The IPO frenzy of 2021 continued with PayTM going public on the 18th of November. Debuting as the country’s biggest ever public offering, expectations were high but investors were soon let down with the share price falling by a disastrous 27.40% on listing day. In fact, the price fell to as low as Rs. 1,281 marking a 40% decrease from its initial valuation of Rs. 2,150. Since then, the stock has recovered a little bit but it is still well below the price it hoped to open at.
Being a tech firm, the expectations of companies like PayTM are massive. This is one reason why investors get excited about their IPOs. Nykaa gained an incredible 96.15% on listing day while Zomato managed 65.59%. The difference between the tech industry and other industries is that a big chunk of the valuation is based on future performance rather than a proven track record. It may well be true that these tech firms go on to achieve enormous success, but there is no guarantee.
With the case of Nykaa, you can at least make the argument that the company is profitable so that you have something to bank on. The same can not be said of PayTM who is not expected to turn a profit until FY30 according to a report published recently by Macquarie, an international brokerage house. It also describes the company as a ‘cash guzzler that lacks focus’. PayTM has dipped its toes in a variety of business lines which could ultimately hinder it from acquiring the majority market share in any. PayTM’s main business is its wallet service, but this is becoming less consequential with the extraordinary rise in UPI transactions.
PayTM’s horrid debut makes it the worst opening day performance of any stock in India or the US, with the next worst flop being that of Robinhood, the trading app. This is amongst companies that have raised at least $2 billion.
One of the issues with IPOs these days, especially those from the tech space, is that companies want the best possible valuation for their existing investors. An IPO presents a great opportunity for early stage investors to cash in their gains. Firms like PayTM will then go to institutions that give them the highest valuations which will in turn please the companies investors as it means that they will rake in the big bucks. The problem with this is that when the market doesn’t agree, we end with a situation like we did on 18-Nov. Retail investors suffer the most and they typically make up the smallest percentage of investors in terms of the amount of capital that they are allowed to purchase. 75% is reserved for institutional investors while 15% is blocked for high net worth individuals which means that only 10% is left. This is also the reason why shares are almost always oversubscribed.
The performance of PayTm’s IPO should now worry the long list of smaller IPOs that are being prepared in India. This includes the likes of Oyo, PharmEasy, Delhivery, & MobiKwik. It could be wise to delay the offering for a while as investors will likely be bruised from their recent experience and the momentum could carry forward into future launches. It would certainly make sense to accept a fairer valuation from the banks. While it is tempting to go for the highest valuation, the markets will not necessarily agree. Right now, PayTM is in the news for all the wrong reasons. Critics are pointing out flaws in its business model and the leadership which in turn creates a pessimistic view of the company’s future.
The challenge for PayTM now is to convince the market that it can be a dominant force in at least one of the segments that it operates in. This is going to be difficult as it will be in competition with tech giants like Amazon, Google, etc. who are also involved in financial services and are rapidly expanding to include a range of other services as well. Analysts believe that PayTM needs to quickly find a way to monetise its user base, which currently stands in excess of 330 million.
The company does have a lot of potential and investors who are in it for the long run can still see significant gains. It is up to the leadership to steady the ship through the current period and start gaining the trust of the investors that it is heading in the right direction and that it will start turning a profit sooner rather than later. IPOs are only the beginning for a company and as such there is still a long way to go before anyone can write off India’s 2nd most valuable startup.