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Paytm stock crash: Why India’s biggest IPO had a muted market debut – Times of India

NEW DELHI: Digital payments platform Paytm made history by launching India’s biggest ever initial public offer (IPO) worth Rs 18,300 crore.
After much anticipation, shares of the company made their market debut on Thursday at 9 per cent discount. However, the stock kept crashing and hit its lower circuit limit of Rs 1,564 towards the end of trade.
Following the debut, Paytm’s market capitalisation fell from an IPO valuation of $20 billion to about $13.6 billion at the close of trade.
Even though Paytm expects to break even by late next year or early 2023, the company said in its prospectus that it expects to make losses for the foreseeable future.
However, investors and analysts seem to lack faith as they questioned the company’s lack of profits and lofty valuations.
The weak response is being viewed as a sign that investors had become disillusioned with a recent string of IPOs with inflated valuations.
According to a Macquarie Research report, Paytm’s business model lacks focus and direction.
The research firm believes that achieving scale with profitability will be a big challenge for the company. Consequently, it has kept a target price of Rs 1,200 for the stock as against its issue price of Rs 2,150, implying over 40 per cent downside risk.
‘Competition may drive down unit economics’
The report further notes that Paytm’s competitors like Amazon, Flipkart, Google and others are offering almost the same services.
So, the competition is quite evident in the certain categories like financial products or buy now pay later (BNPL) space.
This can be clearly implied from the fact that although Paytm’s $2.5 billion offering was priced at the top of the indicative range, demand was much weaker than other recent stock sales, as Paytm has lost some market share to Google and Flipkart’s PhonePe.
It also expects that the company’s free cash flow (FCF) position will not turn positive until financial year 2030.
Building scale with profitability a challenge
Paytm has its hands full with multiple business verticals ranging from payment gateway, consumer lending, financial services, among others.
The report said that the firm has been a cash burning machine, spinning off several business lines with no visibility on achieving profitability.
It further noted that the business generates very low revenues for every dollar invested or spent through marketing.
“This is especially problematic for a low-margin consumer-facing business where competition across each vertical is only increasing,” it said.
Even though the company has been forced to pivot to several other businesses in search of profitability, the report states that it has amassed over 50 million strong active consumer base and 22 million merchant base.
However, none of this has translated into significant revenue or profitability.
Paytm’s business disrupted by UPI
The payments-based business model of Paytm has been disrupted by the exponential growth in United Payment Interface (UPI) transactions.
Developed by government-backed National Payments Corporation of India (NPCI), UPI was made available free of cost in December 2019 to merchants and consumers.
As a result, it now accounts for nearly 65 per cent of Paytm’s GMV and is expected to further rise to 85 per cent by FY26.

“UPI has up-ended business economics for payments system providers. To the extent that we believe standalone payments as a business model cannot succeed in India,” it noted.
However, the company still continues to earn 70 per cent of its revenues just from its payments business.
It is a market leader in the mobile wallets space. However, such wallets have become increasingly irrelevant since the advent of UPI.
The report estimates that revenue from this vertical will only deliver a 4 per cent CAGR over FY21-26, despite our aggressive assumption of 32 per cent CAGR in GMV over the same period.
Sharp decline in Paytm’s e-commerce revenues
Paytm’s e-commerce business Paytm Mall contributes 55 per cent of it revenues in the segment. Over the period FY2019-21, this segment witnessed a sharp decline in revenues.
E-commerce is a segment where Paytm has had to compete head-on with big players like Amazon and
Walmart-owned Flipkart. These players also have strong two-way customer-merchant ecosystems
with strong consumer value propositions.
Company’s governance and risk
The report beleives that a board consisting of only 8 members with 6 of them based outside India is not necessarily an ideal structure.
Besides, there is no distinction between the chairman and managing director and CEO of the company. All posts are managed by the founder Vijay Shekhar Sharma himself. Macquarie states that split between these will bring more objectivity to the board.
It also noted the high attrition rate in the senior management of the company. What triggered this red flag is the fact that 5 of the comapny’s senior executives quit ahead of its DRHO filing in July.
Low possibility of bank license
The Paytm Payments Bank is not allowed to lend as per RBI license conditions, so the company cannot directly lend to its customer base. Hence, distribution/cross-selling has been the way to go.
In other words, it cannot assume credit risk in any form.
Even though it will become eligible to apply for small finance bank licence after in completes 5 years of operation in May 2022, the probability of it getting a bank licence is low as per the report.
“The main reason in our view is that Chinese controlled firms, Alibaba and Ant group, together still own close to a 31 per cent stake in One97 Communications (parent entity) post the IPO. If we consider a pass through to the Paytm payments bank, then the Chinese controlled entities still own around 15 per cent stake in the payments bank,” it noted.