Could Paytm’s Lacklustre Listing Affect Future Tech IPOs?

Paytm’s stock price has been on a downtrend since its listing on November 18, losing more than 30 per cent between the listing day and November 22.

The high valuation of the company in its initial public offering (IPO) has received criticism from several quarters. Investors further began questioning the company’s business model, and whether it could generate profits in the future.

A report by Macquarie highlighted these issues and ultimately attributed a target price of Rs 1,200 per share to the company, a 44 per cent decline from the higher price band.

The Adverse Impact on MobiKwik

The Paytm debacle appears to have spooked investors. Mobikwik, another company operating in the payments space, has seen its valuation in the unlisted space dip almost 30 per cent, according to a report.

Investors, who had expected to make a quick gain on listing, appear to have lost interest in the stock. Mobikwik operates in the same segments as Paytm, and suffers from the same issues of having multiple business lines but no profitable monetisation.

Mobikwik does not have a significant market position in most of its businesses, unlike Paytm. Mobikwik is betting on the buy-now-pay-later business as the payments, wealth management, and other business segments continue struggling.

In light of Paytm’s criticism of high IPO pricing, Mobikwik’s IPO, which was said to be aiming for a $ 1 billion valuation, could suffer. With around Rs 288 crore in revenues for financial year 2021, the expected $ 1 billion valuation would mean a valuation of more than 30 times revenues.

According to reports, BharatPe’s Chief Executive Officer Ashneer Grover said that he doesn’t expect any more fintech listings for this equity market cycle.

He said that Paytm’s growth had been stagnating for the last three years. Hence, the company’s mega-IPO did not see demands at high valuations. Grover further questioned the basis of Paytm’s IPO pricing as its peers with similar business models commanded much lower valuations in the private markets.

PhonePe, which is a leader in the UPI market, and has a higher market share compared to Paytm, is valued at $ 9 billion.

Investors Are Still Enthusiastic

While Mobikwik’s valuations have decreased due to the Paytm debacle, other tech firms have continued trading at high valuations. Nykaa, Zomato and PolicyBazaar, have continued trading at premium valuations despite the Paytm debacle.

But these companies hold a strong market position. Further, Nykaa and PolicyBazaar are operating around their breakeven points, giving a further boost to their valuations.

In addition, smaller IPOs have performed quite well in recent times, with LatentView Analytics listing at a 169 per cent premium.

Nevertheless, unlike Paytm, all of these companies had public offers that were at a large discount to their listing prices. Hence, the lower valuations helped these companies do well in the public offerings.

While Paytm’s management has said that they had left money on the table for investors, the public market listing shows otherwise. IPOs that had relatively lower valuations have created greater wealth compared to smaller players.

Valuation Troubles

Therefore, writing off the tech IPO space after Paytm’s decline would be unfair, as several recent tech IPOs have showed us. The Paytm debacle appears to be a one-off problem that arose from the management’s obsession with having the largest Indian IPO after Coal India’s 2010 IPO.

The fiasco also indicates that companies cannot get away easily with highly priced IPOs. A large number of retail investors have entered direct equity investing recently. A large spate of successful listings led to a trend of investing for listing gains.

However, the Paytm IPO was a huge disappointment for investors who were looking for quick listing gains.

Investors who had invested during the dot-com bubble had to wait for years to just recoup their investment principal (assuming the company survived).

These companies included blue-chip stocks such as Infosys, Microsoft and several others. Quite evidently, extremely high valuations can lower investment returns for great businesses as well.

Nevertheless, companies with rightly-priced IPOs do appear to continue attracting investors. Recently, Vijay Shekhar Sharma talked about Tesla, and highlighted the car company’s journey from being the most shorted stock in the world to a highly valued electric car manufacturer.

Paytm’s management has said that the public markets do not understand Paytm’s business model, and that the $ 18 billion was fair.