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Paytm debacle casts shadow over startup IPOs and harms stock market mood

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Workers set the stage at the listing ceremony for the IPO of One97 Communications, operator of PayTM, on the Bombay Stock Exchange in Mumbai on November 18, 2021 |  Bloomberg
Workers set the stage at the listing ceremony for the IPO of One97 Communications, operator of PayTM, on the Bombay Stock Exchange in Mumbai on November 18, 2021 | Bloomberg

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New Delhi: A mind-boggling two-day plunge by Indias Paytm after its IPO casts a shadow over the outlook for tech companies preparing to go public in what was supposed to be the country’s break-up year.

According to Edelweiss Financial Services Ltd, at least some of the IPO prospects that were on the periphery looking to take advantage of the flow of transactions may now rethink the timing and pricing of their issuance. Payment services firm MobiKwik could delay its IPO by a few months due to lack of investor demand and a 30-40% drop in valuation, the Economic Times reported on Tuesday, citing sources that he did not identify.

The Paytm debacle darkened the mood in the Indian stock market, with its benchmark S&P BSE Sensex losing four consecutive sessions, the longest losing streak in a month. Retail investors, who bought an unprecedented number of shares in Paytms’ parent company, One 97 Communications Ltd., saw 37% of their value wiped out in just two trading days. Further losses could be expected if the stock collapses from its Monday closing price of Rs 1,359.6 to Rs 1,200 forecast by Macquarie Group Ltd.

The event will somehow inspire people to be cautious and not take the market for granted by blindly placing bets, said Gopal Agrawal, managing director and co-head of investment banking at Edelweiss Financial Services. It is important that the history and prospects of a business are well understood by investors.

Indian stock markets were in tears this year, backed by a central bank that cut interest rates to an all-time high and millions of new individual investors looking for higher returns in riskier assets. The rally encouraged at least half a dozen tech startups to seek public listings, including Oyo Hotels & Homes backed by SoftBank Group Corp. and logistics provider Delhivery Pvt.

Firms in the South Asian country have raised around $ 15 billion through IPOs this year, already an annual record in terms of total revenue. Yet critics have questioned the valuations of some of these IPOs, given that they are still loss-making companies.

The pandemic has led to massive adoption of technology in the country that has been incorporated into the valuations of many tech companies, said Ashutosh Sharma, vice president and chief research officer at Forrester Research Inc. a downward trend? I do not know. But going forward, investors will be cautious about the risks and the business future of tech companies.

The valuation of Paytms, at around 26 times the estimated selling price for FY2023, is expensive, especially when profitability remains elusive for a long time, Suresh Ganapathy and Param Subramanian of Macquarie Capital Securities (India) Pvt. wrote in one of the few research reports covering the Paytms outlook. Most fintech players globally trade around 0.3 to 0.5 times the ratio of price growth to sales, they said.

The large size of Paytms’ IPOs has also constrained demand, which could bode well for smaller potential IPOs. The Zomato Ltd. food delivery app. and beauty startup Nykaa – both smaller than the Paytms offering – have seen their shares increase by more than 80% since their IPOs.

Edelweisss Agrawal suggests setting the price for sales of shares to leave something on the table for investors.

If the price of an issue could be 10% higher or lower, it would be advisable to go for a lower price, which offers a much greater advantage in trading, he said. –Bloomberg

Disclosure:Paytm founder Vijay Shekhar Sharma is one of ThePrint’s prominent founding investors. Please click here for more investor details.


Read also: Paytm shares fall 13% more after historic IPO flop


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