Mutual funds sidestep Paytm’s IPO as doubts persists over business model

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MUMBAI: Paytm’s initial public offering — the country’s biggest — has failed to attract any real interest from one of the country’s largest institutional investor cohorts.

While the over-Rs 18,000-crore stock offering managed to sail through on the final day of the issue, domestic mutual funds cumulatively bid for merely 348,828 shares of the 48.4 million on offer to investors. This was one of the lowest participation from mutual funds in an IPO in recent memory.

The signs of disdain for the IPO from domestic mutual funds were visible as only four local asset management companies participated in the anchor book of the company before the public offering, which started on November 8.

Mutual funds have been active participants in the ongoing frenzy in India’s primary market. A company such as Zomato, the IPO of which was widely scoffed at for its rich valuations, saw strong participation from domestic mutual funds. Mutual funds had applied for 1.9 billion shares of Zomato, though institutional investors were offered around 389 million shares. Similarly, in the IPO of Nykaa’s parent, mutual funds applied for 81.6 million of the 14.3 million shares on offer for qualified institutional buyers.

In Paytm’s case, however, investors have expressed concerns about the exorbitant valuation and its business model at large. The issue was valued at close to 50 times its previous year’s revenue, which made it more expensive than many of its international peers.

Paytm is a household name in India given the spurt in its growth since demonetisation in November 2016. But there are many unanswered questions over the company’s ability to challenge market leaders in new businesses.

Paytm started off as a payments application but quickly saw much of its market share dwindle as competition jumped in. The company shifted focus to e-commerce but its fortunes in that space also failed to take off due to the market dominance of Amazon and Walmart-backed Flipkart. The company has since entered other spaces such as stock broking, mutual fund distribution, buy-now-pay-later, insurance broking and payments bank. Market participants have not been enthused by Paytm’s entry into these segments as it faces a tall task in taking on market leaders such as Zerodha and PolicyBazaar.

Prior to the IPO, most brokerages had recommended investors to “subscribe for long-term” as they said the company’s scale and improving gross merchant value was worth betting on. Further, there was an expectation that Paytm would soon turn out an operating profit, although much of that would be dependent on the company’s ongoing cost-cutting measures.

There are many skeptics of Paytm’s ambition to create an ecosystem of financial needs of the 21st century. With Bajaj Finance’s entry into the fintech space and legacy banks accelerating their technology investments, perhaps, domestic mutual funds see prudence in backing the market leaders than a challenger.

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