#Paytm Karo- Before or after the listing, Paytm shares continue to attract investors’ interest despite dismal stock performance. Paytm is the third-biggest player in India’s digital payment ecosystem, accounting for 14.94% of total UPI transactional value in December 2022.
Paytm -The Story So far
Today, if India is outpacing the world in the adoption of digital payments, then you must give due credit to Paytm for it. It is because the company was set up when the digital payment ecosystem in India was still in its infancy, and people were still struggling with debit card payments.
Paytm took the lead in driving digital payments and successfully moved a lot of cash and debit card transactions to mobile. GenZ and millennials quickly found digital payments more convenient than carrying cash. So, there was a time when Paytm became synonymous with making mobile payments.
However, since the IPO, Paytm share price has lost 75% of its value, shattering investor confidence. So, let’s check if Paytm share price will increase from here and why it has dropped so much.
Incorporated in 2010, Paytm is one of the most successful startups in India, which has seen its valuations quadruple in the years before. As a result, it emerged as the key player in digital payments innovation in India.
In its IPO, Paytm raised ₹18,300 crores, off which ₹8,300 crores was a fresh issue, and the remaining ₹10,000 crores was offloaded by existing investors. Vijay Shekhar Sharma, the founder of Paytm, offloaded shares worth up to ₹402.65 crores.
The IPO price band was between at ₹2,080- ₹2,150 per share, and the face value of the share was ₹1. Therefore, the IPO was done at a valuation of ₹1.5 lakh crore or $20 billion.
Despite the euphoria around the market and extensive media coverage, Paytm IPO didn’t have a smooth sail and was only oversubscribed by 1.89 times, that too on the final day of the issue.
Paytm share price analysis- Why did Paytm share price drop?
As it was anticipated, Paytm share price listed at a discount. As a result, the stock was listed at ₹1,950 and closed over 27% lower at ₹1,564 per share from its issue price on the opening day. And, since its listing, Paytm share price failed to recover over its issue price and continued sliding. As a result, it made a low of ₹438 on 24th November 2022 and was the most prominent wealth destroyer in 2022.
Many factors contributed to the steep slide in Paytm share price, including:
Expensive valuations: Despite being a key player in India’s digital payments revolution, Paytm didn’t have the market advantage. It demanded 47x the price of its sales, which is enormous for a fintech player, and globally most fintech players trade at 0.3-0.5x price-to-sales growth ratio. And it has no market leadership position in any of the business segments. For instance, in the digital payments segment, Paytm is miles behind PhonePe and Google regarding market share.
A Macquire report on Paytm mentioned that Paytm has too many fingers in too many pies, and the word profitability is elusive in their business model.
Lack of guidance on revenue and profitability: In FY22, Paytm posted a net loss of ₹2,396 crores on revenue of ₹5,264 crores. And, in the Q2FY23 period, the revenue was ₹1,49014 crores, and losses widened to ₹588.5 crores from ₹461.5 crores in the same period last year.
And interestingly, the growth in operative revenue in Q2FY23 came in from the financial services division, merchant subscription revenue, and an increase in bill payments. However, the digital payments business is not a revenue generator for the company as the government has mandated the UPI platform as a “zero charge framework.”.
As lack of profitability is a big concern for investors, CEO Vijay Shekhar Sharma at the company’s first annual general meeting stated that Paytm is looking forward to becoming operationally profitable by September 2023, which the investors find hard to believe given the cash-burning business model.
Offloading by promoters and hedge funds: As mentioned above, shares worth ₹10,000 crores were offloaded by hedge funds and promoters via the OFS route. Offloading by shark investors indicated they saw less growth opportunity and took the IPO as an opportunity to reduce their stake in the company.
Bad timing and retail investors’ hype: The crucial element for the success of any IPO is conducive market conditions. With fundamentals not so attractive and the Fed announced plans to taper quantitative easing by raising the interest rates, HNIs and institutions avoided the IPO and slowly started getting their hands off the riskier assets.
The Paytm IPO came at the end of the market cycle, and the lack of liquidity in the market resulted in lower demand for the issue. Moreover, as the market started to cool off, Paytm share price was severely hit due to its expensive valuations. Also, downgrades and cuts in Paytm share price by brokerages dampened sentiment.
Series of senior executive exits: Ahead of the IPO, five senior executives resigned from the company, and three senior management officials exited the company after the IPO, which soured investors’ sentiment, putting a big question mark on the company’s growth potential.
Paytm share buyback
Just a year after its IPO, the Paytm board approved a share buyback worth ₹850 crores at a price not exceeding ₹810 per share. The acquisition will be made via the open market, and none of the company’s top management executives and directors will tender their share in the buyback period.
Why is Paytm buying back shares just a year after the IPO?
The company management states that the buyback shows confidence that Paytm is on a clear path to profitability. And buyback will not have any impact on the company’s growth plans.
However, a buyback of shares just a year after the IPO has raised many questions among investors amid the downward slide of Paytm share price.
- Will buyback support the falling Paytm share price and drive liquidity into the counter?
- Has the money raised in IPO to fund the growth opportunities disappeared?
- Is the company providing an exit route for pre-IPO investors?
As per buyback rules by SEBI, no company can use proceeds from an IPO to fund the buyback. And the company said that it would use excess liquidity in its books to fund the buyback, which raises many questions. So, it is an open-ended question with no conclusion.
Effect on Paytm share price
Since the listing of Paytm shares on bourses, it has been under constant selling pressure from investors. And, with such a large investor base, the buyback size will not support Paytm share price in the long term.
The positive effect on Paytm share price will only be reflected in the few quarters if the company manages to walk the talk of becoming operationally profitable by September 2023. So, JP Morgan expects Paytm to burn $33 million before turning adjusted EBITDA breakeven in Q2FY24.
An amount higher than this can become an issue for the growth of Paytm share price, and it may continue to underperform. For Paytm share price to reach its issue price, it has to start firing all cylinders simultaneously and focus on building core products that drive profitability.
Paytm has a long road to cover, and the real impact of the share buyback is yet to be seen on the share price, given the volatility and depressed sentiment around the stock. In addition, the board needs to be more transparent with its growth plans, unlike in private funding rounds, where the company is valued based on future growth potential; the stock market discounts all information- past, present, and future and reflected on the share price.
What is the size of Paytm share buyback?
Paytm board has approved a share buyback worth ₹850 crores, at a price not exceeding ₹810 per share via the open market. The share buyback period is six months; during that period, the company’s key management officials cannot sell their shares.
Why is Paytm buying back shares?
Paytm board has stated that buyback is a vote of confidence about the company’s intention to become operationally profitable by September 2023. The buyback is intended to support the falling Paytm share price in the near term.
Who can participate in the Paytm share buyback?
The record date for Paytm share buyback is 27th December 2022, meaning those with Paytm shares on their Demat account can participate in the buyback process.