Paytm IPO: Hit or a Miss?

Ever left for the Diwali bonanza sale of your local market without your wallet? Wondering what to do?- suddenly, you hear the phrase "no worries ji Paytm Karo" .

It's been more than a decade now that One-97 Communications Ltd.  has been saving us when we forget our wallets. One-97 Communications Ltd. is once again knocking on our doors- this time not for an E-KYC but for the subscription of its IPO that is hitting the markets today. 

The biggest IPO in terms of market issues has already created a huge buzz. But should you invest in it or not? Let's find out.

Overview of Digital Payments 

Although India is still a majorly cash-driven economy, digital payments have gradually grown with around 43 billion transactions worth $20 trillion as of the financial year 2021. These numbers are projected to more than double as the public begins to switch to digital payments as time passes due to increased security, convenience, and simplicity.

Covid-19 has been a major aspect in increasing the awareness towards digitization as the major provider of groceries, the “Kirana Stores”, directed by government regulations, had to switch to digital payments to maintain the necessities to remain contactless, making the online intermediaries more accepted in the Indian households.

The result of the aforementioned projected growth is forecasted to be valued at US$ 40-50 trillion by the financial year 2026. Looks like the industry is all set to grow, right? Now let's dive straight to the overview of Paytm itself.

Overview of Paytm

Founded in 2010, PayTm is an inspiration of Vijay Shekhar Sharma; it commenced its operations with an initial investment of $2 million and back then was a platform for DTH & mobile recharge, which now is a platform for payments, insurance mutual funds services, railways, and air tickets platform and whatnot.

They offer products and services to their consumers and merchants across payment services, commerce, cloud, and financial services. During the initial crawling phase, they introduced products like the Paytm Wallet, the Paytm App with mobile top-ups and bill payments, and a payment gateway for merchants, which helped them to create a large customer base.

In 2015 & 2016, they launched additional services such as the QR code for in-store payments and entertainment and flight ticketing, which helped expand the use cases where consumers could use Paytm.

This was the time when the entire economy had a hard blow in the light of Demonetization, PayTm used the circumstances to their advantage. History will definitely certify that this was the golden year in the life cycle of PayTm. Over the past 5 years, they have launched additional features which have helped increase user base & monetization.

Details of the IPO

Isn't it great that the company is coming up with such a huge issue size, but the point to be noted is out if the issue size Rs. 8,300 Cr. is a fresh issue while the balance of Rs. 10,000 Cr. is an Offer for sale.

That's all about the key details. Moving forward, we will see why this digital payments giant is coming up with the IPO.

Why does Paytm need an IPO?

The primary reasons for the IPO were growing and strengthening the Paytms ecosystem, including acquiring and retaining consumers and merchants and providing them with greater access to technology and financial services.

Also, Invest in new business initiatives, acquisitions, and strategic partnerships. These are two primary purposes other than the capital being utilized for general corporate purposes. Seems like they are all set to utilize the funding well. Now let's talk numbers and learn about the company's financials and how it has been performing through the years.

Financial of Paytm

Technological and E-Commerce brands and companies that do not focus much on profit generation are to be analyzed on the basis of GMV more than revenue.



The image below shows the operational and financial matrices; GMV has been traveling northside, whereas revenue has fallen slightly over the years.

Payment and Financial Services segmenting has been contributing positively over the last 3 years in terms of growth in revenue, whereas the contribution from commerce and cloud services has declined from 15,365 million in 2019 to a mere 6,932 million in 2021. 

For a better understanding, you can refer to the following official data.

For better clarity, look at the PAT figures of Paytm from 2019 to 2021.

This was all about the numbers. The time has come when you will be able to make your final decision by looking at the pros & cons of investing in the IPO. So, Let's dive in!

Why should you invest?

1. Asset light model, fostered ecosystem, wide presence

India is set to take on the USA and China in terms of development and size of the economy. Technology would be the game changer for being ahead, and brands like PayTm that enjoy their monopoly in tech-driven businesses will enjoy and reap the prosperity.

Over the years, PayTm has actively created a wide ecosystem for customers, one place for all your problems.

2. Underpenetrated market, huge area for growth

India has 700 million generation Z and millennials, the largest in the world. Mobile payment users are forecasted to increase from 252 million in FY 2021 to 650-700 million in FY 2026, and mobile payments are expected to increase by 5x, crossing 100 billion payments in volume.

Total digital payments by value are forecasted to grow at a CAGR of 17% from FY21 to FY22. This indicates that the serviceable area is large, and the brand name of PayTm being recognized in the market will definitely have an advantage.

3. The payments bank, a differentiating factor

Paytm has a payments bank license which is one of the factors that differentiates it from its peers. It offers flexibility in terms of liquidity since it can accept deposits from customers; this helps PayTm to manage its working capital a bit better than peers and offsets some extra costs that would have been incurred to manage the working capital.

4. Brand value

A brand for a company is the same as a person's reputation. Paytm enjoys a great brand name which adds to the customers' loyalty. Over the years, PayTm has focussed more on brand rather than the generation of profits because it realizes that once it gets to the roots of the Indian demographics, the market is too large and concrete to generate profits.

There is no doubt that for Paytm, its brand name and tagline is the most precious asset, which unfortunately is not being reflected in its balance sheets .

Why should you avoid applying?

1. A chunk of losses and negative cash flow

History has provided enough evidence that companies with a consistent chunk of losses and negative cash flows have had a tough time coping with the evolving business landscape, and the business model that PayTm exists in is evolving and highly competitive, which makes it necessary for PayTm to burn some more cash to capture mass customer acquisition.

2. Fierce competition

With low cost and intensively underpenetrated market which is open for all. Paytm has not been able to do justice with its first-mover advantage. The industry is flooded with players like Phone Pe- backed by Walmart, and Google Pay- backed by Google. With the players being leaders in their respective domains, the market size has been shared by all.

3. Valuations are based on story, more than numbers

There have been examples where brands who justified their valuations via story have failed to seek a rally in their share prices once they have been listed- the most recent example that comes to our mind is Zomato Ltd.

Since these brands are loss-making multiples, they cannot be valued using earning multiples also, they don't have any listed peers, so the only option that analysts and investors are left with is to value their story- which obviously becomes too subjective.

4. Over diversification & highly regulated landscape

Over the years, PayTm has faced criticism for changing its path from being a B2C brand to a B2B brand. Many products, cloud services being one of them have been low penetrated and high cash burning. Moreover, the customer acquisition cost has also suffered because of this over-diversification.

Further, because of this PayTm comes under the regulatory arbitrage of many entities like SEBI, RBI, IRDA, and DOT( Department of Telecommunications). Evolving laws and regulations from these entities may hamper the business model of PayTm because compliance with these norms evolves investing huge time and money.

The Bottom Line

While the digital intermediary definitely has its roots deep-set with the digitization movement in India, the IPO leaves a few things to be desired. With an Offer for sale of 10,000 crores, it seems that investors have not left the retail investors with much room to move around in. 

Given the GMP, it seems that retail investors can enter the stock later at low prices, but those prone to FOMO must try their luck given that the market is underpenetrated and expected to grow at a rising pace in the future. Happy Investing!

*Disclaimer: The stock discussed above aren't recommendations from Finology; they are only picked to make you understand the concept.