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Paytm shares sink on debut; Macquarie Capital sees 44% downside to issue price

Paytm’s business model lacks focus and direction, say analysts


Investors now accustomed to stellar listing from recent initial public offerings (IPO) got a rude awakening on Thursday, as shares of One 97 Communications, the parent company of Paytm crashed on the first day of their trading.

At Rs 18,300 crore, Paytm’s public issue was India’s largest so far after state-owned Coal India. Paytm raised funds in the Rs 2,080-2,150 share price band. The stock, however, opened at just Rs 1,955, a 9 per cent discount to its final issue price of Rs 2,150. It fell further and was down almost 23 per cent to Rs 1,660 by late morning trading.

Paytm is a fintech giant offering a wide range of services from mobile wallet, bill payments, air, rail and movie ticketing, UPI (unified payments interface), digital gold investments, merchant cash advance and FASTag (electronic toll payments) among many other things. Its subsidiaries include a payment bank, Paytm mall and a share trading and mutual fund platform.

“Paytm’s business model lacks focus and direction,” said Suresh Ganapathy and Param Subramanian, analysts at Macquarie Capital Securities India.

Releasing a research report ahead of the listing of Paytm, the analysts put a “underperform” rating on the stock, and set a target price of Rs 1,200, a huge 44 per cent downside.

“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,” Ganapathy and Subramanian said.

Paytm has a market share of 65-70 per cent in the digital wallets business and about 40 per cent in the consumer to merchant segment by transaction volume of mobile payment instruments, the analysts pointed.

Another broking firm ICICI Direct, had earlier flagged dependency on payment services for majority of revenue as a key risk. In FY2019, FY2020 and FY2021, revenue from financial services accounted for 52.5 per cent, 58.1 per cent and 75.3 per cent, its analysts Kajal Gandhi and Vishal Narnolia had said.

“Failure to broaden the scope of payments services that are attractive may inhibit the growth of business, as well as increase the vulnerability of core payments business to competitors,” the analysts said.

The Macquarie analysts note that most things Paytm does, every other large ecosystem player like Amazon, Flipkart and Google also does. There is growing competition in the buy-now-pay-later space (where Paytm operates Paytm Postpaid) as well.

Paytm is still loss making; in the previous financial year, it reported a net loss of Rs 1,701 crore on a revenue of Rs 3,186.8 crore. In the IPO prospectus, the company did warn that with increasing operating expenses in future, it may not be able to achieve and maintain profitability.

As competition in the distribution business continues to grow, take rates are only going to head lower, point out the Macquarie analysts.

“Unless Paytm lends, it can’t make significant money by merely being a distributor. We therefore question its ability to achieve scale with profitability,” Ganapathy and Subramanian said.

Obtaining a small finance bank license could also prove to be difficult for the company, given that Chinese firms Alibaba and Ant Financial hold a substantial 31 per cent stake.

“Paytm’s valuation, at 26 times FY23 estimated Price to Sales, is expensive especially when profitability remains elusive for a long time. Most fintech players globally trade around 0.3 times-0.5 times price to sales growth ratio and we have assumed the upper end of this band. We are unwilling to give it a premium here as we are unsure about the path to profitability,” the analysts said.

Several other analysts, too, had earlier flagged the expensive valuations of the issue.  


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