India’s most beloved tech unicorn is set to debut on national stock exchanges this year. And despite the huge losses in the company’s books, all indicators point to an exceptional rating.
Paytm, which started out as a mobile wallet and has branched out into a range of financial services over the years, filed its IPO documents with the securities regulator Securities and Exchange Board of India on July 16 (pdf) . Delhi-based company NCR plans to raise up to 12,000 crore rupees ($ 1.6 billion) with the offer, making it the largest public offering in Indian stock market history. Paytm also intends to increase Rs 4,600 crore through a sale of secondary shares, bringing the total supply to Rs 16,600 crore.
The company’s huge hopes in the stock markets come despite the fact that its financial health has been far from good. It has recorded losses for the past eight consecutive years. Meanwhile, the company has spent billions to disperse into various business segments including insurance sales, wealth management, digital gold, travel and movie ticketing, fantasy sports, e-commerce, and also launched a payment bank (a bank operating on a smaller scale without involving credit risk).
Experts believe the success of this IPO is pretty much inevitable as investors look past the current financial state of tech companies. Most of the interest is based on metrics like user base growth, quality of user engagement, and bottom line revenue, which is not the case when evaluating businesses. traditional.
“These business models are such that they have the potential to suddenly turn to profits quickly,” said Kajal Gandhi, senior analyst at ICICI Securities. “Tomorrow, when they start billing customers, the benefits will take on a significant dimension. Investors are going into businesses that have enormous potential, they may currently incur losses. Valuations can remain rich at this point. “
This faith in the future of deficit tech unicorns was visible last week when restaurant discovery and food delivery company Zomato went public. The company’s IPO was 38 times oversubscribed, despite heavy losses on its books.
Founded in 2009, Paytm has so far raised funds from some of the world’s most renowned investors, including Softbank of Japan and Ant Group of China. The company spent a large chunk of that money bombarding existing players with lower service costs, discounts, and cash backs.
Even though the company’s income increased, over the years it continued to spend a lot. In the year ended March 31, Paytm’s parent company One97 Communications reported a consolidated loss of Rs 1,701 crore (pdf), less than Rs 2,942 crore a year ago, mainly due to lower expenses.
Most of the companies in the One97 group are in the red. For example, the companies Paytm General Insurance and Paytm Life Insurance have not reported any sales so far.
In the e-commerce arena, where the company hoped to compete with incumbents Amazon and Flipkart, it has yet to make a mark.
“Over the past two or three years, the linchpin has turned more to financial services than to e-commerce,” said Ankur Bisen, senior vice president of Technopak Advisors. “But I think that’s where they (Paytm) see an opportunity to make money, assuming their strategies and initiatives go as planned.”
Should we invest in the IPO of Paytm?
While pundits take a positive view of Paytm’s IPO, they warn that investors will need to stay invested in the stock for a while to earn good returns. After all, the company might see its fortunes pick up sharply when it starts making money, as this would boost investor confidence.
And reaching this stage is not out of reach. Paytm could break even in 12 to 18 months with heightened financial discipline and targeted strategic investments, according to Gautam Chhugani, chief financial officer, financial technology and crypto at brokerage firm Bernstein. “We expect Paytm’s revenue base to double by FY 23 (the year ending March 2023) to around $ 1 billion, with non-payment revenue contributing to around 33. %, led by credit technology, ”Chhugani said in a pre-IPO intro on Paytm released in May.
The company itself, however, did not express such hope. Paytm expects to “continue to experience net losses for the foreseeable future and not to achieve or maintain profitability in the future,” he said in his pre-IPO documents filed with SEBI . The company has listed several risk factors that could hamper its revenue and therefore profitability, including the possibility of higher payment processing fees and increased operating expenses in the future.
“Our profitability depends on the profitability of our business… when we become a listed company, we will incur significant additional legal, accounting and other expenses that we did not incur as a private company,” Paytm said in the prospectus .
On the other hand, the chief executive and founder of the company, Vijay Shekhar Sharma, told the Reuters Next conference in January that Paytm could become profitable this year due to increased use of its payment platforms during the pandemic.