MC Interview | Subscribe to Paytm IPO, don't wait for listing, suggests Jyoti Roy of Angel One

Paytm, the largest ever IPO, opens for subscription. What is your advice to investors? Do you think one should subscribe the issue or better take call after listing?

Paytm’s Rs 18,300-crore IPO is open for subscription for which we had given a subscribe rating. We believe that Patym is well-positioned to benefit from the exponential 5x growth in mobile payments between FY2021 and FY2026 to $3,065 billion which will help drive the topline growth for the company. We recommend that investors should subscribe to the IPO rather than take a call post the listing.

Is it overpriced, given the company posting losses year-after-year, though revenue from operations has been increasing?

It is true that Paytm has been posting losses despite an increase in revenues as they are in the initial phase of their life cycle wherein cash burn tends to be very high due to customer acquisition costs. However, we have seen in case of global new-age businesses that post the initial phase, cash burn tends to go down drastically as the companies achieve economies of scale and bring down their acquisition costs.

The sheer economies of scale achieved by these companies also make it very difficult for new entrants to come into the market which allows them to monetise their assets/customer base and start making money at a later date.

Therefore, while valuations at 49.7xFY2021 revenues may look expensive, investors need to keep in mind that FY2021 numbers were impacted due to COVID and therefore do not give a true picture.

Also read - MC Interview | Wait for better opportunity to enter Paytm, says Divam Sharma of Green Portfolio

Patym should be able to grow ahead of the markets, given its dominant position in the mobile payments space, which is expected to grow by 5x between FY2021 and FY2026. Therefore, we believe that Paytm will be able to post a revenue CAGR of 52 percent between FY21 and FY24, valuing the company at 14.2xFY24 price to sales which looks reasonable.

What is the best valuation criteria for payment platforms like Paytm?

Companies like Paytm will seem expensive on a P/E (price-to-earnings) basis therefore we believe that traditional matrices like P/E will not be the right measure to value the company. A better way to value such high-growth companies will be on price-to-sales basis and compare with other global peers like Paypal.

However, one needs to keep in mind that Paytm will have a much longer runway for growth in India, compared to its peers in developed markets. Therefore, given the strong growth prospects, we believe that Paytm will command a premium to global peers.

Also read - Most new-age public issues, including Paytm IPO, are high-risk bets, says Devina Mehra of First Global

What are the key risks and concerns one should consider before subscribing to the Paytm IPO?

One of the key risks for Paytm is increased competition in the past few years. While Paytm has become synonymous with digital payments through mobile, there has been an increase in competition in the recent past with large players like Google Pay and PhonePe scaling up their operations significantly.

An increase in payment processing charges by financial institutions and card networks is another key risk as any increase in charges will lead to increased costs for the company, impacting its margins. Execution risk is one of the biggest risks for potential investors as a failure to grow relationships, increase transaction volume, and attract new merchants to the ecosystem could have an adverse impact on growth, impacting valuations.

Also read Moneycontrol’s Exclusive Research Note on Paytm IPO

What are the listing gains you expect for Nykaa, Fino Payments Bank and Policybazaar IPOs?

While we would not like to hazard a guess on the potential listing gains for all these new-age tech IPOs, we expect strong listing gains for the Naykaa IPO given that it was reasonably valued at 21.7xFY2021 revenues and left a lot on the table for investors. While we had a subscribe rating for Nykaa, we had assigned a neutral rating for both Policybazaar and Fino Payments bank, given their expensive valuations. We expect marginal listing gains for these two.

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