident from the fact that there was very little participation from a certain class of investors and HNIs,” according to an investment banker who requested anonymity.

That was in stark contrast to recent IPOs like Nykaa and Zomato to name a few prominent listing successes, he added.

No Moat

Analyst say that even the most ardent stock investors and long-term shareholders cannot guarantee IPO success unless the target company can prove it has “moats” and market leadership in the segment it serves.

“There are two kinds of digital companies: ones that have a strong moat – or market leadership – where a company doesn’t have any competition, and ones that don’t,” Vanvari said. “Paytm, or every fintech, may not have a strong ‘moat’ in India. There are banks and other types of financial institutions to pose stiff competition.”

Paytm also faces fierce rivals in the Unified Payments Interface (UPI) transactions domain, which is dominated by giant competitors like Walmart-owned homegrown payments company PhonePe, as well as GooglePay, which reportedly have a combined market share of about 80%.

Flawed Business Model

“Paytm’s business strategy lacks concentration and direction,” Macquarie Capital argued in a research report titled ‘Too Many Fingers In Too Many Pies’. This report, which was released on Paytm’s IPO day, also describing the group as a “cash guzzler”.

It was hardly the stuff to send its stock rising off in a positive direction.

“Paytm has been a cash burning machine, spinning off several business lines with no visibility on achieving profitability,” the report said.

“Paytm has drawn in equity capital of Rs 190 billion since inception, of which 70% (Rs 132 billion or $1.77 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.”

But as the investment banker said: “Clearly, Paytm’s poor performance during its initial public offering and thereafter has tilted the fulcrum in favour of investors, who will now have a greater and more direct say in the valuation going forward.”

• Indrajit Basu