Paytm IPO – Should you subscribe for lisiting gains or wait for correction?

About the Company –

Paytm was founded in 2009, as a “mobile-first” digital payments platform to enable cashless payments for Indians, giving them the power to make payments from their mobile phones. Starting with bill payments and mobile top-ups as the first use cases, and Paytm Wallet as the first Paytm Payment Instrument, they have built the largest payments platform in India based on the number of consumers, number of merchants, number of transactions and revenue as of March 31, 2021 according to RedSeer. They have also been able to leverage  core payments platform to build an ecosystem with innovative offerings in commerce and cloud, and financial services. Paytm is available across the country with “Paytm karo” (i.e. “use Paytm”) evolving into a verb for hundreds of millions of Indian consumers, shopkeepers, merchants and small businesses, according to RedSeer. As per the Kantar BrandZ India 2020 Report, the “Paytm” brand is India’s most valuable payments brand, with a brand value of US$ 6.3 billion, and Paytm remains the easiest way to transact across multiple methods.

Services –

  1. Payment services
  2. Commerce and cloud services
  3. Financial services

Payment & Financial Services –

Paytm helps their merchants grow their business by giving them solutions that allow them to accept payments, acquire and retain consumers, improve their business operations and access financial services. Merchants can use in-store and online payment solutions to accept payments through Paytm Payment Instruments as well as major third-party payment methods. To help them acquire and retain customers, and create demand, Paytm offers them services like selling tickets to customers, advertising, mini-app listings, channel and loyalty solutions. They also provide software and cloud services that allow large, medium and small merchants to improve their business operations and access important financial tools such as banking, wealth and credit facilities.

Commerce and Cloud Services –

Commerce and cloud services offerings provides a lifestyle destination for consumers to avail services such as ticketing, travel, entertainment, gaming, food delivery, ride hailing and more. In FY 2020, it processed a total Commerce GMV of ₹142.2 billion, and in aggregate generated over ₹11 billion of revenues in FY 2021 and in the first quarter of FY 2022, it processed a total Commerce GMV of ₹42.4 billion and ₹9.0 billion, and in aggregate generated over ₹6.9 billion and ₹2.0 billion of revenue, respectively.

Interlink between three Services –

No of Users

337 million registered consumers and over 21.8 million registered merchants (as of June 30, 2021).

Revenue Share

In FY 2019, FY 2020 and FY 2021, revenue from Payment and financial services accounted for ₹16,955 million, ₹19,068 million, ₹21,092 million, respectively, i.e., 52.5%, 58.1%, 75.3% respectively of Revenue from operations.

Revenue model of Paytm is described below –

Offer Size –

Details of the Offer size:

 Offer- Equity Shares aggregating up to ₹ 183,000 million

(i) Fresh Issue – Equity Shares aggregating up to ₹ 83,000 million

(ii) Offer for Sale – Equity Shares aggregating up to ₹ 100,000 million by the Selling Shareholders

Objects of the Issue –

The Company proposes to utilise the Net Proceeds towards funding the following objects

  1. Growing and strengthening Paytm ecosystem, including through acquisition and retention of consumers and merchants and providing them with greater access to technology and financial services;
  2. Investing in new business initiatives, acquisitions and strategic partnerships; and 3. general corporate purposes.

In addition, Company expects to receive the benefits of listing of the Equity Shares on the Stock Exchanges, including among other things, enhancement of  Company’s brand name among existing and potential consumers and merchants, retaining existing and attracting potential employees, and creation of a public market for the Equity Shares in India.

Key Risks –

History of net losses –

Paytm has incurred net losses of ₹(42,355) million, ₹(29,433) million, ₹(17,040) million, ₹(2,881) million and ₹(3,766) million in FY 2019, FY 2020 and FY 2021, and in the three months ended June 30, 2020 and 2021, respectively. They expect to continue to incur net losses for the foreseeable future and they may not achieve profitability in the future. Because the market for their platforms, products and services is evolving, it is difficult for them to predict their future results of operations or the limits of their market opportunity.

Increase of Payment processing charges –

Paytm is required to pay payment processing charges to financial institutions and card networks for processing transactions on their platform. These costs depend on (i) the category of merchant, and (ii) payment instrument used by the consumer. Other factors sometimes may include (i) size and number of transactions processed on their platforms, and (ii) the network through which the transaction is routed. From time to time, financial institutions have increased, and may in the future increase charges levied for processing transactions on their platform. These charges vary for each payment instrument and they may not be able to pass on these costs to their merchants. Accordingly, any increase or decrease in payment gateway charges could make their pricing less competitive, lead them to change their pricing model, or adversely affect their margins and prevent them from reaching profitability.

Impact of COVID -19 –

Lockdowns imposed as a result of the pandemic impacted their operations, in particular their commerce and cloud business. Revenue from their commerce and cloud services decreased by 38.0% to ₹6,932 million in FY 2021 from ₹11,188 million in FY 2020. Their Commerce GMV (Total value of commerce products sold on Paytm platforms) declined in FY 2021 primarily due to disruptions to their partners in travel, entertainment and e-commerce industries. According to RedSeer, during the FY 2021 the travel industry declined by approximately 55% and movies declined by 88% compared to FY 2020 due to the various restrictions imposed as a result of the COVID-19 pandemic. While their revenue from payments and financial services increased in FY 2021 compared to FY 2020, the pandemic disrupted many of their merchant partners with particular severity from March 2020 to May 2020. This resulted in a decline in their payments volume. While their year on year GMV (rupee value of total payments made to merchants through transactions on their app) has been growing consistently.

Future Prospects –

  • UPI Payments in India – Crossed $100 Bn in Oct,2021
  • Only company in India in which Berkshire Hathway (Warren Buffet) has invested.
  • Access to Rural villages and merchants
  • Physical presence in every part of the country – Competitive Edge over its peers


Financials –

Even though the company’s revenues have gone up, over the years, it has continued to spend heavily. In the year that ended on March 31, Paytm’s parent firm One97 Communications reported a consolidated loss of Rs 17010 million , narrower than Rs29,420 million a year ago, mainly due to lower expenses.

Most of One97’s group companies are in the red. For instance, Paytm General Insurance and Paytm Life Insurance businesses have reported no revenues so far.
In the e-commerce space, where the company was hoping to compete with incumbents Amazon and Flipkart, it hasn’t made a mark so far.

Basis for offer price –

Should you apply for this IPO?

Experts have mixed opinion on the Paytm IPO. “At the upper end of the price band, Paytm is valued at 49.7x its FY21 revenues,” Jyoti Roy, DVP-Equity Strategist, Angel One Ltd said. “While valuations may appear to be expensive, Paytm has become synonymous with digital payments through mobile and is the market leader in the mobile payment space.”

His recommendation to investors is to subscribe to this issue as he feels that Patym is well positioned to benefit from the exponential 5x growth expected in mobile payments between FY2021 and FY2026 which justifies the higher valuations.

Considering trailing twelve months (TTM) sales of Rs 3,142 crore on post-issue basis, the company is going to list at a market cap/sales of 44.36 with a market cap of Rs.1,39,379 crore,” Marwadi Financial Services worked out the valuations of the company.

The brokerage highlighted that the company is at a great risk if it fails to retain its consumers, attract new consumers, expand the volume of transactions from consumers due to which its business, revenue, profitability and growth may be harmed. Failure to maintain or improve the technology infrastructure could also harm the business and prospects.

It suggests investors to ‘avoid’ this IPO as valuations are too demanding for a loss-making company.

Rising pace of digitalisation continues to present significant opportunity to grow the user base for online transactions for bill payments, shopping, entertainment and other financial needs.

“Monetising the large installed customer/merchant base of Paytm for broader financial service offerings, such as credit, wealth, and insurance is the key opportunity for the company and it would lead to the profitability going forward,” Arihant Capital Markets said.

It, however, pointed out that the company’s history of net losses and negative cash flows in prior years put a big question mark on its ability to turn green. The company may not be able to pass on any increases in payment processing charges payable to financial institutions and card networks, to its customers which may result in losses.

The brokerage finds the valuations on the higher side and works out that at the upper band of Rs 2,150, the issue is valued at a P/BV of 21.3x FY21 P/BV and 49.7x FY21 P/sales (post issue). It recommends investors to subscribe to this issue for ‘listing gains’.

“For the current valuations to sustain, the company has to remain on the path of high growth trajectory for revenues for a period of three years at least. All three verticals have to keep on firing at an accelerated pace,” said a report from KR Choksey.

The brokerage said that the company comes under the purview of three financial regulators – the Reserve Bank of India (RBI), Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority of India (IRDA). Any unfavourable move by any of the regulators can materially impact the valuation.

Further, any delay in execution in any of the business segments can potentially affect the valuation as best case scenario is already priced in.

“Most of the positives are already getting captured in the current valuation, leaving little room for sustainable upside,” the report said, suggesting investors to subscribe to the issue for ‘listing gains’.