In what could be the largest-ever listing in India’s capital market, Ant Financial-backed fintech giant Paytm opened its USD 2.47 billion (INR 183 billion) initial public offering (IPO) on Monday. However, the initial response from investors has been unexpectedly muted.
Paytm’s public issue was subscribed mere 18% on day one. While the retail portion was booked 78%, the quota reserved for qualified institutional buyers and non-institutional investors was subscribed 6% and 2%, respectively.
Paytm’s offer comprises a fresh issue of equity shares worth up to INR 83 billion (USD 1.12 billion) and an offer for sale by existing investors for INR 100 billion (USD 1.3 billion). The company has fixed the price band of USD 28– 29 (INR 2,080–2,150) apiece for the IPO, which will conclude on November 10.
Last week, Paytm raised the country’s biggest anchor round of INR 82.3 billion (USD 1.11 billion) as part of its mega IPO. Oversubscribed by 10x, the anchor round saw participation from a wide range of global investors such as Singapore’s GIC, Canada Pension Plan Investment Board, and BlackRock, according to Paytm’s filings with the local regulator. Through this round of financing, Paytm has raised almost half of its USD 2.4 billion IPO target.
Initially, the Noida-headquartered company filed for a USD 2.2 billion IPO in July but later increased its offering size, aiming for a valuation of up to USD 20 billion. Paytm’s backers, including SoftBank, Ant Financial, Alibaba, and Elevation Capital, as well as founder Vijay Shekhar Sharma, are offloading their shares with the listing.
A slow start
According to Neil Bahal, managing director of Negen Capital, a Mumbai-based investment management firm, there are a host of reasons for the lackluster investor demand for Paytm’s IPO.
“It is an extremely large IPO and hence it won’t get significant oversubscription numbers,” Bahal told KrASIA. He added that investors are being cautious as the recent CarTrade.com IPO was “a complete disaster” where they have lost heavily so far.
The fact that Paytm’s share price in the unlisted market was over INR 3,200 just last month and was reduced to around INR 2,000 in the IPO doesn’t help either. “Basically, that has already left a poor taste and a lot of bad word of mouth,” he said.
Moreover, he believes, given that Paytm still has huge losses, its valuation for the listing—49x of its revenues—is extremely rich even for a tech company.
Paytm IPO’s muted subscription on day one is starkly different from the bumper listing of Nykaa last week that got a 100% retail subscription within the first hour, said Sonam Srivastava, founder of Wright Research, who manages innovation theme at investment platform smallcase. “Volatility and liquidity concerns in the broader market as well as the concerns about Paytm’s lofty valuations could be the reason for the slow numbers.”
Although the big growth projection for fintech penetration in India where Paytm is a major player justifies this valuation, she believes.
Paytm is the fourth high-profile startup to list its shares on an Indian stock exchange after food delivery major Zomato, lifestyle omnichannel retailer Nykaa, and digital insurance marketplace PolicyBazaar—all of which went public earlier this year. Other startups, including payments firm MobiKwik, travel platform ixigo, hospitality giant Oyo, last-mile delivery firm Delhivery, ride-sharing major Ola, and digital healthcare company PharmEasy, have filed draft documents with the market regulator or are planning to in early 2022.
“If the IPO does poorly, then further tech IPOs will have to happen at more reasonable valuations which would be great news for investors,” said Negen’s Bahal. “India’s startup ecosystem is going through a revolution and is going to sustain for a very long period of time. It is a period of time like none other for tech companies. Investors will make a lot of money in Indian tech stocks if they pick the right targets.”
Eyes on profitability
Paytm’s parent company, One97 Communications, was set up in 2000 by Sharma and sold value-added services to telecom operators for a decade. In mid-2010, Sharma founded Paytm to get into e-wallet services, mobile recharges, and utility bill payments. Since then, the company has emerged as India’s leading mobile payments and financial services provider.
In its 11 years of operations as a digital payment company, Paytm has added scores of use cases to its app, such as utility payments, online and QR code-based money transfers, mobile recharges, games, online shopping, hotel bookings, entertainment, and travel tickets. It also offers different insurance products, mutual funds, stock trading, and personal loans under its financial services arm, Paytm Money.
Along with offering a wide network of services, Paytm has opened up its platform for third-party services to list their mini-apps in segments across content, food delivery, e-commerce, and ride-hailing in a bid to become the country’s first super app.
Overall, the company currently provides payment services, commerce and cloud services, and financial services to 337 million registered consumers and over 21.8 million registered merchants. In Q2 of 2021, its revenue surged more than 45% to INR 9.48 billion over the last year, while its losses widened almost 31% to INR 3.7 billion. Payments and financial services are the main drivers of the company’s revenue, accounting for almost 80% of its total, according to the company’s prospectus.
Paytm plans to use INR 43 billion out of the proceeds raised from the IPO to grow and strengthen its ecosystem, which includes onboarding new consumers and merchants. It will invest another INR 20 billion in new business initiatives, acquisitions, and strategic partnerships.
“Investors have to look at Paytm like any other new-age business, which mostly makes losses initially to gain users and then monetize them later on. Paytm also follows this model,” said Prateek Singh, founder and CEO of trading learning platform LearnApp and a seasoned trader. “The question which investors need to answer before investing in Paytm’s IPO is that how will they generate profits going forward. They have an active user base but no clear indication of where the profits will come from. To succeed, they will have to come up with ingenious solutions to monetize their current revenue model.”
