Is Paytm Worth What Its Owners Ask?

Paytm’s initial public offering (IPO) comes at a time when the frenzy of startup IPOs is showing signs of fatigue. Indeed, even the enthusiasm generated by the offer of the fintech company has also diminished a little compared to that observed a few weeks ago.

That said, Paytm’s IPO would still get a strong response from investors, and one only needs to look at its list of anchor books to be confident. Leading investors such as BlackRock and long-term investors such as the Canada Pension Fund and Singapore GIC have taken stakes in the company. The anchor book collected ??8,235 crores in total. There is no doubt that his ??The 18,300 crore IPO would also be oversubscribed several times, despite its size.

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What do investors get with exposure to Paytm? Formerly known as One97 Communications Ltd, Paytm started out as a mobile wallet company and has grown into a one stop shop for all digital payments. Its platform has 337 million registered customers and 21.8 million merchants. It is a market leader in mobile payments, wallets and its merchant base. Analysts believe that Paytm’s strength lies in its ability to keep pace with customer and merchant acquisition over the past several years. It is perhaps on this growth that the big investors are betting.

Sure, the company has taken a leap forward in digital payments after the government rendered 86% of banknotes worthless through demonetization in November 2016. But demonetization led to an explosion of digital payment providers in India. . “Paytm is the only payments company in India that, along with its subsidiaries, owns every layer of the payment stack,” analysts at Axis Capital Ltd said in a note. This gives the company an edge, analysts said. the glory lies in its relentless growth in transaction volume. The company has a 40% market share in mobile transactions, eclipsing most of the major competitors.

But growth in volumes yields less benefit when the service offered is a cheap commodity in an intensely competitive market. As mentioned earlier, India’s digital space exploded after 2016. Additionally, the Unified Payment Interface (UPI), introduced in 2016, reduced transaction costs for Indians, making digital payments the product. cheap they are. This means that just growing volume will not be enough. Paytm needs to get more for its money with every transaction, which is easier said than done.

The company makes money by charging its customers and merchants a fee for every digital transaction they make on its platform. To elaborate, Paytm gets a discount every time a consumer transfers money or pays through the app for utility purchases or bills. Other sources of income are the sale of third-party products and the new Buy Now, Pay Later (BNPL) line of credit.

It also gets a merchant discount on top of the fees for using its point-of-sale (PoS) machines. But Paytm’s revenue fell in FY21, resulting in a net loss of ??1,701 crores. Granted, the drop in revenue is due to its business and cloud vertical, while revenue from payments and financial services grew 10.6%. Despite this, revenues from the payments and financial services that house its entire suite of digital offerings have barely increased over the past five years. During the same period, the company’s gross value of goods (GMV) jumped to ??4.03 trillion in FY21 from just ??35,000 crore in FY17. Aswath Damodaran, professor of finance at the Stern School of Business, pointed out in an October 4 blog post that GMV percentage revenue (participation rate) fell sharply in fiscal year 21. “The image that emerges from Paytm is that of a leadership too focused on accumulating user numbers and too distracted to care about converting them into revenue and profit, while making grandiose statements about its future, ”a- he writes.

It is this persistent problem with revenues and earnings that makes it difficult for analysts to justify the valuation of Paytm when it went public. The company sells shares to ??2,080-2,150 per share. This places its valuation at ??$ 1.39 trillion post-issue at the high end of the price range, making it the eighth largest Indian company by market cap. Damodaran valued Paytm’s fair valuation at $ 20 billion, close to what the company said in its IPO. But for that to happen, the company must constantly improve its participation rate.

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About Meredith Campagna

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