India’s leading digital payments system company Paytm made history after successfully launching India’s biggest ever IPO in the current month. As per the sources, the total worth of this public offering was Rs 18,300 Crores with the fixed price band at Rs 2080 to Rs 2,150 for each share.
The company hit headlines when the shares of the company made their market debut after much anticipation on Thursday at a 9 per cent discount. Against the expectations, Paytm Stock listed at Rs 1,955 dropped 9% from its issue price on the BSE. After some hours, the stock prices declined further and reached Rs 1,564 a share (a drop of 27.25%) & hit the lower circuit limit at the end of the day trade.
It has been seen that Paytm's market capitalization dropped to about $13.6 billion from its IPO valuation of $20 billion.
Here comes a question: How did India’s greatest IPO fail to give an outstanding performance? Let’s figure it out.
High Valuation Led to Losses for the Investors
Experts said that the company’s high valuation, loss-making business decisions and muted investor’s response are some of the primary reasons for the downfall, even though the company expects to break even by next year or in early 2023.
HNIs or and other powerful investors usually borrow funds for the IPO offerings at highly competitive rates. Hence, the investors will make a profit only if the IPO lists at a higher premium than the cost of funding.
After June 2021, merely 25% of the IPO were listed at a discount which led to a huge loss for the investors.
In the case of Paytm, the debut price was lower than anticipated as the stock opened at Rs 1,955 against the issue price of Rs 2,1050 at the upper end at BSE. The stock price is falling at 9.1 per cent. According to Money control, only aggressive investors were requested to put their money for future investments.
The weak response is being viewed as a sign that investors had become disillusioned with a recent string of IPOs with high valuations.
There are numerous reports out there that have claimed that Paytm’s business model lacks focus and attention.
Macquarie Stock Market Research firm has further said that achieving scale with profitability is the biggest challenge for the company. Also, the target price of Rs 1200 for the stock against its issue price of Rs 2,150 clearly shows the 40 per cent downside risks.
Competition May Drive Down Unit Economics
Also, the research firm points out that competitors of Paytm such as Amazon, Flipkart, Google etc are offering the same services. The competition became tough when new services such as Buy Today Pay Later were launched by the competitors.
This can be clearly seen from the fact that despite Paytm’s offering being much larger than other offerings, the demand was weaker than the recent stock sale. This is because Paytm has lost much of its market share to its competitors like Google and Flipkart.
Stiff Competition with Disruption in Business
Paytm holds its major competition with significant giants in the eCommerce industry like Amazon, GooglePay and Flipkart's Phone Pe. It faces intense competition from these adversaries in specific business areas like purchase currently pay later or buy today and pay later (BTPL)
Although Paytm's Rs. 18,300 crores IPO was listed at the top of the indicator range, it neglected to earn a lot of interest rather than other ongoing IPO events.
The biggest reason behind the market loss to Google Pay and Phone Pe was mainly responsible for this. It is also believed that the company’s FCF (Free cash flow) will not regain its pace till FY 2030.
In addition, the huge development in UPI-based payment structure hampered Paytm's business model.
UPI was presented by GOI in 2019 to build and promote a unified platform for payment in the whole country.
At this point, UPI represents almost 65% of Paytm's GMV, with a strong possibility to reach 85% by FY26
In any case, Paytm actually procures around 70% of its income from the payment business. It is a key part of the mobile wallet section. Nonetheless, this section has lost pertinence because of the advent of UPI payments.
Trouble to Achieve Scale with Profitability
According to a report by Macquarie Research, Paytm needs concentration, innovation and development in its business model. The firm accepts Paytm doesn't have the ability to accomplish scale with productivity.
The digital payment platform is associated with various business verticals, including consumer lending, payment gateway, monetary services etc. It has been consuming a lot of its money while attempting to maintain a few business fragments along with no emphasis on accomplishing benefits. In addition, Paytm procures lower revenue for every dollar it spends through advertising.
As such, the organization has been forced to move into other business segments as it is continuously looking for profitability. In any case, Paytm enjoys a huge client base with 50 million active customers and 22 million merchant banking clients.
Major Decline in Ecommerce Revenue
Paytm Mall, Paytm's internet business arm, contributes around 55% of its income in this income. During FY2019-21, the segment saw a sharp fall in income. This was predominantly because of rising competition from other significant adversaries.
Paytm neglected to stay aware of the internet business giants like Amazon and Walmart-possessed Flipkart. These players accompany a huge client merchant ecosystem and huge buyer offers.
Conclusion
Paytm stock crash tells us a lot. Only a good company is not the one that can offer you amazing benefits. There are certain things you need to ponder before subscribing to an IPO.
Therefore investors, keen to subscribe to SME IPOs must check the company’s financial and fundamentals. Carefully read the financial statements of a company, analyze its strength and weakness and valuations of a company before subscribing to the IPOs.
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