India’s leading digital payments platform made history by launching the biggest ever IPO in the country this month. The Rs. 18,300 crores worth public offering had its price band fixed at Rs. 2,080 – 2,150 for each share.
However, Paytm stock is listed at Rs. 1,955, dropping 9% from its issue price on the Bombay Stock Exchange. It further declined 27.25% to reach Rs. 1,564 a share during the day. On the NSE, Paytm IPO started with Rs. 1,950 per share, signifying a 9.30% drop from the fixed issue price. There was a 27.34% drop during the day, pushing the share price to Rs. 1,562.
Paytm’s market cap nosedived to $13.6 billion from its IPO valuation of $20 billion.
So, how did India’s biggest IPO deliver such a weak performance? Let’s find out more about it.
Inflation in Valuation Led to Losses for Investors
India’s IPO market collected over Rs. 72,300 crores this year so far and is about to touch the Rs. 1 lakh crores milestone. The IPO frenzy has been supported by abundant liquidity, bullish sentiments among investors, and SEBI simplifying the listing procedure.
With funds reserved in secondary markets, investors, especially HNIs, have been borrowing funds for the public offerings at excessively competitive rates. However, investors can earn profit only if the entity lists at a greater premium than the cost of funding. During the second half of this year, roughly 25% of the public offerings were listed at a discount resulting in significant losses for investors.
Stiff Competition with Disruption in Business
Paytm competes with major rivals such as Amazon, GooglePay, and Flipkart’s Phone Pe. It faces tough competition from these rivals in certain business segments like buy now pay later or financial products space.
Although Paytm’s Rs. 18,300 crores IPO was positioned at the peak of the indicative range, it failed to garner much demand as opposed to other recent IPO events. Paytm’s loss of market share to Google Pay and Phone Pe was mainly responsible for this. Analysts believe its free cash flow will not turn positive before FY2030.
Moreover, the massive growth in UPI-based payment structure hampered Paytm’s payment-based business model. UPI was introduced by the government’s NCPI back in 2019 to establish and promote a unified platform for payment across the country.
As of now, UPI accounts for nearly 65% of Paytm’s GMV, with a possibility to reach 85% by FY26. Nevertheless, Paytm still earns around 70% of its revenue from the payments business. It is a major player in the mobile wallet segment. However, this segment has lost relevance due to the rise in UPI payments.
Major Decline in E-commerce Revenues
Paytm Mall, Paytm’s e-commerce arm, contributes about 55% of its revenue in this revenue. During FY2019-21, this segment witnessed a sharp fall in revenue. This was mainly due to rising competition from other major rivals.
Paytm failed to keep up with the e-commerce giants like Amazon and Walmart-owned Flipkart. These players come with a robust customer-merchant ecosystem and significant consumer value propositions.
Difficulty to Achieve Scale with Profitability
As per a report by Macquarie Research, Paytm lacks focus, direction and innovation in its business model. The firm believes Paytm does not have the capacity to achieve scale with profitability.
The digital payment platform is involved in a number of business verticals, including consumer lending, payment gateway, financial services and more. It has been burning much of its cash while trying to run several business segments together with no focus on achieving profitability. Moreover, the company earns lower revenue for each dollar it spends through marketing.
In other words, the company has been forced to move into other business segments in its search for profitability. Nonetheless, Paytm enjoys a massive customer base with 50 million active users and 22 million merchant users.
Issues with Company Governance
The Macquarie Research report suggests that Paytm’s upper management does not represent an ideal structure. Its board consists of only 8 members, out of which 6 are based in foreign countries.
Moreover, there is no clear distinction between the posts of managing director, CEO and chairman. All these posts are held by one individual, Vijay Shekhar Sharma, who founded the firm. Analysts believe a split in these posts will bring increased objectivity to the board.
With 5 senior management officials leaving right before its DRHP filing, the company suffers a high attrition rate. This can affect its future operations and functionality.
Investors intending to subscribe to IPOs should be careful enough while selecting the company. They should analyse the strengths, weaknesses, fundamentals and valuations of the companies.
Frequently Asked Questions
- How many times was Paytm IPO subscribed on the final day?
On the final day, Paytm IPO was subscribed a total of 1.89 times.
- How many bids did Paytm IPO receive on the first day?
Paytm IPO received bids for 88.21 lakhs.
- Which is the parent firm of Paytm?
One97 Communications is the parent firm of Paytm.