BENGALURU : Paytm permanently changed the way Indians recharge their phones and pay their bills. And the story of its founder Vijay Shekhar Sharma , a quintessential small-town boy who dreamt big and doggedly persisted with his dream, is truly an inspiring one.
While Paytm ’s growth since demonetization —mostly as a payments company—has been exponential, the company did make mistakes. Some of the pivots were opportunistic and smart; others came across as reckless and brash. The sort one makes when sitting on a huge pile of cash.
Its foray into e-commerce via Paytm Mall was a case of reckless diversification. No one ever believed that Paytm had a sniffing chance of making a success of its e-commerce gamble. While Sharma was busy building Paytm Mall, PhonePe and Google Pay were building alternate payment solutions that would pose a serious threat to the core business of Paytm.
Overtime, Paytm became ‘everything for everyone’. It earned several labels, from being a wallet company and mobile commerce firm to being a payments bank and India’s largest fintech player.
Paytm’s ‘go big or home’ philosophy helped it capitalize on opportunities, but also led it astray at some of the defining moments in its journey, the initial public offering (IPO) being an example. Anyone who has been part of any IPO understands the importance of optimizing the size and price of the IPO–neither too low to leave significant value on the table nor too high to disappoint retail investors. In its desire to be seen as the biggest IPO ever, the company erred on both the offer size and price.
Global brokerage firm Macquarie Research’s coverage of the company sums up the problem: “Paytm has a history of spinning off several business verticals without achieving market leadership or profitability. Paytm has been a cash burning machine, spinning off several business lines with no visibility on achieving profitability. Despite factoring in an aggressive ~50% CAGR increase over the next five years in non-payment business revenues led by distribution business, we expect Paytm to generate positive free cash flow only by FY30E.”
In contrast, the business models of companies such as Zomato and Nykaa are relatively easy to understand. While Zomato may be a loss-making company, its path to profitability, and the levers available to get there are clear. Paytm’s business model, and its path to profitability are difficult to comprehend. Hence, the investor wariness is quite understandable. Paytm’s reception at the bourses exposes the dichotomy between customer love for a product and the investor dislike for the stock.
Cheap money fuelled by the Fed’s zero interest rate policy has created an unprecedented frenzy and FOMO (fear of missing out) resulting in a stampede for Indian technology IPOs.
The spate of IPOs, including those planned, has triggered several questions. Do retail investors have the sophistication to understand the complexities of investing in loss making companies? Can they evaluate businesses that are expected to rely on unprofitable growth for some years before they can hope to make money? Do analysts and brokerages have the ability to accurately forecast future scenarios and compute the right share price for these companies? Are sophisticated institutional investors exiting the gate after dumping their stock on unwary retail investors? Is this optimism and bull-run expected to continue, or was 2021 an exceptional year because of the pandemic induced abundance of cheap money? Finally, who would be left holding the can when the tide turns and cheap money disappears?
The correction in the shares of Paytm after it listed helps us think through some of the answers, and the lessons it holds for every stakeholder, from retail investors to analysts and even the Securities and Exchange Board of India (Sebi), the regulatory body for the country’s securities and commodity market.
(On Wednesday though, shares of Paytm rallied 17.27% to end the day at ₹1,753.15.)
But, before we delve into the answers, it will be interesting to trace and understand some of the changes sweeping the startup landscape across the world.
The ways of private capital
Companies that went public in the last 10 years across different ecosystems have remained private for longer than companies that went public in prior periods. Even when the time to list has been the same, there has been an exponential increase in the market cap at the time of IPO. Take the example of Infosys. The IT services exporter took 12 years to go public. At the time of its IPO in 1993, it was a sub $100 million company. On the other hand, Zomato took almost the […]
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