Paytm IPO is here – 7 things to know before you invest

The ₹18,300 crores Paytm’s three-day initial public offer (IPO) opened on Monday, 8th November 2021 and is India’s largest IPO trumping Coal India’s ₹15,200 in 2010. PayTM IPO is another monumental event for the country’s fintech ecosystem – although what will be the future? We will probably know soon enough.

Paytm is the fourth tech startup this year after Zomato, Nykaa and Policybazaar.

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In this article

• Issue details
• About the company
• Key investors in Paytm
• Objectives of the IPO
• IPO risks
• Financials and Valuation
• Recommendation

For you: What is an IPO? Should you invest in them?

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Here are important things to know about the Paytm IPO before you invest:

1. Issue details

• Price Band: ₹2080- ₹2150
• Open Date: Nov 8, 2021
• End Date: Nov 10, 2021
• IPO Size: ₹18,300 Cr
• Face Value: ₹1 per share
• Minimum Investment:  ₹12,900 (6 shares)
• Lead Managers: Morgan Stanley India Company Private Limited, Goldman Sachs (India) Securities Private Limited, Axis Capital Limited, ICICI Securities Limited, J.P. Morgan India Private Limited, Citigroup Global Markets India Private Limited, HDFC Bank Limited
• Issue break-up:

QIB Portion	75%
NIB Portion	15%
Retail Portion	10%

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2. About the company

Incorporated in 2000, One 97 Communications Ltd is India’s leading digital ecosystem for consumers as well as merchants.

The company launched PayTM app in 2010 as a platform to let people top up their mobile phone balance. By 2014, it became a digital wallet platform. At present, the company is diversified financial services and e-commerce platform offering everything from digital wallet, payments bank service, mutual funds, stockbroking, and insurance to e-commerce (a bet that didn’t quite pan out), fantasy sports, and ticketing (part of their commerce and cloud segment).

The company’s brand ‘Paytm’ is one of the most renowned brands in India and is the largest payment platform in India in terms of number of transactions.

• Paytm Mall – Online shopping
• Paytm Money – Stock broking, mutual funds, IPO and investment services
• Paytm Gold for Digital Gold investment
• Paytm Travel – online ticket booking service for travel and movies
• Bill payments
• Paytm Wallet – semi-closed wallet
• FasTag for automatic toll payment through RFID.

The aim of Paytm is to keep users locked-in inside its super app (we hope that this strategy pays off dividends).

Let’s look at some astounding numbers on Paytm:

• Number of merchants registered on Paytm’s platform exceeds the population of countries like Sri Lanka, Netherlands and Belgium – total 2.2 crores. The total volume generated by these merchants is ₹4 lakh crores.
• Paytm’s client base exeeds the population of countries like Malaysia, Australia and Ghana – total 33.3 crores, as of June 2021.

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3. Key investors in Paytm

World-renowned investors have invested money in Paytm, which includes Berkshire Hathaway (Warren Buffet’s company), China’s Alibaba Group, Ant Financial (who runs Ali-Pay), SoftBank and Saif Partners. Interestingly, Paytm’s biggest shareholder is China’s Ant Group holding nearly 27.9% stake in the company following by SVF India Holdings that has 17.3% stake in the company.

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4. Why is the company raising funds?

The ₹18,300 crores IPO comprises a fresh issue of ₹8,300 crores and an offer-for-sale of ₹10,000 crores. Last week, Paytm raised Rs 8,235 crore from anchor investors including BlackRock, Vanguard, and Fidelity.

The money raised from fresh issue of ₹8,300 crores will be infused in the company and utilized in the following ways:

• Growing and strengthening Paytm ecosystem, including through acquisition and retention of consumers and merchants and providing them with greater access to technology and financial services (₹4,300 crores)
• Investing in new business initiatives, acquisitions and strategic partnerships (₹2,000 crores)
• General corporate purposes

The offer-for-sale (OFS) of ₹10,000 crores will directly go to the existing investors and will not come into the company. Here is a list of existing investors who are offloading their stake:

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5. IPO risks

• A large chunk of Paytm’s revenues come from its merchants and any failure to attract merchants and volumes can adversely affect business.
• During the pandemic, when use of digital wallet and mobile payments surged in India, the company posted a decline in the revenues. Despite a 60% cut in marketing and promotional expenses, the losses continued. This poses a big risk in the profitability prospect of the company going forward.
• While Paytm was a big beneficiary of demonetisation in 2016, thefirm has lost market share to relatively recent entrants. On the UPI payments front, Phonepe and Google pay now dominate market and new players are entering the space like WhatsApp, capturing the market at fast pace. This is a red flag for Paytm’s other businesses as well.
• Any increase in payments processing charges Paytm pays to financial institutions and card networks could hit profitability of the company considering these fees form 40% of the total operating expenses.
• Failure to maintain or improve technology infrastructure could harm the company’s business and prospects.
• Paytm has a history of net losses, and they anticipate increasing operating expenses in the future, and may not be able to achieve and maintain profitability.

 

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6. Financials and Valuation

One 97 Communications (Paytm) has three revenue lines namely:

1. Payment services
2. Financial Services
3. Commercial and Cloud Services

of the above, payment and financial services contribute 70% of the revenues. The company’s revenue from the B2B segment (merchants) is growing rapidly while its revenues from payment to consumers are declining.

Here’s a look at key financials of the company from the last 3 financial years:

(in crores)	Revenue	Expense	PAT
2019	₹3,580	₹7,744	-₹4,236
2020	₹3,541	₹6,138	-₹2,942
2021	₹3,187	₹4,783	-₹1,704

Overall revenue of the company declined 1.09% in the financial year 2020 compared to FY19 and it dropped 10% in FY21 from FY20, which is not a good sign. The company has also been burning cash and has incurred more than ₹8,900 crore of cash outflow from operating activities.

If we talk about profits, we can see the company has been continuously making losses, however, the losses are declining over the years. In FY2019, the company’s made a loss of ₹4,236 on revenue of ₹3,580, which is to say its loss figure was much higher than its revenues. This is a red flag. In this year’s June quarter, the company again made a loss of ₹382 crores.

Paytm started as a digital wallet and payments platform and has disrupted the Indian payments industry. There is no doubt about it. However, we believe its future in retail probably lies in the mutual fund, insurance and stockbroking segments. They’re highly lucrative industries and there’s definitely a lot of untapped potential there, given only 5-6% of Indians invest in equities compared to 60% and above in the West.

However, the management had been continuously pointing out in several interviews that its current focus is not on profitability but growth.

Let’s talk about valuation…….

• At the upper price band of ₹2,150, the company is valued at Price/Book Value of 21.33 times for FY21 and is valuing itself at $20 billion. This is 50 times its sale, much higher than what some of its global peers command.
• Since the company is still a loss-making entity, the PE valuation will not make sense here. In this case, using a revenue multiple approach will be more applicable for the company. In the financial year 2021, the company raised some funds at a revenue multiple of 37.18, and now at the current price band it is asking for a revenue multiple of 36.76, almost the same. This is a good sign.
• To be honest, almost all of the value of Paytm comes from expectations of the future – crystal gazing. There is significant uncertainty in every single dimension, which leaves discomfort both about the company’s valuation and its future profitability and growth.

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7. Recommendation

Now that’s one answer that most of you are most interested in – should we invest in Paytm IPO?

PayTM created disruption in the payments space in India and is one app that brought even the smallest vendors like your sabzi-wala and nariyal-pani-wala guy on digital payment platform – something that was unthinkable in India not too long ago. Domenitisation in 2016 had a lot to do with it but of course, the company saw the opportunity and smartly cashed on it. However, we can’t ignore the fact that it is still a loss-making company whose income has dipped 6% year-on-year since FY19.

Aswath Damodaran, a professor of finance at the Stern School of Business, NYU aptly wrote about Paytm:

“The picture that emerges of PayTM is that of a management that is too focused on racking up user numbers, and too distracted to care about converting those into revenues and profits, while making grandiose statements about its future. Using the corporate life cycle framework to assess PayTM, it resembles an adolescent with attention deficit issues, in its scattershot approach to growth and absence of attention to business details, and if you are an investor, you have to hope that going public will cause it to grow up quickly.”

The company’s valuation is steep, which means at the price ask it is an expensive IPO. The intensifying competition and its declining revenues and market share does not help.

For long-term investors who are looking for value, we do not think Paytm would make good financial sense. There are other good companies in the financial services and digital space that you can consider investing in, among listed companies. As for high-risk investors, who want to take a pie of this disruptor in the fintech space, you may consider investing a small chunk knowing it is really a high-risk bet. Your investing horizon should be long enough and you need to monitor the company regularly to see if it is meeting its promises post-IPO….

Should you subscribe to the IPO for listing gains? Well, it’s a gamble. The valuations are expensive so technically the room for price rise on the listing day is less. However, it’s a seller’s market at the moment and the IPO frenzy can take the price in any direction. Since casinos are banned in India, but you have an itch to gamble – this can be your moment. No, we are not recommending you to gamble, but the point we are trying to make is subscribing to an IPO simply for listing gains is a gamble that we don’t recommend.

If you choose to invest in IPOs, make sure to allocate no more than a small percentage of your portfolio. This rule applies to investing in any individual stock. Experts recommend that you avoid putting large percentages of your cash in any one company, no matter whether it’s a hot IPO name or has been listed on the NSE for over two decades.