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Paytm IPO opens: Should you subscribe? Experts offer mixed suggestions

For current valuations to sustain, the company has to remain on the path of high growth trajectory for revenues for a period of three years at least.

November 08, 2021 / 07:34 AM IST
Paytm is aiming for a pre-Diwali IPO launch and is awaiting approval from market regulator SEBI, which is expected this week (Representative image)

Paytm is aiming for a pre-Diwali IPO launch and is awaiting approval from market regulator SEBI, which is expected this week (Representative image)

One 97 Communications, the parent company of mobile wallet Paytm, is floating an Rs 18,300-crore public issue today at a price band of Rs 2,080-2,150. 

The initial public offering will consist of an offer-for-sale of Rs 10,000 crore and fresh issue of shares worth Rs 8,300 crore. The issue closes on Wednesday.

The company plans to expand its businesses and strengthen the Paytm ecosystem through roping in and retaining consumers and merchants and providing them greater access to technology and financial services. It also intends to invest in new business initiatives, acquisitions and strategic partnerships.

Incorporated in 2000, One 97 Communications Ltd is India’s leading digital ecosystem for consumers as well as merchants. In 2009, the company launched the first digital mobile payment platform, Paytm App, to offer cashless payment services to customers and now, it has become India’s largest payment platform with a total brand value of $6.3 billion as per Kantar BrandZ India 2020 Report.

The company has the largest payments platform in India with a GMV of Rs 4 lakh crore in FY2021. It also has an overall mobile payments transaction market share of approximately 40 percent by volume and wallet payments transaction market share of 65–70 percent in India as of FY2021.

It offers payment services, commerce and cloud services, and financial services to 33.7 crore registered consumers and over 2.2 crore registered merchants, as of June 30, 2021.

The offerings under payment services include, recharge and bill payments, money transfer and in-store payments. Its commerce and cloud services offer travel and entertainment ticketing, mini-apps store, games and Paytm First subscription.

Financial services include digital banking (Paytm wallet/FASTag), lending, wealth management and insurance.

Experts have mixed opinion on the Paytm IPO. “At the upper end of the price band, Paytm is valued at 49.7x its FY21 revenues,” Jyoti Roy, DVP-Equity Strategist, Angel One Ltd said. “While valuations may appear to be expensive, Paytm has become synonymous with digital payments through mobile and is the market leader in the mobile payment space.”

His recommendation to investors is to subscribe to this issue as he feels that Patym is well positioned to benefit from the exponential 5x growth expected in mobile payments between FY2021 and FY2026 which justifies the higher valuations.

“Considering trailing twelve months (TTM) sales of Rs 3,142 crore on post-issue basis, the company is going to list at a market cap/sales of 44.36 with a market cap of Rs.1,39,379 crore,” Marwadi Financial Services worked out the valuations of the company.

The brokerage highlighted that the company is at a great risk if it fails to retain its consumers, attract new consumers, expand the volume of transactions from consumers due to which its business, revenue, profitability and growth may be harmed. Failure to maintain or improve the technology infrastructure could also harm the business and prospects.

It suggests investors to ‘avoid’ this IPO as valuations are too demanding for a loss-making company.

Rising pace of digitalisation continues to present significant opportunity to grow the user base for online transactions for bill payments, shopping, entertainment and other financial needs.

“Monetising the large installed customer/merchant base of Paytm for broader financial service offerings, such as credit, wealth, and insurance is the key opportunity for the company and it would lead to the profitability going forward,” Arihant Capital Markets said.

It, however, pointed out that the company’s history of net losses and negative cash flows in prior years put a big question mark on its ability to turn green. The company may not be able to pass on any increases in payment processing charges payable to financial institutions and card networks, to its customers which may result in losses.

The brokerage finds the valuations on the higher side and works out that at the upper band of Rs 2,150, the issue is valued at a P/BV of 21.3x FY21 P/BV and 49.7x FY21 P/sales (post issue). It recommends investors to subscribe to this issue for ‘listing gains’.

“For the current valuations to sustain, the company has to remain on the path of high growth trajectory for revenues for a period of three years at least. All three verticals have to keep on firing at an accelerated pace,” said a report from KR Choksey.

The brokerage said that the company comes under the purview of three financial regulators – the Reserve Bank of India (RBI), Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority of India (IRDA). Any unfavourable move by any of the regulators can materially impact the valuation.

Further, any delay in execution in any of the business segments can potentially affect the valuation as best case scenario is already priced in.

“Most of the positives are already getting captured in the current valuation, leaving little room for sustainable upside,” the report said, suggesting investors to subscribe to the issue for ‘listing gains’.

Moneycontrol News
first published: Nov 8, 2021 07:34 am