A flood of initial public offerings (IPOs) was made in 2021 in an effort to capitalize on the bull market. New-age tech companies tried cashing in on this bull run by also going public.
With all the vanity they had gathered over the years, Nykaa, Paytm and Zomato were among the few to get listed at absurdly high valuations. In fact, Paytm raised a staggering Rs. 18,300 crore, making it the second-largest IPO of all time after LIC.
And then s**t got real! The markets lost their appetite, and start-up listings started bleeding. Poster boy PayTm is now trading at Rs. 530 per share, dropping to a fourth of its listing price, down 75%.
Is there a case for Paytm’s stock to make a comeback? We think not!
In the payment business, Paytm’s market share has fallen from 37% in 2018 to 15% by the end of 2022. Although it still ranks among the top 3 payment apps, PhonePe and Google Pay command much higher market shares of 47% and 33% respectively.
The payments business can make money from merchants in the form of subscription fees, platform fees and MDR (merchant discount rate), and doesn't really make money from consumers - unless you sell them something else.
From merchants, Paytm saw a big success when it introduced the Soundbox (the device that announces the payment amount). Paytm’s Soundbox currently holds an 85% market share but is slowly being eroded by the more affordable version of PhonePe - while Paytm charges Rs. 125 per month, PhonePe charges just Rs. 50! If it cuts down fees (which it will have to), revenue from this source, which currently makes up 15% of total revenue will go down.
From consumers, the payment business doesn't make enough money, and all payment players, including Paytm, use it just to acquire users, eventually selling them other things to make money.
It has tried several things here from shopping to gaming but has failed miserably. It has been seeing success in lending and financial services, but there’s a long way to this becoming a needle-mover.
💡 The core payment business doesn't make enough anyway, and Paytm is losing market share. In other businesses, after several failures, there is some hope, but a long way for this to make a difference
2. Management Amiss
The company has been in the newsreels constantly, whether it was the multiple litigations recorded in its DRHP or its CEO’s rash driving.
Paytm had been barred from onboarding new customers by the RBI, citing violations of KYC norms and other regulatory proceedings, and told to undertake a full audit of its systems.
It has also been under fire for various data breaches, some that have been admitted and others denied under the guise of data security, all of which have cumulatively led to a lack of confidence in the company and its management.
3. Cash Bash
Capital allocation has been a forever problem with Paytm. Historically it has been burning money to acquire users and then investing in the business to monetise the user base, with little success.
While one can justify burning money to grow a business, its poor capital decisions continue even after its IPO. After one of the largest IPOs in the nation, Paytm was flush with cash - Rs. 8,300 crore to be precise.
As of 2QFY23, Rs. 2,500 crore of the IPO funds were spent towards business expansion and growth, leaving Rs. 5,800 crore balance.
While it is still burning money and making losses, the firm decided on an Rs. 850 crore buyback (around 15% of available IPO funds) to instil investor confidence, by providing support to the stock price and boosting the EPS.
But why would any loss-making company even think of dividends or buybacks, instead of investing in the business and first making it profitable? No one knows.
Moreover, unfortunately, the announcement did little to renew that confidence as the share price has fallen 5-6% since!
SoftBank's Vision Fund invested US$ 1.6 billion in Paytm, making it one of the company's largest investments in India However, in November of last year, it announced the sale of 4.5% of its share in Paytm, out of a total of 17.5%. At the time, the value of its investment had dropped by almost 45%!
Apart from SoftBank, Alibaba sold off 3% of its 6.3% stake in the firm this month, plunging the share price even further.
In short, with these large institutions losing faith and selling off their holdings, the supply of the share increases, with not enough buyers, causing the price to fall - simple yet humbling economics.
Clearly, some erroneous decisions have caused the firm to not live up to the exceedingly high expectations it set. Yet, with the introduction of the ticket cross-selling partnership with IRCTC, its lending leg taking off, the broking and financial services business being fast-growing and the share still attracting FII eyes, it may still have hope of a revival.
Furthermore, the previously detrimental cash burn rate due to heavy indirect expenditure on marketing and advertising has started to subside as of 2QFY23, and the company aims at bringing this burn rate to zero - a positive step towards profitability.
With its wide customer base, and “Paytm par bees rupaye prapt hue” going off literally every 6 seconds, the country might just believe in the Paytm story later, but for now, the risk may not outweigh the reward just yet.