Paytm Listing: And They All Fall Down...

There’s an old Army joke about being a good husband that goes something like this: “When your wife says jump, you don’t say why. You ask, how high?”

The mood, pricing and valuations of recent initial public offerings (IPOs) in India have mirrored just that.

An almost non-stop party in the IPO space seems to have taken a sour turn today. Touted as the largest-ever IPO with an issue size of Rs 18,300 crore, Paytm had a somewhat awkward run across the line as subscriptions dithered and finally closed with a modest oversubscription of 1.89X on the final day.

On listing day, it opened at a steep discount and proceeded to see selling pressure. Paytm extended its losses towards close, hitting lower circuit and ending down Rs 590 or 27%. There is some anger about the valuations, the price and the naked bravado many tech startups have displayed as they enter the stock market.

I think today’s events present an opportunity to take a sobering look at the parties involved, and accountability that must now be taken.

The promoter 

A running criticism of Paytm has been that it doesn’t have a distinctive or proven business model. It certainly had a first-mover advantage and the demonetisation moment was life-changing for Paytm and its fortunes. Things have changed since then. The company is functioning in a space that now has no entry barriers, thanks to UPI.

Another piece of criticism Paytm has faced is its attempt to do too much, while doing nothing meaningful for profitability. Over the years, Paytm has added numerous layers and verticals in an attempt to make it a “superapp”. What has been most befuddling though, is the founder’s dogged stance around profitability. In a pre-IPO press conference, Vijay Shekhar Sharma or VSS as he is known, announced passionately his focus would remain “merchants, merchants, merchants”.

One97 Communications, the parent company, remains unprofitable. While the extent of losses has reduced over time, One97 reported a consolidated loss of Rs 1,701 crore in FY21 compared with Rs 2,942 crore in FY20. In the first quarter of FY22, revenue from operations rose 62% year-on-year, the company said in its prospectus. The consolidated loss for the three months ended June stood at Rs 381.9 crore.

Also read: Nykaa Has Listed. Now What?

VSS has said Paytm is not about quarterly profits but long-term change, a line similar to the one Zomato has taken. “We have heard that a public listing changes a number of things for companies. We are adamant that we will not let our IPO change anything, and we aren’t going to morph into a QSQT business. We will continue to focus relentlessly on the long term,” said Zomato post earnings.

I’m confused. If you’re not into QSQT – ‘quarter se quarter tak’, as it is condescendingly called now – then why are you in the stock market ? That’s how the model works here, there is quarterly accountability. If you wanted to play tennis, not football, why are you on the football field?

And while on the subject, I also find it increasingly curious how founders are dialling up and dialling down on marketing expenses before and after they are listed – Paytm has cut down on its marketing expenses by more than 60% despite building a host of services including insurance, wealth tech, lending etc. But I’m waiting to see how that line item reads post listing.

The banker 

“A higher valuation could have been achieved but we decided to price it at a level where everyone makes money. We could have priced it higher but this is where we felt most comfortable,” said Madhur Deora, group chief financial officer at Paytm. The Paytm IPO was valued at close to 65% of Axis Bank, about 40% of Kotak Mahindra Bank and 20% of HDFC Bank. Ask yourself, are you ready to make a fixed deposit with Paytm? Also ask yourself, why did bankers push for a valuation that was so completely out of whack with reality? Who advised the promoters to price their IPO this way?

As analysts at Macquarie note, “Paytm is a cash guzzler. Paytm’s valuation, at ~26x FY23E Price to Sales (P/S), is expensive especially when profitability remains elusive for a long time.”

A second question to the bankers. Why did Paytm decide to increase its IPO size to Rs 18,300 crore from Rs 16,600 earlier? Were existing shareholders like Alibaba’s Ant Financial and Softbank anxious to jump off? Or was a private placement that was being considered pre IPO unsuccessful?

The one thing I can say with confidence is, at the end of this year, no matter where these stocks are trading, no one will be happier nor wealthier than the lead investment bankers.

The regulator 

A key reason for Indian firms going ‘IPO’ was apparently the perception of a large appetite for investment in India’s tech firms among global institutional investors.

The Securities and Exchange Board of India (SEBI) upped the party mood by relaxing a number of norms to make it easier for start-ups to get listed. The regulator reduced the time that early stage investors need to hold 25% of the pre-issue capital to one year, from two years earlier. It also amended regulations that previously barred start-ups going public from making discretionary allotments. This helped the start-ups to allocate up to 60% of the issue size of the IPO to an eligible investor subject to a lock-in period of 30 days on such shares.

Also read: Samvat 2077: With Decade-High Returns, Here’s What Stood Out

It seems the regulator is now having a change of heart; earlier this week, SEBI proposed putting a cap on IPO proceeds earmarked for making future acquisitions without identifying specific targets and monitoring funds reserved for general corporate purposes. It also suggested certain conditions for the offer for sale (OFS) by the significant shareholder and recommended that 50% of the anchor book should be given to those investors who agree with 90 days or longer lock-in.

The big question, many IPOs later, is whether the horse has already bolted the stable.

The investor 

And finally, the retail investor, alternately hapless and cunning. Switching between being a canny day trader to being a helpless long term investor depending on what colour the trading screen is that morning. To be fair, there was abundant caution exhibited while approaching the Paytm IPO. A sedate retail subscription 1.66X of vs 12.2X for Nykaa, 7 X for Zomato – I am not even getting into the figures for smaller IPOs we have seen recently.

Does the retail audience not realise this is risky? Of course they do. They just don’t like it when the joke is on them. A mixture of FOMO (fear of missing out) and TINA (there is no alternative, to stocks) has ensured a highly frothy, deeply engaged retail crowd in the IPO bazaar.

A final word for the business channels reporting on these listings. Images of emotional promoters, spooling footage of the listing ceremony, promoters grabbing the bull by its horns, loads of bonhomie. And post-event analysis. It is time for everyone to take accountability in this circle of nonsense that has thrown caution to all conversations around valuations, profitability and fundamentals. Everyone’s an Amazon and everyone’s a winner.

Where does this leave the road ahead for IPOs? My suspicion is this may last a while. Smaller issues are being played the same way small cap stocks are, for a punt. Things will turn sharply when the secondary market begins to show cracks. When institutional money starts de-leveraging and stepping back.

The bigger question is what happens then to some of the recent listings. There may be a wave of selling. But what comes next is the true punishment. When stocks grind into a range offering neither exit nor bounce is when the pain will be real.

Many in the market have likened today’s Paytm debacle to the Reliance Power fiasco. Is this a Reliance Power, everyone is asking? I believe not. There are differences. Reliance Power was seeking money on the basis of nothing, zero. Power generation was considered a sunrise sector in the late 2000s, the stock market was booming and Anil Ambani’s ambitious IPO was seeking to cash in on both.

Paytm has done an admirable job in the fintech space, and Paytm is a product with high recall. What is missing is a plan on what happens next.

Several articles are quoting Vijay Shekhar’s recent line on his IPO, “Valuation lies in the eyes of the beholder who is the money holder.” Hubris is never a great approach. But hubris and greed, that’s just hell.