Is All Well With Fintech Giant Paytm?

2021 may well be summed up as the year of startup IPOs. They finally came of age, mostly because of unexpected windfall during the pandemic. The markets saw eight startup IPOs last year. But the clear leader of the pack, Paytm, turned out to be a lame duck.

While it was India’s biggest IPO ever as it looked to raise Rs 18,300 crores at an issue price of Rs 2,150, the fintech firm’s shares plummeted soon after its public market debut.

Market experts, brokerages and investors were spooked by the company’s long-term financial prospects and timeline for attaining profitability.

Two months later, the negative sentiment around Paytm stock hasn’t abated. On January 17, the company’s stock was trading at Rs 1,099, more than 50% lower than its issue price of Rs 2,150. The stock hit a high of Rs 1,961.05 on November 18, but has failed to touch its issue price since listing.

Macquarie’s previous target price for Paytm was Rs 1,200 in November. But last week, retaining its lowest rating for One97 Communications Ltd, Macquarie further cut its target price to Rs 900, implying a 25% downside from current levels.

Macquarie explained its reasons.

The RBI could curb wallet charges as it reviews the charges levied on customers across various digital payment modes.

Prepaid payment instruments (PPIs) and wallet companies like Paytm, Mobikwik, PhonePe, Freecharge, Amazon Pay, etc., charge customers anywhere between 2 percent and 2.5 percent. The payments business still forms 70% of Paytm’s overall gross revenue and hence any regulations capping charges could impact revenues significantly.

Also, the Insurance Regulatory and Development Authority of India’s recent decision not to grant an insurance license to Paytm could affect the fintech firm’s chances of getting a banking license.

Senior management attrition and a fall in the average ticket size of loans disbursed to Rs 5000 are other factors that impact the company’s long-term financial prospects.

JPMorgan, Morgan Stanley and Goldman Sachs have however set a one-year price target of Rs 1,630-1,875 on Paytm. The three were among the lead bankers for the Paytm listing and have cited the company’s strong network effect and cross-selling opportunities are strong levers for growth.

“Macro factors like quantitative easing, free money due to US monetary policy and other parameters led to a spook in the market in terms of pricing the IPO. Paytm’s shares have received a similar response to that of global peers in the last six months…But that is not a complete reasoning. What happened to the IPO is still a question,” says Vijay Shekhar Sharma.

Paytm CEO Vijay Shekhar Sharma has said that the company’s share market performance has been in line with that of global peers in the sector over the past six months due to macroeconomic factors. On the question of small ticket size of loans, Sharma has said that it is by design to ensure better quality of loans. While Paytm has made its presence in digital payments, going forward, its execution in financial services and cloud segments will be watched closely. Investors will also look at how Paytm will monetise its bevy of services in a highly competitive industry.

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