Paytm shares sink in their early stages; Macquarie Capital sees 44% drop in issue price

Investors now accustomed to the exceptionally high listing of recent Initial Public Offerings (IPOs) had a sharp wake-up call on Thursday, as shares in One 97 Communications, Paytm’s parent company, collapsed on the first day of trading.

At Rs 18,300 crore, Paytm’s public issue was so far India’s largest after state-owned Coal India. Paytm raised funds in the share price range of Rs 2,080-2,150. The share, however, opened at just Rs 1,955, a 9% discount from its issue price. final of Rs 2,150. It fell further and fell almost 23% to Rs 1,660 by late morning.

Paytm is a fintech giant offering a wide range of services ranging from mobile wallet, bill payment, airline, rail and movie ticketing, UPI (unified payment interface), digital gold investments, to the merchant cash advance and FASTag (electronic payment of tolls), among others. . Its subsidiaries include a payment bank, a Paytm mall, and a stock and mutual fund trading platform.

“Paytm’s business model lacks focus and direction,” said Suresh Ganapathy and Param Subramanian, analysts at Macquarie Capital Securities India.

By releasing a research report ahead of Paytm’s listing, analysts gave the stock an “underperformance” rating and set a target price of 1,200 rupees, a whopping 44% downside.

“Touching multiple lines of business prevents Paytm from being a category leader in all businesses except wallets, which are becoming inconsequential with the surge in UPI payments. Competition and regulation will reduce unit economics and / or medium-term growth prospects, ”said Ganapathy and Subramanian.

Paytm has a 65-70% market share in the digital wallet industry and around 40% in the consumer-to-merchant segment in terms of mobile payment instrument transaction volume, analysts said.

Another brokerage firm ICICI Direct previously reported reliance on payment services for the majority of its revenue as a key risk. In fiscal 2019, fiscal 2020 and 2021, financial services revenue represented 52.5%, 58.1% and 75.3%, its analysts Kajal Gandhi and Vishal Narnolia said.

“Failure to expand the reach of attractive payment services can hamper business growth, as well as increase the vulnerability of core payment businesses to competitors,” analysts said.

Macquarie analysts note that most of the things Paytm does, all of the other big players in the ecosystem like Amazon, Flipkart, and Google do as well. There is also growing competition in the buy now-pay later space (where Paytm operates Paytm Postpaid).

Paytm is still in deficit; In the previous fiscal year he reported a net loss of Rs 1,701 crore on income of Rs 3,186.8 crore. In the IPO prospectus, the company warned that with increased operating expenses in the future, it may not be able to achieve and maintain profitability.

As competition in the distribution sector continues to grow, take rates are only going to decline, Macquarie analysts say.

“Unless Paytm lends, he can’t make a lot of money just being a distributor. So we question its ability to scale cost effectively, ”said Ganapathy and Subramanian.

Obtaining a small finance bank license could also prove difficult for the company, given that Chinese companies Alibaba and Ant Financial hold a substantial 31% stake.

“Paytm’s valuation, at 26 times the estimated selling price for FY 23, is expensive, especially when profitability remains elusive for a long time. Most fintech players globally trade between 0.3 times and 0.5 times the ratio of price growth to sales and we have assumed the upper end of that band. We are not prepared to give it a bonus here because we are not sure of the path to profitability, ”analysts said.

Several other analysts had also earlier pointed out the show’s expensive ratings.