One 97 Communications, the operator of leading digital payments platform Paytm, was caught in a complete bear trap on listing day. The stock plunged as much as 26.2 percent to hit a low of Rs 1,586 amidst weak market conditions.
Though Paytm has a strong market share, what triggered the selling was its high valuation, muted investor response, and loss-making business, experts say.
The stock’s debut itself was lower than expected. It opened at Rs 1,955, down 9.1 percent from the issue price of Rs 2,150, and hit the day's low of Rs 1,586.25 on the BSE. It was trading at Rs 1,676.10, down by Rs 473.90 or 22.04 percent, at 13:00 hours IST.
Most experts Moneycontrol spoke to advise only aggressive investors to look at the company for investment.
Paytm offers payment services, commerce and cloud services, and financial services to 33.7 crore consumers and over 2.18 crore merchants, as of June 2021.
Why the response was tepid
One 97 Communications had increased its IPO size to Rs 18,300 crore from Rs 16,000 crore and it did raise the amount. The public issue, however, received a subscription of only 1.89 times during November 8-10, supported by qualified institutional investors, whose reserved portion was subscribed 2.79 times.
"The retail portion was subscribed only 1.66 times and non-institutional investors 0.24 times. Also, it is a loss-making company," says Rahul Sharma, Co-Founder, Equity99.
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"The company has a huge customer base with strong brand positioning and it has an early- mover advantage in digital payment services. However, it is still a loss-making company and very aggressively priced. Therefore, we saw a tepid response in terms of subscriptions," says Santosh Meena, Head of Research, Swastika Investmart.
"Short-term investors might remain in this counter as we might see some pullback, but we don't expect any long-term momentum. So, long-term investors can exit and wait for declines," he adds.
Parth Nyati, Founder of Tradingo, feels the company has been loss-making and there is no sign that it might turn profitable in the near future.
Aggressive investors who got the allotment can hold the stock with a long-term view. However, investors who applied for listing gain can exit on the bounce-back, he advised. “New investors are advised to look for peers that may perform much better than Paytm. We feel the company sought the high valuation on the strength of its brand and it might see a correction in the near term," he said.
Paytm, formally known as One 97 Communications, reported a consolidated loss of Rs 1,701 crore for financial year FY21, which was lower than the Rs 2,942.4 crore loss posted in FY20, and a loss of Rs 4,230.9 crore in FY19.
Total income, at Rs 3,186.8 crore, for FY21 was lower, compared to Rs 3,540.7 crore in FY20 and Rs 3,579.7 crore in FY19.
On a quarterly basis, consolidated loss widened to Rs 381.9 crore in Q1FY22, from a loss of Rs 284.4 crore in Q1FY21. But the company has shown significant growth in revenue, at Rs 948 crore, in Q1FY22, compared to the Rs 649.4 crore in the corresponding quarter of last fiscal.
Its payment and financial services segment contributed to 75.3 percent and 77.4 percent of total revenue in FY21 and the June 2021 quarter, respectively.
Paytm is the largest payments platform in India with a gross merchandise value of Rs 4.03 lakh crore in FY21, having an overall mobile payments transaction volume market share of approximately 40 percent, and wallet payments transaction market share of 65 -70 percent in India as of FY21.
‘Bajaj Finserv a better option’
It is difficult to value such kind companies, for the time being, he says. "By the time the market understand the way to value such kinds of businesses and how fast it will become profitable and how well it will use its strength to explore new businesses like credit cards and payment banking, I would advise only aggressive investors to hold this stock for the long term. I believe Bajaj Finserv is a much better option to play on the fintech business," Meena said.
Meena believes Bajaj Finserv has a proven track record, with great valuation comfort, compared to Paytm.
Also read: Scenes from Paytm's listing: Laughter and joy amid falling shares
Abhay Agarwal, Founder and Fund Manager, Piper Serica, also feels that for short-term investors, there is no big immediate upside, and advised them to exit and explore other opportunities.
"We believe long-term investors will get better entry points over the next 12 months as the company starts sharing its operating performance with investors every quarter. We do not advise investors to jump in, expecting a quick return."
Utilisation of funds
The Rs 18,300-crore public issue comprised a fresh issue of Rs 8,300 crore and an offer for sale (OFS) of Rs 10,000 crore by selling shareholders, including several investors.
The fresh issue of funds, after reduction of issue expenses, will be utilised for strengthening the Paytm ecosystem (including through acquisition and retention of consumers and merchants and providing them with greater access to technology and financial services); and investing in new business initiatives, acquisitions and strategic partnerships.
Among experts, only Divam Sharma, Co-founder of Green Portfolio, advised investors who got allotment to look at Paytm as a long-term allocation. “This is a high-growth story which still has miles to go. Their leadership in payments and diversification towards e-commerce, cloud services and financial services should ensure high growth for the company in the coming years," he reasoned.
He believes that support from large institutional investors, including global pension funds and government funds, will ensure adequate support for the company in the coming years.
As per the latest shareholding, foreign investors, including Morgan Stanley and Canada Pension Plan Investment Board, hold a 10.37 percent stake in Paytm.
Old foreign investors, including Antfin (Netherlands) Holding, SVF India Holdings (Cayman), Saif III Mauritius Company, Alibaba.Com, SAIF Partners India and BH International Holdings have a 70.30 percent stake in the company.Disclaimer: The views and investment tips by 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 making any investment decisions.