Divam Sharma, Co-Founder of Green Portfolio and a smallcase manager, says that the valuation of Paytm is on the higher side and suggests that investors should wait for a better opportunity to make buy into the company.
“While one could justify such high valuations on the back of industry-wide growth, it is noteworthy that the company posted a decline in revenues in FY21, the year of the pandemic, when the use of digital and mobile payments surged,” the seasoned investment manager says in an interview with Moneycontrol.
Also Read Moneycontrol's Exclusive Research Note on Paytm IPO
On the public issues launched this week, he says that although these IPOs (Paytm, Sapphire Foods and Latent View) are fully priced, he likes Latent View Analytics because it is a niche player. Excerpts from the interview:
What is your advice to investors regarding the Paytm IPO?
Paytm has created a leading digital ecosystem for consumers as well as merchants. It addresses a very large market opportunity across payment services, commerce and cloud services and financial services. Some of its strengths are:
- Trusted brand, scale and reach
- Product and technology DNA
- Network effect with 333+ million consumers and 22+ million merchants
- Culture of innovation and pioneering new products
- High volume market share of 40 percent in payment transactions and 65-70 percent in wallet payment transactions
That being said, at the upper band of Rs 2,150, the issue is valued at a P/BV (price-to-book value) of 21.3x FY21 P/BV and 49.7x FY21 P/sales (post issue).
Also read - Nykaa IPO: Shares trade at over 60% premium in grey market, stock likely to debut on November 10
In our opinion, the valuation is on the higher side and we would recommend that investors should wait for a better opportunity to make an entry into the stock. While one could justify such high valuations on the back of industry wide growth, it is noteworthy that the company posted a decline in revenues in FY21, the year of the pandemic, when use of digital and mobile payments surged.
What is the best valuation criteria for payment platforms providers like Paytm?
Paytm and global peers are best valued in terms of Price to Sales multiple. One could compare Paytm to some of the other listed payment companies globally like Paypal (Enterprise Value (EV)/Revenue of 15x), Ant Group (parent company), Mastercard (EV/Revenue-24x), and Visa (EV/Revenue-25x).
Catch Paytm IPO’s Live Subscription Updates Here
Paytm’s valuation (46.1x FY21 EV/Revenue) is at a steep premium over the 17x revenue multiple sought by China’s Ant Group in its IPO last year.
What are the key risks and concerns one should consider before subscribing to the Paytm IPO?
Some of the key risks are - The company has a history of net losses and may not be able to achieve profitability in the foreseeable future. Reduction in losses in the recent financial years have been mainly on account of reduction in marketing and promotional expenses.
- Although the company has been growing its gross merchandise value (GMV) over the last few years, it has to retain the consistency in growth to ensure itself turning into profits.
- The company does not have distinct credible moats to safeguard its business from intense competition.
- Evolving regulatory and competitive environment may pose additional risks.
Catch Sapphire Foods IPO's Live Subscription Updates Here
What would your best IPO pick among Paytm, Sapphire Foods and Latent View Analytics for portfolio addition?
Although these IPOs are fully priced, we like Latent View Analytics, considering that it is a niche player, one-of-its-kind offering in the analytics space, Fortune 500 clientele and the future potential that this analytics business holds.
What are the listing gains you expect for Nykaa, Fino Payments Bank and Policybazaar IPOs?
Also read - Most new-age public issues, including Paytm IPO, are high-risk bets, says Devina Mehra of First Global
We expect Nykaa to be a bumper listing with 50-70 percent listing gains for IPO investors and a negative-to-flat listing for Fino and PB Fintech.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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