Paytm staged India’s largest-ever IPO, then flopped in its debut. Investors are ‘coming to their senses,’ analysts say

November 18, 2021, 10:20 AM UTC

Shares of Indian digital payments firm Paytm disappointed in their trading debut on Thursday after the company’s oversubscribed $2.44 billion initial public offering last week made it India’s largest ever. Paytm’s stock sunk 27% below its issue price in afternoon trading on the Bombay Stock Exchange and the National Stock Exchange as investors fretted about its long-term prospects and whether it can ever turn a profit. 

Paytm’s shares were trading at a discount of 27.3% or INR 1564 ($21.15) per share at 1514 Indian Standard Time after opening at INR 1955 ($26.4), down from the issue price of INR2150 ($29).

Paytm is the second notable loss-making company after food delivery firm Zomato to raise money on Indian exchanges. Paytm, the fintech company that Indians use for daily services like buying groceries and paying their electricity bills, narrowed its operating loss to INR16.55 billion ($220.6 million) in the financial year that ended March 2021 from INR 24.68 billion ($329 million) a year ago. It counts China’s Ant Group, Softbank’s Vision Fund, and Berkshire Hathaway among its investors.

Paytm is one of India’s largest digital payments companies with around 337 million users, 50 million of whom are active monthly users. Indians use the service to pay for a wide range of services, from taxi cabs to airline and movie tickets. Paytm serves more merchants than any other payments firm in India, with over 20 million partners in its network. It makes money by charging large merchants a fee.

Paytm also offers wealth management solutions and banking services.

But analysts said that investor sentiment toward the firm has soured because the company has failed to state how each of its business units will turn a profit. 

Ahead of the company’s share listing, brokerage firm Macquarie Research reduced its target price to INR1,200 ($16.2) a share, down 40% from the issue price of INR 2,150, saying that Paytm’s business model lacks focus and direction.

Paytm’s spokesman did not comment on the share debut.

Dabbling in multiple business lines inhibits Paytm from being a category leader in any business except payment wallets, which are becoming inconsequential with the meteoric rise of a government-run Unified Payment Interface (UPI) for digital payments, Macquarie said in a note to investors.

Paytm won’t make significant money by merely being a payments distributor; eventually, it will have to provide lending, the brokerage said.

“It is okay that the culture (of Paytm) is to get more revenues, but do their businesses have a path to profitability?” said Abhishek Basumallick, co-founder of equity advisory firm Intelsense.

The company is likely to find it difficult to expand its customer base at the same rate as in the past because it will have to find growth in India’s rural hinterlands, where Internet penetration is relatively low compared to urban centers, Basumallick said.

The company’s rapid expansion has been fueled by offering discounts and cash back to customers, but such incentives will prolong how soon it can turn profitable, says Tanushree Banerjee, co-head of research at Equitymaster, a company that provides investment advice.

Investors’ subdued response to Paytm’s share listing will not likely hurt the broader trend of global firms investing in Indian markets as an alternative to China, where a government crackdown on Internet firms, online tutoring, and real estate has rattled investors, analysts say.

But Paytm’s flop is likely to make India’s retail investors more skeptical about the performance of digital firms, analysts add. On Tuesday, the Reserve Bank of India said in a report that equity valuations are too high by conventional yardsticks such as the share price relative to company’s earnings per share.

India’s benchmark stock index, the Sensex, hit a record high of 62,156 points on Oct. 19, up roughly 30% year-to-date as the economy recovers and COVID cases decline. Since the October high, the index has fallen by 3.45% to 60,008 points. Indian tech startups have queued up to list, hoping to take advantage of the sizzling markets to get rich share valuations, and the tepid response to Paytm’s share listing struck a sharp contrast to other recent IPOs. 

Indian e-cosmetic retailer Nykaa’s shares popped nearly 80% in their debut on Nov. 10 following its $713 million IPO, turning the company’s founder Falguni Nayar into India’s wealthiest female self-made billionaire. Online insurance aggregator Policybazar also debuted on Nov. 15 with a gain of around 17%.

Food online delivery company Zomato’s shares popped more than 70% in their debut in late July, which had buoyed expectations of spectacular share premiums among other digital firms.

Some of the blockbuster debuts in the past months are partly due to a sense of euphoria among Indian investors that a bull run in the stock markets would never end, but people are “coming to their senses,” says Neil Bahal, managing director of Negen Capital, a Mumbai-based investment management firm.

“If a couple of public issues fail, it would be a boon to the markets,” he said. “Share prices will then get reasonably valued.”

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