Paytm IPO Opens: Buy or Dodge?

One 97 Communication Ltd, the parent company of Paytm, has opened subscriptions for the biggest IPO India has seen in its history. Riding on the back of bullish investor sentiment, strong equity market performance and the increasing digital adoption Paytm aims to raise 18,300 crore at a band of 2,080-2,150, valuing the company at 1.39 trillion at the top end.

Even though experts believe Paytm IPO is the best bet to ride the Fintech IPO wave considering its market leadership, the scale of operations and diverse product portfolio, they have expressed concerns over high valuations ascribed. 

What do investors get with an exposure to Paytm? 

With a gross merchandise value (GMV), of 4 trillion in FY21 Paytm has set up India’s largest digital ecosystem since launch in 2010.  It gradually expanded to create a ‘super-app’ and evolved into a comprehensive payments ecosystem that includes money transfers, credit, insurance, merchants, wealth management and e-commerce services. 

It has 337 million registered customers; 21.8 million merchants and a 40% market share in mobile transactions.

Soon after demonetisation Paytm enabled India’s digital shift towards a cashless economy. The space exploded after 2016 with the launch of Unified Payments Interface which brought down transaction costs for Indians, making digital payments the cheap commodity they are. This means volume growth won’t cut and growth in competition with lucrative business models like PhonePe, Google Pay and Whatsapp payments. 

Even as experts are bullish on listing gains in the range of 50-70%. But considering there is a small allocation caveat, should you buy it at a 50% premium cost?

“If the investors buy the stock at a premium they may expect a 2 year zero return scenario. So one needs to adopt a realistic approach in their return expectations while investing in the new age fintech companies like Paytm. In the long-term, these companies won’t be valued on profitability. So it is important to study the nuances of the business models, understand the risk the company can take as competitive intensity is expected to be very high and the regulatory risks are foreseen in the future,” Amit Khurana, Head of Equities, Dolat Capital Market stated.

India’s digital ecosystem is at an inflection point, where China was in 2014-15 and US was in 2009-10. The space is expected to witness regulatory churn. That’s why, “in the long term fintech companies are expected a 20-30% downward trend after regulatory checks kick-in”, he added.

Almost all of Paytm value comes in from future expectations, which involves a great amount of business uncertainty. Hence, Aswath Damodaran, professor of finance, Stern School of Business, New York University, wrote in his blog, “even if you strongly favour the company and find it undervalued, it would be hubris to concentrate your portfolio around this stock. In other words, this is the type of stock that you would put 5% or perhaps 10% of your portfolio in, not 25% or 40%.”

Everyone wants to cash in on the excitement around brands that have become an indispensable part of our daily lives. Investors need to take a holistic view. Will it perform on the basis of valuations it has set up and what are the kind of returns one is expecting? 




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