PAYTM IPO – 3 WHYs & 3 WHY NOTs
In July'21, Paytm filed its Draft Prospectus with SEBI, looking to raise ₹16,600 Crores (approx. $2.21 Billion), at a valuation of about $20 Billion. Let’s be honest, it’s a tech IPO that you would inevitably put your money in and most certainly make listing gains too. But the question is, would you stick with it for a longer term?
So let's ask:
WHY should you be interested in Paytm's IPO:
In the past 12 years, Paytm has built something sensational – India’s biggest Startup, a one stop shop for everything Fintech, and a userbase bigger than America’s population. They executed it so beautifully that marquee investors from across the world just couldn’t ignore them. We’re talking about China’s Alibaba Group and Japan’s Softbank. And if these names are not enough, you probably wouldn’t wanna miss a stock that Warren Buffet (Berkshire Hathaway) picked up.
In 2020, for the first time Paytm achieved unit economics. Which means that they finally stopped doing social service and started making some money – a 12.9% overall contribution margin (up from -61.8% two years back).
Let’s accept it. Even if we didn’t tell you so much about their business, you would’ve applied for this IPO anyway. And why not…Tech IPOs have been selling like ripe bananas and this one will be the biggest so far, in India.
So is that it? Everything's rosy? Well...not really. Lets look at the other side.
WHY should you NOT be interested in Paytm's IPO:
When a business goes live with its IPO, it’s not a kid anymore. Paytm’s prospectus speaks a lot about all that it has achieved so far, but very little about how is it going to make its pursuits sustainable. This company may be 12 years old, yet a lot of its business arms are still in their initial stages – like Paytm Money’s zero brokerage, Paytm First Games and Paytm Postpaid 2.0 were all launched in 2020. It takes YEARS for a Startup to even establish proof of concept.
The company still loses ₹1.5 in every ₹1 earned. Which means that it is far from creating value for its shareholders. Given the pace at which it has been burning cash, we computed its cash runway – it has 4-5 years to prove itself. Do you have that much patience?
Paytm’s IPO is priced at an extremely ambitious EV/R multiple of 54x (a very common ratio used to value companies). We computed the EV/R of fintech companies across the world and arrived at a median of 17x. In short…it’s highly overvalued as compared to the global norm. Here's a snapshot comparison:
EV/R Multiple Comparison
Alipay (Fintech Behemoth, China)
Robinhood (Wealthtech, USA)
HDFC Bank (biggest listed bank in India)
Wise (Payment App, UK)
Still not able to make up your mind? Here's our past analysis of two of its business arms that will give you a closer look into Paytm's business prospects:
Fintech - Paytm's Fintech Gameplan
Analysis of Financials (upto FY19-20) - Paytm's Financial Health Checkup
This article is a part of the July'21 edition of our Startup Newsletter. Here's the complete publication:
All figures of Paytm and its group companies is taken from Paytm's Draft Prospectus.
The material herein is provided for informational purposes only. The information should not be viewed as professional, legal or other advice. Professional advice should be sought prior to actions on any of the information contained herein.