Paytm’s debacle casts doubt over IPOs for Indian start-ups

A stunning two-day plunge by Paytm after its initial public offering casts a shadow over the prospects for technology firms preparing to go public in what was supposed to be the country’s breakout year.

At least some of the IPO prospects that have been “on the periphery” and looking to benefit from the flood of transactions may now rethink the timing and pricing of their issues, according to Edelweiss Financial Services Ltd.

The Paytm debacle has dimmed the mood in India’s stock market with its benchmark S&P BSE Sensex Index dropping four sessions in a row, the longest losing streak in a month. Retail investors, who bought an unprecedented amount of shares in Paytm’s parent One 97 Communications Ltd., have seen 37 per cent of their value wiped out in just two trading days. Further losses may be in store if the stock slumps from its Monday closing price of ₹1,359.6 to the ₹1,200 predicted by Macquarie Group Ltd.

“The event in a way will nudge people to be cautious and not take the market for granted by blindly placing bets,” said Gopal Agrawal, managing director and co-head of investment banking at Edelweiss Financial Services. “It is important that a company’s story and prospects are well understood by investors.”

Also read: No respite for Paytm investors, stock slumps another 13% on Monday

Equity markets had been on a tear this year, buoyed by a central bank that slashed interest rates to a record low and millions of new individual investors seeking higher returns in riskier assets. The rally has encouraged at least half-a-dozen technology start-ups to seek to public listings, including SoftBank Group-backed Oyo Hotels & Homes and logistics provider Delhivery Pvt.

Firms in the country have raised about $15 billion through IPOs this year, already an annual record by total proceeds. Yet critics have been questioning valuations on some of these IPOs, given they are still loss-making companies.

“The pandemic led to huge technology adoption in the country that got priced into the valuations of many technology companies,” said Ashutosh Sharma, vice president and research director at Forrester Research Inc. “Is this the beginning of a downward trend? I don’t know. But going forward, investors will look cautiously on the risks and business future of tech companies.”

Paytm’s valuation, at about 26 times estimated price-to-sales for the financial year 2023, is expensive especially when profitability remains elusive for a long time, Suresh Ganapathy and Param Subramanian of Macquarie Capital Securities (India) Pvt. wrote in one of the few research reports covering Paytm’s prospects. Most fintech players globally trade around 0.3-0.5 times price-to-sales growth ratio, they said.

Paytm’s large IPO size also restricted demand, which could bode well for smaller prospective IPOs. Food delivery app Zomato Ltd. and beauty startup Nykaa — both smaller than Paytm’s offering — have seen their shares surge more than 80 pe cent since their IPOs.

Edelweiss’s Agrawal suggests pricing share sales to “leave something on the table for investors.”

“If an issue could be priced 10 per cent higher or lower, it will be advisable to go with a lower pricing, which offers a much bigger upside when it comes to trade,” he said.

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