Paytm IPO Debacle & India’s New Economy Market

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The mood in the stock market has turned sombre following Paytm’s less-than-impressive debut. Many believe we have entered a consolidation phase and only those companies with a sharp focus on delivering profits are likely to see a strong reception going forward.

Will Paytm’s debacle bring sanity to the stock market? How will it affect the tech IPO rally?

I present here my thoughts and analysis, based on the market sentiments and observations, after sensing the market mood and collecting insightful observations from several related others.

Being an insider in India’s burgeoning Start-up market and following the same closely, I’m concerned with this trend, especially in Valuation, which are notional mostly, the large IPOs and the way Investors pour in huge money in them, no matter if they’re bleeding in their Balance Sheets. Big bubble is going to burst soon? But who cares, its a rat race with herd mentality. Of course, there are many very good ones in between but they keep struggling to stay afloat for long. The saga of Start-up Unicorns & the IPOs resemble the Indian Cinema’s current Box-Office trend!

Veterans and old hands in stock market are not quite perturbed, rather quite hopeful and confident that, it is a minor hiccup and the stock in question, being a quality one, would gradually climb up to do very well, considering the market history, trends, company’s brand equity, market share and performance, considering also the large investment by several top global investors and institutions.

While the old economy players grumble, uncomfortable with all App based scrips, pointing at lesser intrinsic values, the inflated valuation, which, they believe would correct course and will consolidate the market while making the subsequent entrants more cautious and realistic. Well, I don’t like to consider the responses another section, the perennially negative minds talking of conspiracy theories, cause of the not so flattering entry.

Course correction though highly desired but undoing of just one large scrip simply cannot push this trough alone. At best, this will turn the other entrants cautious and the retail investors to look other ways. 20% of new issues have under-performed. Inflated initial valuation just got corrected by the market.

Considering the above, SEBI has to play better vigil and guide the players sensibly to protect the market interest while maintain better ecosystem. Positivity springs hope and market expects to overcome soon and do better. The general sentiment is confident of a stronger Indian economy and that warms the heart, calamities notwithstanding.

The impact is specific to the individual company, but the incident has led to awareness on some general issues regarding valuation and may help in course correction to some limited extent.

This over-valuation tendency was also exhibited in USA subprime real estate crisis in 2008.

A highly successful young start-up entrepreneur from Bangalore offers the following sound logic and insightful analysis, when I broached this subject:

“1. User growth has not translated to GMV or revenue or ebidta growth. Means no business verticals have been launched, money is spent but still has not matured in 4 years. 

2. UPI transaction volume has come down to 11%, 3rd in the ecosystem. 

3. GMV to take rate from 2.18% has become 0.79% – so low margin. 

4. Last but not the least is that valuation was too high when compared with Visa or MasterCard kind of US scrips.”

I would still expect the stock market to grow, but with tone down expectations from IPOs and more judicious investment in truly good companies with future potential.

A veteran Gujarati investor friend from Ahmadabad says to me that in their community they believe – ‘you marry your daughter in the family where Parents are good’. If founder/MD/Chairman is good, it will come back to its valued price, and Paytm’s founder enjoys huge market credibility.

Real debacle is not Paytm. Granted that the pandemic fast-forwarded digital adoption and accelerated growth for this segment, but can that really explain Nyka’s $1.4 billion valuation rising to $7.4 billion from January 2021 to October 2021?

Policybazaar raised capital at $2.4 billion as early as March 2021 and went for an IPO at $6.15 billion seven months later. Zomato, which raised capital in February 2021 at $5.4 billion, went for an IPO at $8.6 billion in four months flat. Ignoring the high base, Paytm actually looks timid on this count—it went for an IPO at $20 billion, while it did raise funds at $15 billion the same time last year.

What’s next?

A taxman says that there’s an asset bubble driven by many factors, mostly because of easy monetary policies of major central banks to avoid recession. PayTM valuation and subsequent listing losses serve as a reality check. Corrections and gains are inevitable in a market with millions of participants driven by twin emotions of greed and fear. It’s very difficult to give a price to a stock which is not valued by investors in the conventional metrics in the short term. But, going by precedence, the stock will be surely aligned to good earnings, if any, in future.

Daniel Kahneman’s behavioural economics concepts’ “halo effect”, which in this case is the name, and “anchoring effect”, which in this case is the IPO price, aptly applies to this stock specific opening debacle and trading.

This correction in the market is good for the ecosystem. It is good for the retail of our country. I am not talking about the people who got allotments in the IPO. I am talking about people entering the equity markets from a longer term perspective. There is some amount of rationality coming into the entire ecosystem and I think that is a good sign.

Paytm’s positioning with its large portfolio questions its focus and cohesiveness. Large Chinese foothold could be another drawback. The shares were overpriced. When you are in a fiercely competitive space you have to be somewhat realistic. The issue advisors are to be blamed here. But then what was the company’s board thinking? Is arrogance in play?

Some of the policies that the government is trying to float may help Paytm like companies. Government think-tank Niti Ayog proposes full-stack digital banks in the country.

Many years ago Jet Airways IPO was priced at Rs 1350 per share. It was a disaster. A couple of years later small investors sold them at Rs 650 per share to minimise losses.

Well, investors must remember that there is always an element of risk involved in the money market. The long-term players and the big traders will make money subsequently. It’s only the retail investors that lose when such IPOs make a less fancy entry.

Indian money market has not yet addressed the struggles of good small start-ups, who continue to struggle to raise money. New economy market must look beyond this Box Office like trend, making unicorns every Friday, to accommodate smaller yet quality players, extending them a supportive ecosystem for holistic growth and equitable distribution of wealth. Valuation driven market will only foster bubbles, which is neither good for the market nor for the country. SEBI can’t turn its back on this issue, neither the industry bodies.

Assets must create values, for themselves and for their stakeholders. If it’s business, it must make profit.

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