Paytm – A Frothy Valuation

Internet and platform companies have become the buzz world in the Dalaal street. Unicorns are commanding sky touching valuations are many of the new age companies are hitting the bourses. Investors of these loss-making companies are making profitable exit in the market by selling their interest to retailers through IPO. 

Listing disaster of Paytm IPO is re-inviting attention, on the question of valuation froth and how to protect small shareholders. Some of the Internet companies which are recently listed e.g. Zomato, Nykaa, including Paytm are commanding a valuation of Rs 1,00,000 crore despite having a history of losses or not a proven profit history.

Paytm is the biggest IPO of our time. It raised over Rs 18000 Crores from the market, fails to live up to Investor’s expectation. Stock has an issue price of Rs 2150, listed at a discount of RS 1950 and closed at Rs 1560, recording a fall of 28%. Though Paytm has managed to maintain market cap little above RS 1 Lakhs Crore, it has eroded investors wealth of over Rs 30,000 Crore on first day of its listing. Out of the issue proceed Rs 10,000 Cores are for offer for sale (OFS), providing exit to promoter shareholders and investors.

In a true sense the traditional valuation matrix is not applicable to companies, neither it should be as new age companies are native of Internet and have the potential to capture the last market emerging from a wide spread digital adoption.

Question of growth potential can never be disputed but markets are always interested in knowing more about the shore of profitability. Before listing promoters, responsibility is limited to small set of investors in a closed-door environment but situation changes after listing. Promoter has the pressure and obligation to continually create value and quarterly report the numbers to street. 

Erosion of value on the listing day is reminder of the fact that investors are not too hopeful of the niche that Paytm will be creating in the near future. Paytm raised to prominence during demonetisation imposed by the Modi Government and it has failed to create a breadth of that niche.

This is also evident from the offer document filed by company with market regulators. Instead of specialising on a particular segment for growth, Company is working on too many areas.  Paytm is innovating by launching new products and services in the commerce and cloud services and its key offering and innovation includes digital product such as travel, ticketing, advertising and Financial Services.  Paytm Gold, insurance services, Payments Bank, Wealth Management etc which remains some of the key areas for driving growth.

Technology is changing fast and globally there are example that many of the technology companies have vanished due to disruption by their peers. In United States many of the technology companies took years to prove their business model. It has taken many years for the company to recover the eroded value.  Paytm has big competition from PhonePe and Google Pay who are taking centre stage of the Indian Payment landscape.

Paytm listing losses throws an imperative question of valuation that internet companies are commanding. Millions of new retail investors have joined the market by bringing in their life savings to the market. Any permanent loss to retail investors will impact the long-term health of Indian Capital Market. How long it will take to recover the loss remains questionable but investors may book partial loss.  Also SEBI needs to review the valuation and pricing for devising suitable architecture for protecting small shareholders.

Author : Shobhit Shrivastava

Shobhit is a tech enthusiast with a deep interest in fin tech space

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