Though retail investors are chasing almost every IPO (initial public offer), institutional investors, especially mutual funds, have been choosy. The IPO of One 97 Communications (PayTM) is a case in the point.
PayTM went public with plans to raise Rs 18,300 crore. Of this, Rs 8,235 crore was raised by placing shares with anchor investors, which included 18 schemes across four mutual fund houses. At the issue price of Rs 2,150 per share, mutual funds invested Rs 1,050 crore. “The company has been a disruptor and managed to attract many consumers. There is a long pathway of growth for the company. We see the company posting profitable growth in medium term,” says a fund manager on the condition of anonymity.
There were many investors chasing this stock even in the unlisted market and expectations are high about listing gains. The digital ecosystem is growing and more Indians are accepting digital payments as the way of life. In October 2021, the transactions in value terms stood at over Rs 7.71 lakh crore, or over USD 100 billion. Around 421 crore transactions were done through UPI in October.
Stiff valuations
“The IPO is valued at 43.7x FY21 price-to-sales and 36.7x FY22 annualized price to-sales, which is at a discount of ~12% to the recently-listed unicorn, Zomato. While there is no listed peer available for PayTM in the domestic market, we believe high valuations for unicorns such as PayTM, which has created significant scale and brand equity, are likely to sustain. Further, a strong 33 percent CAGR in GMV over FY19-FY21, despite the pandemic, vindicates PayTM’s leadership and brand value. This along with 17% estimated CAGR in digital payments in value to US$40tn during FY21-FY26E indicates a sustainable growth in the long run,” wrote Vikas Jain, Senior Research Analyst, Reliance Securities in his IPO note recommending a ‘subscribe’ on the PayTM IPO.
Though there are many optimists, not everyone want to invest at this stage. "Four years back, PayTM was dominating the payments market post-demonetization and GST issues. It kind of brought a revolution in payments market, but it has then lost its way. Now, it is trying to focus on a lot of things. Also, the emergence of a deep-pocketed player such as GPay has posed a strong competition to PayTM. Today, what is the need of a wallet, you have several other payment options, for example the buy now pay later facility. Also, the payment business is under a tight regulatory framework of RBI," said a fund manager, requesting anonymity.
He is not alone. "Looking at last five years track record of the company, it is difficult to understand what the sustainable business model of the company is, apart from acquiring customers through discounts. If they are looking for growth through the lending business, then there are already well-established banks in the listed universe of companies, as well as other players in the financials space,” said another fund manager requesting anonymity.
The company’s business is not profitable and it is the case with many new-age firms. Investors, however, are focusing on the long-term growth these business may offer and are willing to ignore the steep valuations they command. As many as 19 Mutual funds invested Rs 1399 crore as anchor investors in the Zomato IPO through 74 schemes. The IPO of Nykaa got Rs 798 crore of investments from mutual funds at Rs 1,125 per share. Despite experts airing their concerns about steep valuations enjoyed by such companies, they are debuting on the stock exchange with listing gains.
Business challenges
Shyam Sekhar, Chief Ideator, ithought Advisory says, “IPOs of loss-making companies are not great starting points for retail investors. Mutual funds receiving money from retail investors too should avoid such IPOs of loss making companies. Though equity mutual funds are meant for long term investing many mutual fund houses subscribe to such IPOs with a view to make some quick trading profits by selling them after 30 days of lock in ends. It goes against the spirit of investing.”
“PayTM does not have a moat and competition is rising. Neither is the business wonderful nor is the price right,” frowns another fund manager on condition of anonymity.
“Retail investors should refrain from investing in companies such as PayTM at current prices since they are making losses. Mutual funds are better positioned to understand the business and track changing business fundamentals,” says Rupesh Nagda, Founder and Managing Director, Family First Capital. As an anchor investor, mutual funds get allotment of stocks in the IPO and if the stock moves too fast and goes above the fair valuation estimates of the fund house, it can book profits, he adds.
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