Some Lessons From Paytm

Here are some of the lessons from Paytm’s listing on the Indian stock market:

1. Bluest of bluechip investors’ including long term shareholders’ cannot guarantee IPO success, unless the path to profitability is clear, the company has moats and has market leadership in the segment it operates, and importantly, company valuations or ‘IPO price per share’, at the time of listing is reasonable.

2. Enterprise valuation at ’45 times sales’ looks quite steep. In my view EV at 10-15 times sales would look reasonable for tech. platform companies since most of them would not have management guidance on revenue numbers, and profits numbers are uncertain for the next few years, given the potential cash burn rate to acquire new users in a competitive fintech market; In Paytm’s case YoY business revenues are more or less stagnant or de-growing in real term ( factoring inflation), based on data available at the time of IPO listing. This could be one of the reasons for the weak listing of Paytm IPO on 18th Nov 2022.

3. How will Paytm compete and win market share against Number 1 and Number 2 players?
PhonePe, GooglePay have a combined market share of 80% as we gather from reports. These are giant competitors as regards the number of UPI transactions. Paytm would have to fiercely compete to stay in the market at the cost of margins. Certainly, these two players would aggressively defend their turf. So the stickiness of Paytm users and retention of the userbase is another big factor to consider while evaluating investments in Paytm from retail equity investors’ perspective.

Also, revenue per Paytm user would be in INR thousands, and not INR lakhs, unless they enter retail lending space which would need different competencies, and would need much higher investments as regards manpower, leadership team, technology investments, software and resources etc.

Spinning off SBUs /Business verticals without gaining market leadership will not augur well in the long run. Since the market mostly accords premium to number 1 or number 2 players in any segment the company operates to serve the customers and consumers.

Recent IPO listing of Paytm would make young investors’ rethink before investing in future IPOs of Platform cos., that unless these companies with IPO aspirations have a clear roadmap to profitability, revenue growth, market leadership, favourable unit economics, and solid moats. Their future success would be in question; retail equity market equity investors’ need to pause, review and rethink.. of course, they could buy shares in the secondary market, post-IPO listing and follow the strategy- “buy on deep dips”!

Unit economics, profitable business model, scale and moats must be clearly visible to investors to determine how the company will compete to win in the fintech market, and achieve sustainable and profitable growth in future!

While I would like to wish “Team Paytm” all the best in their future journey, it is also important for the young retail investors to be cautious with their hard-earned money. Most successful PE Companies make 1000 times/500 times returns in tech start-ups during IPO, so 27% loss on listing day won’t matter much for PE companies; however the retail investors losing 27% on a listing day makes you think. Is the Management quality good, yes it is since they have managed to reach so far; they have created a good brand and their intent is noble as we believe; do they have a purpose, yes it appears so, based on the commentary of the leadership team; do they have the market leadership; no, not yet; will they achieve profitability and scale in the next 5 to 10 years; don’t know since there is no guidance in this regard as yet!

Any thoughts or comments are welcome since we can learn from new insights and new perspectives!