The correction in shares of Paytm, formally known as One97 Communications, continued on Monday after the stock fell 27 percent on the day of listing. The biggest IPO to hit Dalal Street was the biggest loser on listing day among all IPOs in a decade.
The stock corrected 18.7 percent on November 22, to hit a record low of Rs 1,271.25, taking the two-day loss to 41 percent and eroding more than Rs 52,000 crore in market capitalisation.
The fall seems to be unstoppable as global brokerage firm Macquarie Research expects the stock to hit as low as Rs 1,200, implying 44.2 percent potential downside from its issue price, citing expensive valuations compared to global fintech players, and PayTM's business model lacking focus and direction.
"PayTM's valuation, at around 26x FY23E price to sales (P/S), is expensive especially when profitability remains elusive for a long time. Most fintech players globally trade around 0.3x-0.5x PSg (price to sales growth ratio) and we have assumed the upper end of this band," says Macquarie, which has initiated with an underperform rating.
"Dabbling in multiple business lines inhibits PayTM from being a category leader in any business except wallets, which are becoming inconsequential with the meteoric rise in UPI payments. Competition and regulation will drive down unit economics and/or growth prospects in the medium term in our view," the brokerage said.
One97 Communications is India's leading digital ecosystem for consumers and merchants as it has built the largest payments platform in India based on the number of consumers, merchants, volume of transactions and revenue as of March 2021.
It offered payment services, commerce and cloud services, and financial services to 33.7 million registered consumers and over 2.18 crore registered merchants, as of June 2021.
Most things that PayTM does, every other large ecosystem player like Amazon, Flipkart, Google, etc, is doing, says Macquarie. "The competition is quite evident in the BNPL (Buy Now Pay Later) space and distribution of various financial products."
The brokerage says they are unwilling to assign a premium on the back of uncertainty over the path to profitability. "For large fintechs, unless they have a closed loop ecosystem and a captive customer base, building scale with profitability will remain a big challenge in our view. Consumer & merchant loan distribution at best, is only a ~$350 million revenue opportunity for PayTM in our view."
As per Macquarie, PayTM has to lend, i.e. use its own balance sheet to make loans and do that profitably, for which it needs a banking licence, credit underwriting experience and collection infrastructure, all of which are lacking at present.
Despite factoring in an aggressive 50 percent CAGR increase over the next five years in non-payment business revenues led by distribution business, the brokerage expects PayTM to generate positive free cash flow only by FY30.
It is the largest payments platform in India with a gross merchandise value (GMV) 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.
One97 Communications had reported a consolidated loss of Rs 1,701 crore in the year ending March 2021, much lower compared to a loss of Rs 2,942.4 crore in FY20. But total income during the year FY21 fell sharply to Rs 3,186.8 crore in FY21 from Rs 3,540.7 crore in FY20.
On a quarterly basis, the company's consolidated loss increased to Rs 381.9 crore in Q1FY22, from a loss of Rs 284.4 crore in Q1FY21; however, revenue increased sharply to Rs 948 crore from Rs 649.4 crore over the same period.
According to Macquariee, the RBI will most likely introduce regulations in the fintech space, particularly in the BNPL space.
The brokerage is also not enthused with the company's complicated organisation structure, related-party transactions, the churn in top management and a thinly staffed board with 75 percent of members being based out of India.
"Macquarie's MGRS (governance and risk scoring) system places PayTM below median. Obtaining a small finance bank license could be difficult given that Chinese controlled firms own more than a 30 percent stake in PayTM," says the brokerage.
Among foreign investors Chinese firm Alibaba.Com Singapore ECommerce and Alibaba group firm Antfin (Netherlands) Holding B.V. together own 31.17 percent stake in the company.
SVF India Holdings (Cayman), SAIF III Mauritius Company, SAIF Partners India IV, and BH International Holdings have 34.98 percent shareholding in Paytm.
Paytm has raised Rs 18,300 crore from its public issue, the biggest-ever money raised by any company through an IPO in the history of Indian capital markets.
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