Explained: the Paytm crash in its early days

India’s largest initial public offering (IPO), which raised Rs 18,300 crore from investors, lost nearly a quarter of its valuation on listing day. The parent company of the Fintech Paytm app, One 97 Communications Ltd, has ended its first trading day with a 27.24% discount off the issue price of Rs 2,150 per share – with a shadow on both the company’s IPO price and the tech companies’ dream run on public procurement this year.

What happened with Paytm on Thursday?

Payment listed at a 9% discount at Rs 1,955 on BSE, and closed at Rs 1,564.15, down 27.24% from the IPO price. Script trading was halted after reaching the lower circuit in the second half of market hours.

On the NSE, Paytm listed at Rs 1,950 and closed at Rs 1,560, 27.44% below the IPO price.

At the current price, the market capitalization of the company stands at Rs 1.01,399 cr, compared to market expectations of a valuation of Rs-1,40,000 cr. In dollar terms, that equates to nearly $ 13.65 billion, significantly less than the $ 16 billion it last raised privately in November 2019.

Paytm’s low listing occurred amid lukewarm sentiment in the broader equity market; The benchmark Sensex fell 372 points to close at 59,636.01 on Thursday. “The low listing of India’s largest IPO and the weakness of the global market amid rising inflation have had an impact on domestic sentiment,” said Vinod Nair, head of research at Geojit Financial Services.

The approximately 14% stake of the founder and CEO of Paytm, Vijay Shekhar Sharma, is now valued at Rs 14,000 cr. The Chinese group Alibaba (6%) and its partner Ant Financial, as well as the Japanese SoftBank and Berkshire Hathaway of Warren Buffett, are the main shareholders.

Why did the title perform poorly?

According to market participants, an inflated valuation and significant float were mainly responsible for this. Institutional investors have raised concerns about the company’s growth prospects, given the lack of a license to enter the lending industry – one of the most lucrative verticals in the fintech space – and intense competition in the segments of Paytm’s operations.

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Macquarie Research noted Thursday that Paytm’s valuation was “expensive” – ​​26 times its estimated price-to-sales ratio for 2022-2023, while the global benchmark is 0.3 to 0.5 times the growth ratio. price / sales for fintech companies.

In addition, stock analysts pointed out that the valuation of the company has traditionally been decided by foreign investors with a higher risk appetite, while the Indian public markets decide on the basis of conventional measures of profitability and profit. .

Indications of a poor start were also visible in the slower take-up of the public offering – the issue was only fully subscribed on the last day at 1.51 times, with the commercial part booked 1.62 times . The gray market that preceded the script’s listing indicated a large discount when signing up.

Analysts also said the offer left nothing on the table for investors – those who receive the company’s shares in the IPO award are sitting on huge losses. Much of the money raised through the offer – around Rs 10,000 cr – went to existing investors who left their stake in part or in full.

“Up to 75% of promoters come from other countries and sell holdings by offer for sale (OFS) worth Rs 10,000 cr, which represents more than 50% of the value of the introduction in stock Exchange. It is not a market leader in any company, ”said Manoj Dalmia, Founder and Director of Proficient Equities Pvt Ltd.

In addition, the stock markets, which appeared to be in a long-term bullish phase until recently, have been sluggish of late due to fears of rising inflation and interest rates and the pullback of the accommodative monetary policy of central banks. The excess liquidity in the system has been a major catalyst fueling the recent IPO frenzy.

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Will other IPOs be impacted?

“The markets will punish overpriced IPOs,” veteran BSE broker Pawan Dharnidharka said. “When the stock price trades at a 20% discount on the day of the listing, that’s a clear sign that promoters should not defraud investors. Issuers are expected to leave profits to investors when listing shares. “

The IPO market has seen several high-profile issues by new-age companies that have raised huge amounts of money from investors. Besides Paytm Rs 18,300 cr, Zomato raised Rs 9,375 cr, Policybazaar Rs 5,700 cr, Nykaa Rs 5,352 cr, Latent View Analytics Rs 600 cr and Easemytrip Rs 510 cr.

Among recent IPOs, the offer from FSN E-Commerce Ventures, the company behind Nykaa, was underwritten more than 82 times by the end of the last day of the bidding process. The company listed at a premium of 79.4% over the IPO price of Rs 1,125. The offer from PB Fintech, the parent company of insurance technology company Policybazaar, was oversubscribed 16.6 times on the last auction day on November 3. NSE.

On the anvil are several other consumer and startup IPOs, including those of Delhivery (Rs 7,460 cr), PharmEasy (Rs 6,250 cr), Cartrade Tech (Rs 2,998 cr) and Oyo (Rs 8,430).

What are the downside risks for Paytm?

Analysts noted that Patym is just a leader in the online wallet segment, which is losing market share as more people opt for UPI-based payments to transfer money directly from their homes. Bank accounts.

“Touching multiple lines of business prevents Paytm from being a category leader in all businesses except portfolios, which are becoming inconsequential with the meteoric rise in

UPI Payments, ”said Macquarie Research – also noting that commissions on portfolio industry transactions were likely to be reduced by competition and regulation.

Analysts also said Paytm’s ability to improve profitability through the distribution of financial products such as loans, mutual funds and insurance would come under competitive and regulatory pressure.

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