Large shareholding by Chinese investors in the company can create roadblocks from a regulatory point of view
Ujjawal Kumar, Research Analyst, Green Portfolio
Stock price of Paytm (One 97 Communications) saw the worst ever IPO listing day performance in the recent history by tanking 27 percent to Rs 1,560 from the issue price of Rs 2,150 apiece.
While the management indicated that they had priced the IPO appropriately leaving enough upside for IPO investors, there were clear signs that the IPO had been priced very aggressively (significantly higher than global trading peers) leaving little or none for the retail investor.
This is a good learning for retail investors and surprisingly some mutual funds as well who got caught in the hype created around the IPO. All said and done one can only ignore the fundamentals at their own peril. Here it also makes sense to understand why the listing day performance of Paytm stood out negatively from the other recent IPOs such as Nykaa, Zomato and Policy Bazaar among others that were also priced aggressively but did well in terms of IPO demand and continue to defend their listing price.
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Paytm is best known to all of us for its payments business where it has achieved significant market share in an intensely competitive market dominated by biggies PhonePe, GooglePay and Amazon among others. This business however got disrupted due to the increasing usage of UPI (where the take rates are nil) and decrease in wallet-led payments. That said the company has a large customer base/merchant base that it is trying to encash by launching multiple other verticals such as consumer lending, co-branded credit cards, insurance distribution, wealth management and so on. However, the scaling of these relatively more profitable verticals remains to be seen as none of these verticals have scaled up in a meaningful way and even today payments business contributes 70 percent of the revenues. Each of these verticals will have its own set of challenges and will need significant time and capital to scale them to a size where they become profitable and free cash flow positive, for example Policy Bazar is still loss making even though it is the leader in insurance distribution. So, profitable revenue growth is definitely a challenge and there is no clear path to profitability from the management as well.
Also read - With 27% fall on debut day, Paytm emerges as biggest loser among IPOs listed in a decade
Some of the other minor factors that we believe contributed to the muted demand were:
a) Large size of the IPO
itself at 18,300 crore
b) No major/significant shareholding by promoters of the company
c) Large shareholding by Chinese investors (Ant Group + Alibaba Group), that can create roadblocks from a regulatory point of view, if lets say Paytm wants to start a lending business of its own.
Having gone through the reasons for the underperformance, we believe the pain is not over yet. The company is still at a market cap of Rs 1 lakh crore plus, which in our view is still on the higher side. The stock could see significant correction going forward in the coming days/weeks.
For investors looking to invest in Paytm we would advise them to wait for now and make an entry at lower levels. One should track the progress of the company in non-payment related verticals and invest only when they see significant positive outperformance.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.