News Analysis

Paytm: No cashback, only cash gone!

Keerthi Sanagasetti BL Research Bureau | Updated on November 18, 2021

Valuation is expensive even after a disappointing listing

 

Paytm (One 97 Communications) made a weak debut today at the stock market, at a 9.1 per cent discount to its offer price of ₹2,150 apiece. At the time of writing, the stock further fell by 16.5 per cent to ₹1,632.65.

The offer worth ₹18,300 crore, with a fresh issue of ₹8,300 crore, was one of the biggest IPOs in the Indian stock market. The buzz around it was heightened as Paytm is a household name in the digital payments space.

But all of that fizzled out sooner than expected. Weak financial metrics, unclear management commentary and the complex structure of the company (with numerous subsidiaries and associates) proved a buzzkill.

Paytm makes a weak debut, lists at 9% discount

The overall offer saw a subscription of just 1.89 times, compared to others whose subscriptions more than centupled in recent times (Latent View Analytics and Sigachi Industries, to name a few). Besides, while the portion reserved for retail investors was subscribed 1.66 times, that of non-institutional buyers was subscribed just 0.24 times. Qualified institutional buyers, however, subscribed 2.79 times the shares reserved for them.

What should investors do now?

We had recommended an ‘avoid’ on the IPO in Portfolio dated November 7 and maintain our stance post the discounted listing. If you had applied for the issue, the allotment might have been hassle-free. However, long-term investors can exit the stock at current levels to avoid further losses (the stock, at current levels, has already eroded 24 per cent of investor wealth from the issue price). The risk-reward metrics for the stock don’t seem favourable for the long term.

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This is because, while the growth story of Indian digital payments holds true, Paytm’s revenue growth hinges on a host of other factors such as the high competition (formidable ones include Jio-Facebook, Whatsapp, Walmart, Flipkart, Phonepay and Google, among others ) it faces in each of the segments it operates in, low take rate (per transaction revenue) and RBI limits on transaction fees and commissions.

Translating these revenues to profits may be another tall task, given its previous track record of acquiring customers and merchants through marketing spends (discounts and other offerings), and lack of a defined path to profitability (EBITDA margin was at a negative 59 per cent in FY21 and negative 37.3 per cent in the June 2021 quarter) in the near future. That apart, regulatory curbs, its complicated business structure, and the exodus of several senior-level personnel months before the issue launch highlight risks to the company’s business and management.

Even after the weak listing and the intra-day fall, the stock seems expensive when compared to other listed profitable foreign peers. At the current trading price of ₹1,632.65 apiece, the company is valued 33.2 times its FY21 revenue, compared to its profitable foreign-listed peers that trade in the range of 7-12 times their revenues.

Published on November 18, 2021

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