Paytm initial public offering (IPO) was one of the most hyped-up IPOs in the market space. However, its lacklustre performance came as a shock to many investors who got trapped at higher prices as the stock opened at a discount on a listing day showing a 27% fall by the end of the day and making a low of around 1300 a couple of days later totalling to a whopping 40% fall. Paytm IPO applications had begun on November 8 and continued till November 10. The listing was supposed to occur on November 18 after completing the allotment process. However, the tepid listing worried many investors as the Institutional investors showed no interest in participating in the IPO, clearly visible from the 0.24x subscription. The retail interest was also tepid with only a 1.66x subscription. The fact to notice is that this IPO came when successful IPOs were getting 50-300x subscribed, with listing gains alone coming between 50-100% premium.
What went wrong?
Other issues from the IPO arose because a major portion of the IPO included Offer for Sale (OFS), through which existing investors could exit their stakes and dilute their holdings. As most investors of Paytm were foreign institutional investors (FII’s), they quickly exited their positions and led to the downfall of the share price. Another issue arising from the IPO was when it came out to the public. Nifty 50, the benchmark for the Indian stock market, had grown exponentially from 7500 to 18600, indicating more than double returns in one year. The bull run phase ought to face some backlash from investors as FII’s started profit booking from September. Along with profit booking, the concerns of the US Fed removing liquidity from markets by hiking interest rates and stopping free cash flow led to a downfall in global markets. The Overnight Index Swap (OIS) is trading at 35 to 40 basis points above the Reverse Repo rate of 3.4 percent. So, bond markets are anticipating rate hikes in India too. When Paytm announced its IPO, FII had become constant sellers, and Domestic Investors like Mutual funds and other government-corporate houses had slowed their liquidity tap due to the overheated prices. Hence, the IPO’s subscription was too low and came under the brunt of FII selling as soon as it was listed. To add fuel to the fire, many financial institutions had downgraded their rating for Paytm, even going as low as 1200 Rs. Per-share.
Paytm has been one of the success stories of India’s path to digitization. Starting with wallets and moving on to UPI, and providing a wide array of services on its app, Paytm has come a long way. With the backing of investors like Warren Buffett, Softbank, and Alibaba, there was an expectation of riding the wave of online payments. However, the sheer size of the IPO amounting to 18500 crores and the abnormal pricing of the share became important reasons for its collapse. The valuation was an exorbitant 26 times the Price to sales ratio for 2023. The normal traded price to sales ratio ranges from 0.3-0.5 for fintech investors.
Even though investors have realigned their expectations from new businesses and do not expect immediate profitability, they look for business models that promise positive cash flow in the future. Investors do not see much of this from Paytm, at least in the medium term. One of the sole reasons is the lack of concentration of the business model. Macquarie Capital had pushed out a report titled “Too many fingers in too many pies.” Paytm has put itself in the payment banks, insurance, utility bill payments, credit cards, and loans. This is too diversified for a gigantic company like Paytm. It seems like Paytm has turned into a cash-churning business. Although the losses have been decreasing over the years, stiff competition has arisen because of emerging players in all the spaces that Paytm has tried to plug into. Being an open space and highly regulated company, Paytm wishes to become a payment space giant despite competition from other players. With the company’s motto being “Go big or go home,” can it beat the odds in the upcoming years?