Be it the local Kirana shop, the Autowala or the vegetable vendor,
Forgot your wallet, just ‘Paytm karo’
No Change, just ‘Paytm karo’
Be it Demonetization, Digitization, or the Pandemic, India, moving towards a digital economy,
Going cashless, just ‘Paytm karo’
The phrase ‘Paytm karo’ is imprinted in the minds of the Indian consumers when it comes to online and digital transactions. In the last few years, Paytm became a household name in the digital payment (though mobile) landscape, especially after demonetization.
The smartphone revolution and emergence of cloud technology in India, along with growing income and higher consumption rates has accelerated the growth of the digital ecosystem in the country.
About Paytm
Founded in 2010, One97 Communications commenced its operations as a digital platform ‘Paytm’ for bill payments and mobile recharge. Started by Vijay Shekhar Sharma, as a recharge platform for mobile and DTH, Paytm gradually moved to a wide array of offerings from digital payments (Paytm Wallet), to shopping (Paytm Mall), to buying gold (Paytm Gold), to online payments (Paytm Payments Bank), to Investment Management (Paytm Money) and the list goes on.
Eventually, the company advanced as a ‘complete payments ecosystem’ covering all related services such as payments, credit, insurance, merchants, wealth management, e-commerce, etc. It became the one stop solution for all digital needs.
It is the principal player in the Indian merchant payments market. It had 333 million registered customers; 21.1 million merchants and a 40% market share in mobile transactions (as of 31st March 2021). Its key competitors include Google Pay and Walmart-backed PhonePe and upcoming players such as Amazon Pay, Whatsapp payments, etc.
Paytm’s gross market value was INR 4,033 billion in FY2021. The company held almost 40% of the total mobile payments’ transaction volume in India and more than 65% of the wallet payments transaction market share in FY2021.
However, when it comes to Unified Payment Interface (UPI) transactions, Paytm is way behind PhonePe and Google Pay, who have surpassed Paytm by a substantial gap, claiming the major chunk of the market.
The Paytm IPO
On 8th November 2021, Paytm raised its IPO of a whopping INR 18,300 crores with fresh issue of INR 8,300 crores and remaining INR 10,000 crore as an OFS, the biggest IPO in the history of the Indian stock market. The fintech giant is valued at approx. INR 150,000 crore (more than USD 20 billion). It will make its debut on Dalal street on 18th November 2021.
Out of the total proceeds, INR 4,300 crore is likely to be used for growth of Paytm’s payments ecosystem, INR 2,000 crore to be used for investments in new business initiatives, acquisitions, and strategic partnerships and remaining for general corporate purposes.
The Subscription: Not so ecstatic response
Unlike Zomato and Nykaa, who were fully subscribed on Day 1 itself, it took 4 days for Paytm to cross the 100% subscription mark, mainly supported by the buying spree of FIIs. The company was finally oversubscribed by 1.89 times, after a lukewarm response in the first two days (only 48% bidding) of its mammoth initial public offering. Institutional buyers bid for 2.79 times the shares offered to them, while the retail investors subscribed 1.66 times at the end of the final day.
The company saw participation from blue-chip investors like Blackrock, Canada Pension Plan Investment Board, GIC, ADIA, APG, City of New York, Texas Teachers Retirement, NPS Japan, University of Texas, NTUC Pension out of Singapore, University of Cambridge etc.
The IPO minted more than 350 new millionaires in the country, comprising majorly of the company’s current and ex-employees, each of them making more than INR 10 million.
Paytm’s Financials: Continuous Losses with dwindling Revenues
In FY2021, Paytm total operating revenues declined 14.6% y-o-y to INR 2,802 crores, primarily due to 38% decline in commerce and cloud services due to disruptions to the company’s partners in travel, entertainment and e-commerce industries. Paytm derives majority of its revenues (75.3% in FY2021) from transaction fees collected from merchants for payment services, followed by commerce and cloud services.
Paytm’s financial performance has not been encouraging over the years, with the company continuing to record losses since inception, despite significant cuts in marketing and promotional expenses. The profitability roadmap seems to be unclear as the company expects to incur losses in the foreseeable future as operating expenses are likely to keep on increasing. As per renowned Finance scholar Aswath Damodaran, Paytm’s operating profits are likely to turn positive and the operating margin to reach 5% in 2026.
The company has had negative cash flows from operating activities till date, primarily due to operating losses and additional working capital requirements.
The take rate (Revenues/GMV) has been on a deteriorating note from 1.56% in FY2019 to 0.79% in FY2021, primarily due to fall in revenues over these years. This indicates that Paytm is focussed more on acquiring new users and transactions, rather than generating revenues from them.
Another risk factor is the company’s cost of capital (company’s capacity to burn cash) which stands at 10.43%, reflecting business risk in the near term.
The Negatives: Paytm inching towards being a speculative bet
Paytm’s financial metrics have not been very enticing. Continuous losses, negative cash flows from operating activities and weak take rates are major areas of concern for the company. The company also faces revenue concentration risk as the majority of its revenues come from payment services.
Although Paytm is having the first mover advantage, Low-cost entry barriers and an underpenetrated market has attracted a number of players in the market, creating a competitive environment.
Regulatory Risks: Due to its over diversification from being a B2C brand to a B2B company, Paytm has faced regulatory pressure and scrutiny from entities such as SEBI, RBI, IRDA, DOT, especially in banking, insurance and stock markets. It is said that in the long run, the regulatory scrutiny can negatively impact the growth of Indian fintech companies to a significant extent. (May be a 20% to 30% downward trend)
Significant drop in the GMP: Currently (as of 16th Nov 2021), the company’s stock was trading at the lowest level of INR 10-20/per share in the grey market, which is significantly lower than the recent start-up IPOs like Nykaa and Zomato witnessed.
The massive IPO seems to be a risky affair. The positives can only be capitalized in the long run. In the short run, it is more inclined towards being a speculative investment.
The Positives: Paytm, one of the most valuable companies in India
‘Paytm Karo’ has been etched in the minds of Indian consumers, being one of the most valuable brands in India. The levers that drive Paytm’s success as the leading Fintech company in India are its large scale of operations, brand equity, growth in user base and GMV, high convenience of digital banking, long term growth on the back of large market opportunities, product and technology DNA, leadership and culture.
The total digital payment market is likely to more than double from USD 20 trillion in FY2021 to USD 40-50 trillion in FY2026, while the mobile payments market is likely to increase five-fold from USD 608 billion to USD 3,065 billion in FY2026. The expected progression in the Indian mobile payment market will provide enough scope of growth for Paytm to enhance its user base and transactions, but the bigger challenges for Paytm will be on the business aspects where it has been struggling in the past.
Although the company reported continuous losses since inception, its GMV has been on the progressive front. The company reported growth in transaction revenues, despite overall decline in revenues. Further, having a payments bank is a differentiating factor, giving it the flexibility in terms of liquidity and working capital management.
The Valuation: An Expensive one
Paytm is valued at around INR 149,428 crore or around USD 20 billion during its IPO time. It is valued at 43.7 times of FY2021 price-to-sales and 36.7 times of FY2022 annualized price-to-sales, which is at a discount of about 12% to the recently-listed unicorn, Zomato.
The biggest IPO in the country appears to be highly overvalued, given that Paytm is still making losses despite being in business for more than 10 years. The company’s shares are priced at a band of INR 2,080 to INR 2,150; believed to be on the expensive side. Paytm is valued at 49.7 times its FY2021 revenues at the upper end of the price band.
Further, investors are being vigilant as the global economy is gradually regularizing the policies that created ample liquidity in the market. Investor euphoria prevailing in the market is also likely to settle down in the coming time, as people are becoming more cautious and returning to business fundamentals.
Why did Paytm IPO not receive the same investor love as Nykaa?
Recently Nykaa [Read our blog post on Nykaa IPO] made a stellar debut on the Indian stock market with more than 82 times oversubscription and share value nearly doubling on listing. Similarly, Zomato also received a blockbuster response at the time of listing. The start-up IPO subscription madness showed that investors were embracing even loss-making companies with a major portion as OFS. However, with a mammoth sized IPO, Paytm could only reach the 100% subscription mark on the last day of listing.
The tepid response that Paytm received changed the norm, reinstated the importance of basic IPO investment fundamentals such as profitability, valuation and fund allocation.
Nykaa at least made profits in FY2021, Paytm is still loss making. Nykaa’s Enterprise Value (EV) to Sales ratio is relatively lower at 25x, as compared to Paytm (45x). EV/Sales is a measure as to how much it would cost to buy a company in terms of its sales. The lower the ratio, the more attractive valuation for a buyer.
The enormous size of the IPO and complicated business model of Paytm, as compared to Nykaa, did not score too well with the investors. Ultimately the whole package matters, with growing business and sound financials, Nykaa appeased the investors’ appetite way more than Paytm. However, it is very soon to predict the IPO market sentiments. What’s working today may not be in the market tomorrow. Only time can tell. However, a prudent investor should always be cautious, well informed and circumspect, before jumping into something.
For now, we are eagerly waiting for the listing and will see how the stock fares on the bourses.
Disclaimer: The article and its contents are prepared based on internal Omnifin Research and public sources. The article does not intend to provide any kind of investment recommendation or influence any investment decision. The images of the company belong to respective trademark owners.