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Paytm IPO: All You Need to Know

Jul 23, 2021 3:10 PM 6 min read

On a day when Zomato listed on the bourse ending +66% higher, what could possibly trump that? The buzz that this may just be the beginning...

Next in line is One97 Communications Ltd., the parent company of Paytm, which filed its DRHP with SEBI on July 16th. The listing of India’s second-largest startup (after Byju’s), and potentially one of the largest public offerings in Indian stock market history (at ₹16,600cr or $2.2bn), is undoubtedly a big deal. Not just for the country’s burgeoning startup scene - many of whose unicorns are slated for IPOs in the near-term - but also for the digital economy, which has grown at a breakneck pace in recent years.

However, could confidence in the sector’s prospects and in Paytm’s brand encourage investors to embrace One97’s offering, despite its less-than-perfect financials (which we’ll get to in a bit)?

About the Company

The Noida-based company was founded in 2010 by Vijay Shekhar Sharma. Initially, it offered mobile and DTH recharge services before launching Paytm Wallet to offer cashless payment services to customers.

Over the years, it received hefty investments from the likes of SoftBank and Ant Group, capital that it used to aggressively expand even as competitors struggled to keep up with its low service costs and countless freebies such as discounts and cashbacks.

Fast-forward to today and Paytm is the largest payments platform in the country and a formidable fintech player, with over 330 million customers, 21 million merchants, 114 million annual transacting users and 7.4 billion total transactions (FY21 numbers). Other stats are also impressive: 800,000 total payment devices, 64 million total payment bank accounts, ₹52bn ($700m) total deposits and ₹52bn in wealth AUM.

Along the way, the company has diversified its offerings and dipped its feet in a variety of verticals - some saw success and some just fizzled out. These include event booking, travel planning, movie ticketing, fantasy sports, banking services, e-commerce, insurance, digital gold, wealth management, brokerage and pay-later options, among others. It has also tried its luck in international markets, including Canada and Japan. In fact, going through their filings, one can see detailed market-sizing exercises for a portfolio of sectors ranging from lending, gaming, wealth management, mutual fund and insurance distribution etc., all of which are somewhat aspirational. But the underlying narrative is - if they do well, Paytm does well, at least directionally.

FYI: Paytm is a “foreign-owned and controlled” company. Its biggest shareholders include Ant (30.33%), SoftBank (18.73%), Elevation Capital (17.65%), Mr. Sharma (14.97%) and Alibaba (7.32%).


Sector Analysis

Paytm’s meteoric rise has been intricately linked to the rise of the digital payments sector in India. In large part, this was enabled by direct or indirect policy interventions.

Notable catalysts include Jio’s entry in 2016 and the ensuing telecom price wars (which dragged down data rates and made them affordable for millions), falling smartphone prices and an expanding middle-class. Demonetisation, which was originally implemented to weed out black money, indirectly popularised cashless payments. Digital India schemes, UPI and RuPay encouraged widespread digital literacy. And the COVID-19 pandemic buoyed tech-related sectors to greater heights, making digital adoption a necessity rather than a choice in a nation that is largely mobile-first.


Fast Facts

  • The IPO includes a fresh issue of up to ₹8,300cr ($1.1bn) and an OFS of ₹8,300cr.
  • A ₹2,000cr ($269.2m) pre-IPO funding round is on the table; if that happens, the fresh issue would be adjusted accordingly.
  • In its last funding round, Paytm was valued at $16bn. It might be targeting a $24-30bn valuation in the IPO, which would make it one of the most valuable financial firms in the country.
  • Existing investors including Mr. Sharma, Ant Financial, SAIF Partners, SoftBank, Ratan Tata and Berkshire Hathaway would be offloading parts of their stakes.
  • The Paytm IPO date has not yet been announced, but it is rumoured to be around Diwali. At $2.2bn, it would be the largest listing since Coal India ($3.3bn, 2010) and Reliance Power ($2.4bn, 2008).
  • 75% of the issue will be reserved for QIBs, 15% for NIIs and the remaining 10% for retail investors.
  • Paytm says it will use the majority of the capital raised to expand its businesses, launch new initiatives and explore fresh acquisitions and strategic partnerships.
  • Link to DRHP


Money Matters

In FY21, One97 reported a consolidated loss of ₹1,701cr ($228.95m), lower than the previous fiscal’s ₹2,942cr ($396m). However, group companies aren't particularly known for clocking profits. In fact, most of them are in red, with some like Paytm Life Insurance and Paytm General Insurance yet to report any revenues. Paytm has posted losses for the last eight consecutive years, though these numbers have fallen gradually over the last two fiscals.


Reading the IPO Room

Let's talk about profitability. Paytm is known for being spendthrift. It is notorious for carpet-bombing its rivals with belligerent spending and expansion. This has automatically meant relentless cash drain over the years - which was fine because the startup had deep-pocketed backers (this safety-net is one reason why some startups don't want to go public). However, will Paytm break-even anytime soon?

For Paytm to make money, they ought to make existing subscribers funnel through as many transactions as possible through their platform while incentivising new ones to do the same. And Paytm believes it can do so by bringing several services within their umbrella, ranging from wealth management, fantasy sports, gaming, lending etc. And become the “superapp” that several companies are aspiring for. Historically, heightened spending in the form of incentives and discounts has allowed that to some extent, notwithstanding steep losses and cash burn. However, the long-term sustainability of this strategy is quite questionable.

But this does not mean the stock doesn’t work! The stocks these days, fuelled partly by elevated retail interest, tend to increasingly trade on growth sentiment and on operating metrics rather than financial performance. As Ashwath Damodaran says for Zomato, but equally true in this case:

You don't have to be right to make money, just less wrong than the rest.

With that being said, the most closely watched metric over the near-medium term is perhaps going to be GMV and if its growth sees a meaningful deceleration, the stock most certainly gets hammered.

The company itself is sending mixed signals. Its CEO had earlier opined that it could turn profitable as early as "this year". However, in its pre-IPO documents the company said it could “continue to incur net losses for the foreseeable future and may not achieve or maintain profitability in the future”. A disclaimer which, since the Uber IPO, seems to have taken heightened relevance in the form of safe legal jargon.

When it comes to competition, in the payments space at least One97 can breathe easy: Paytm is easily the largest player. However, elsewhere the story is different. In e-commerce, established players like Amazon and Flipkart are better poised to hold ground, recent regulatory hiccups notwithstanding. The company also has super-app ambitions and has filed an application with the RBI for a new umbrella entity (NUE) licence. In these spaces, it faces challenges from big names like Tata and RIL and even international operators such as Revoult knocking on the door. Moreover, existing giants make One97’s disruptor-dreams difficult vis-a-vis its forays into banking (where private and public lenders hold sway), insurance (traditional firms still rule the roost) and brokerage (conventional banks and new-age players like Zerodha).


Of Regulators and Disruptors

One97 also has run into more than a convenient amount of regulatory trouble. SEBI has its eyes on Paytm Money and its 100% stake in its insurance subsidiary has been flagged by the RBI.

Moreover, regulatory headwinds are increasingly critical of the up-and-coming tech sector, particularly of big entities that have amassed unhealthy monopolies and mushrooming valuations through a flood of foreign money and endless acquisitions of smaller players. Paytm’s large monopoly in the payments sector might not go down well with regulators in the long run, considering their recent actions in the e-commerce, payment processing and social media sectors. (Traditional sectors have gross over-concentrations too - look at telecom! - but reforming these is another matter altogether.)

On the policy side of things, there's NPCI, which will soon begin prohibiting third-party platforms from initiating certain UPI transactions. Updated rules for the online gambling industry could affect Paytm First Games, which already ran into some trouble with Google last year. And Paytm's status as a foreign-owned company - with major Chinese backing - may not particularly evoke applause from an economy and polity that are embracing “Atmanirbhar” ideals.


The Bottom Line

Paytm is a loss-making enterprise. Its balance sheet is hardly perfect. And there are substantial risks involved in investing in its IPO. But that doesn’t mean investors are wary about loss-making unicorns. Just look at Zomato, whose recent IPO was oversubscribed 38 times.

The overall sentiment for the digital payments ecosystem is overwhelmingly positive. Moreover, Paytm itself is a behemoth. Besides its dominant position in the payments sector and its numerous forays into related segments, its clout is such that it has become a household name.

Case in point: “Paytm” has entered our daily vocabulary as a frequently-used verb. Now that’s brand recognition. 


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