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In early 2021, when Vijay Shekhar Sharma, Founder and CEO of Paytm or One97 Communication Limited, made it clear that his company would hit the market that year, it sparked a thousand IPO, or initial public offering, dreams in the fintech sector.
By July that year, when Paytm filed for an IPO and targeted $25–30 billion valuation, listing became the hot topic of fintech discussions. It gave wings to every promoter and investor’s aspiration to go public.
By November, when the fate of Paytm at the stock exchanges proved to be less than ideal, as its acceptance among investors proved to be very slim, fintechs went back to the drawing board to relook their IPO stance. Words like ‘efficiency’, ‘scale’ and ‘profitability’ — which rarely found mention among fintechs earlier — suddenly became serious talking points.
About two years later, when the Paytm stock touched an all-time high of ₹998.30, the IPO dreams of fintechs suddenly seemed within reach again.
Cut to the present, with the Paytm stock languishing at ₹400 a share, marred by regulatory and operational issues, the question that plagues Indian fintechs is whether they can ever transition from being market disruptors to wealth creators in the stock market?
Path to profitability
At a staggering 87 per cent, the fintech adoption rate in India towers above the global average of 64 per cent.
The subcontinent is redefining digital finance. Indian fintechs are poised to become a $100-billion marketby 2025.
Yet, faced with more and more complaince requirements, particularly on the regulatory front, many fintechs that were about to embark on the IPO path have now dropped out. They are held back by a string of worries, including cash burn and mounting losses, not to mention Paytm’s singeing experience at the bourses.
“There is no doubt that valuations were very stretched in 2021 and until about early 2022,” says an investor who declines to be named. “Some companies came out with IPOs at valuations that were just not tenable, and that caused a lot of stress in the market,” he adds.
Kunal Varma, Co-founder and CEO, Freo
The bottom line for any company to list at bourses is profitability.
The idea is to keep a simplified approach to financials, mainly the profit-and-loss (P&L) statement.
“P&L could be boiled down to just four pivotal lines — revenue, contribution, gross profit, and profit before tax (PBT). We may look bad in the near term, but in the long run this is what will help the company, investors and the retail investors,” says a co-founder of a fintech major.
Public issues in the works
The fintech sector hasn’t had a supportive environment in the last two years.
The volatile nature of the stock market and high interest rates dampened sentiment, forcing investors to think twice before doing even a due diligence on any aspect of a fintech’s business.
“Anyone who was predicating their business models around regulatory arbitrage had to go back and realign the business,” says another fintech founder.
Navi Technologies, GoDigit, PayMate and MobiKwik are among the fintechs that have filed IPO papers with Sebi.
Unicorn fintech One MobiKwik Systems has re-filed papers for an initial share sale to raise up to ₹700 crore, which is way below the ₹1,900 crore it had proposed when it first filed the draft papers in July 2021.
The company may consider a pre-IPO placement of its securities worth up to ₹140 crore. If that happens, then the size of the fresh issue may be further slashed, clearly indicating that current IPO sentiments don’t favour fintechs.
What’s more, MobiKwik’s IPO documents reveal that proceeds from the issue, to the tune of ₹250 crore, will be used to fund growth in the financial services business and ₹135 crore would go towards the payment services business.
This is quite a departure from the initial expectations of fintechs, which had viewed IPOs as an exit route for existing private equity and venture capital investors, rather than a capital raising exercise for their business.
Lessons learnt
Fintech platform KreditBee is inching closer to a public listing. Madhusudan Ekambaram, co-founder and CEO, says the credit platform is probably one round away from an IPO.
In January last year, it raised $100 million in an extended Series D funding led by Advent International. “The company plans to go for an IPO in less than three years,” Ekambaram says.
Harshil Mathur, co-founder and chief executive, Razorpay
Ahmedabad-based LendingKart is also said to be gearing up for its IPO in 1–2 years.
Striking an optimistic note, Kunal Varma, co-founder and CEO of Freo, a neo-bank outfit, says, “Learning from the past, especially from pioneers like Paytm, we’ve gained valuable insights into navigating market and regulatory dynamics with a focus on profitability. The experience has not only enriched fintechs but also made the market more receptive and better prepared for fintech offerings... the path to IPOs for fintech companies in India seems not just realistic but also filled with opportunities.”
Wait and watch
Some experts, however, remain circumspect about the fintech sector’s IPO prospects.
Profitability isn’t just a milestone but a recurring theme for companies preparing for an IPO, an industry executive points out. In order to ensure a successful list and life after that in the bourses, it is crucial to align projections accurately, he says.
“Founders are resilient and have conviction in their business model, but investors are wary post the regulatory crackdown. If the regulator has not clearly defined rules, that means the area is a no-go zone,” another late-stage investor says.
Take the case of Razorpay, a major business-to-business fintech player. The company is clear that it should be profitable across its business verticals in the next two years before it can think of listing.
“We are looking to scale up and become profitable on all our business fronts. We give ourselves two years to get to that scale before we can go public. Our online payments business is break-even,” says Harshil Mathur, co-founder and chief executive, Razorpay.
Moreover, turning profitable goes beyond its IPO strategy; it is a key component of the company’s long-term plans, Mathur says. Currently, while Razorpay’s payment business is profitable, it is busy cutting losses in its non-payment business vertical.
There were strong talks of IPO at PhonePe and Cred, two marquee fintechs, until recently. The fate of these plans remains unknown post the Paytm show.
It remains to be seen which companies would attempt the IPO journey once the dust settles down around the Paytm saga. For now, it seems that the quitters may outnumber the bravehearts.
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