Paytm IPO Valuation: What Happened?

Paytm's IPO: An Unexpected Turn

A surprising outcome may have been observed regarding Paytm’s initial public offering (IPO), particularly for those not closely following its progress. The company had secured substantial funding from well-known investors and had successfully expanded its reach to become a globally recognized brand within the fintech sector.

The Exchange: A Recap

The Exchange provides insights into startups, market trends, and financial matters.

You can access The Exchange every morning on TechCrunch+ or subscribe to the newsletter delivered each Saturday.

Despite these positive indicators, Paytm experienced a challenging start to its public trading. The company recorded two consecutive days of double-digit percentage declines following its debut last Thursday.

Analyzing the Post-IPO Performance

A drop of 27%, followed by a further 13% decline in share price, represents a significantly unfavorable outcome for a newly public company.

The question arises: what factors contributed to this disappointing performance? To gain a clearer understanding, we will revisit Paytm’s IPO filing, supplemented by recent data released today regarding the company’s operational results.

Seeking Explanations in the Numbers

Our aim is to identify within the financial data sufficient justification for the company’s poor post-IPO showing. Was the initial pricing of Paytm’s shares inaccurate?

Determining whether mispricing was the primary cause will help us assess if the broader Indian stock market exhibits resistance towards tech-focused unicorn companies.

Leveraging Analyst Insights

With support from analyst data, as provided by TechCrunch’s Manish Singh, we can further investigate the situation.

This analysis will allow for a more comprehensive evaluation of the factors influencing Paytm’s IPO performance.

Paytm’s Initial Public Offering Documentation

To maintain conciseness, a detailed examination of Paytm’s service offerings will be omitted. Suffice it to say, the company provides payment solutions, bill payment facilities, and loan services within the Indian market, alongside other ventures.

The question arises: how viable is the fintech sector within India? Let's analyze the company’s IPO filing to gain insight.

The following represents the company’s income statement:

All figures presented are denominated in millions of Indian rupees (₹). Converting the 2021 data to US dollars reveals Paytm generated $428.5 million in total revenue for the year ending March 31, 2021. This was offset by total expenses of $643.2 million, resulting in a net loss of $214.6 million.

The company’s profitability appears lower than anticipated, despite demonstrating a trend of decreasing losses annually since 2018. While diminishing losses are a positive indicator, they are less compelling when considered alongside declining revenues and a slowdown in sales and marketing expenditures.

In essence, Paytm recorded its lowest revenue figure within the available data for its most recent fiscal year. Simultaneously, it experienced substantial reductions in “marketing and promotional expenses,” which contributed to a lower overall cost structure. It is favorable that Paytm’s contraction wasn’t more significant given the sharp cuts to its marketing budget. However, reigniting growth will likely necessitate increased spending, potentially affecting its ability to continue reducing losses.

At a broad overview, Paytm has successfully established a substantial and widely-used fintech enterprise in India. However, it seems the company is facing challenges in generating sufficient revenue to cover its operational costs.

A portion of this difficulty can be attributed to the impact of the COVID-19 pandemic and the resulting economic disruption. As Paytm indicated in its filing:

Numerous other companies encountered similar difficulties. However, shared challenges in revenue growth do not guarantee a successful IPO.

It’s probable that a majority of individuals, if asked about Paytm’s growth rate in the last fiscal year, would not have predicted a negative result. Launching an IPO with declining income is inherently challenging!

Nevertheless, there are positive aspects to consider. For instance, the company has experienced robust growth in its Gross Merchandise Volume (GMV) in recent years:

Furthermore, the company recently announced positive results for several key financial metrics. The relevant GMV chart is shown below:

It’s important to remember that the fiscal period previously discussed concluded on March 31, 2021. Since then, GMV growth has been notably strong, as has loan volume:

These are encouraging signs. However, are they sufficient to justify an increase in the company’s valuation? Not at this time.

Analyst Perspectives on Paytm

Several analysts expressed bearish sentiments regarding the Paytm initial public offering. Macquarie Research, for instance, criticized the company’s business model, characterizing it as lacking both clear focus and strategic direction.

Their report, reviewed by The Exchange, suggested a potential downside of over 40% for the stock. The core of their negativity stemmed from anticipated increased competition.

This competition, they believe, will negatively impact Paytm’s unit economics. Furthermore, achieving substantial growth while maintaining profitability was predicted to be a significant hurdle.

Contrasting Views

Conversely, in early November, Bernstein offered a more optimistic valuation. They estimated Paytm’s worth to be between $21 billion and $24 billion.

This valuation equated to a revenue multiple of approximately 22 to 25 times the projected revenue for fiscal year 2023. However, in contrast to some predictions in other sectors, the bearish analysts proved to be accurate in their assessment of Paytm.

Ultimately, the market’s performance validated the concerns raised by the analysts who foresaw challenges for the company.

• Key Concern: Lack of focus in Paytm’s business strategy.
• Predicted Impact: Declining unit economics due to heightened competition.
• Valuation Discrepancy: Bernstein’s optimistic estimate versus Macquarie’s bearish outlook.

The outcome demonstrated the importance of considering diverse perspectives when evaluating investment opportunities. The accuracy of the bearish predictions highlights the significance of thorough market analysis.

Paytm's Valuation Challenges

Despite positive product outcomes in recent periods, Paytm continues to struggle under the burden of its initial public offering (IPO) price. What accounts for this persistent difficulty? Declining revenue figures undoubtedly contribute to the issue.

However, the fundamental problem may lie in an initial overvaluation during the IPO itself.

According to reports from the Financial Times, Paytm was valued at $20 billion at the time of its IPO. TechCrunch estimated the valuation at $19 billion, though slight discrepancies exist in share calculations.

This valuation appears substantial, particularly considering the company’s total revenue for the preceding fiscal year was less than $500 million. This translates to a revenue multiple exceeding 40x.

While the revenue multiple has decreased alongside the share price, Paytm’s valuation still resembles that of a rapidly expanding Software-as-a-Service (SaaS) company, rather than a fintech firm that has recently experienced negative growth.

The core of the issue, therefore, seems to be a disconnect between Paytm’s IPO price and its recent financial performance. The initial pricing simply exceeded justification based on current results.

It is true that Paytm secured significant funding at a favorable valuation, providing a robust financial foundation for future expansion. However, public market investors typically demand more than just future potential.

Past performance remains crucial, and Paytm’s trailing results were insufficient to justify its IPO price.