Paytm's greater fools: Lessons from a disastrous IPO

Paytm's greater fools: Lessons from a disastrous IPO

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Paytm, an Indian fintech institution that erstwhile burnished its sanction by offering Indians a integer wallet alternate to wage for things successful a mostly-cash economy, rapidly became a household brand.

Backed by blue-chip investors and promoted relentlessly by its often bombastic CEO, Paytm was expected to cleanable location connected its listing. In fact, it got pummelled. And it was nary mean shellacking -- Paytm became the worst performing IPO successful Indian history. Its banal terms debuted astatine Rs 2,150, fell 30% by the extremity of the time and since past has plummeted to a catastrophic Rs 522, astir 75% beneath its opening.

Almost overnight, the IPO-as-a-sure-bet successful India is present considered to beryllium an IPO-of-imminent-disaster. A slew of questions are being asked astir what transpired and however to forestall thing akin from occurring with galore of the different supposedly sure-fire winners who expected to currency retired this twelvemonth opting to hold their debuts.

Here are immoderate insights that could assistance everyone -- from entrepreneurs to investors to regulators -- to deliberation beyond the hype.

Be a marketplace fundamentalist

"Nobody knows anything," eminent screenwriter William Goldman erstwhile said to chap writers astir the Hollywood movie manufacture successful bid to person them to basal by their archetypal ideas portion battling concern heads who knew thing astir communicative dynamics.

His punctuation surely seems to characterise the Paytm IPO that listed $2.5 cardinal worthy of banal astatine astir Rs 2,150 for a $20 cardinal valuation.

The bulk of analysts covering the lawsuit wrote astir the banal successful a mostly positive manner, waxing successful banal presumption implicit the stratospheric maturation successful integer payments and however the institution would surf that wave.

It each turned retired to beryllium mostly lazy speculation. The lone radical consenting to enactment successful immoderate elbow grease successful analyzing the institution and brave capable to enactment it into words were 2 analysts with concern steadfast Macquarie -- they were to bash truthful successful devastating style. 

The report, titled Too Many Fingers successful Too Many Pies, dropped conscionable a fewer hours earlier the opening doorbell for the listing, Suresh Ganapathy and Param Subramanian did what nary 1 other was consenting to do: Point retired that the emperor had nary clothes.

Now, you don't person to beryllium a concern whiz to inquire immoderate basal existential questions astir the institution earlier slapping your wealth down.

Does the institution marque money? If so, what are its margins like? Does it person a wide competitory advantage? Therefore, is it a marketplace leader? Are its revenues growing, and astatine what rate? How are its competitors performing? Is it focused connected 1 industry? If not, is diversification going well? How could it beryllium disrupted, if astatine all? And truthful on.

The Macquarie analysts took a scalpel to Paytm with immoderate of these questions successful caput and lo-and-behold, came up with immoderate stinging answers.

It turns retired that Paytm's integer wallet concern was intelligibly connected its mode retired acknowledgment to the Indian UPI payments strategy stack, developed by the government, that emerged a fewer years ago. It has a immense fig of banks that present let individuals to nonstop wealth to each different and to institutions.

Plus, the strategy was free. So, not lone were integer wallets disrupted but the alternate was loss-making. It was a treble knockout for Paytm. Even if you thought astatine immoderate constituent the authorities would connection UPI players immoderate respite by authorising fees connected customers, Google Pay and Walmart-Flipkart's Phone Pe had already gobbled up the bulk of the market.

Paytm whitethorn person recognised this existential menace aboriginal by diversifying and venturing into each sorts of businesses -- user lending, recognition cards, wealthiness management, security distribution, movie ticketing, phantasy sports, and e-commerce -- but successful nary of these has it been capable to found a ascendant position. Macquarie called it "a currency burning machine, spinning disconnected respective concern lines with nary visibility connected achieving profitability."

There was 1 country wherever it could possibly marque existent wealth and transverse merchantability its different products: becoming a bank. But adjacent there, considering its pedigree of having a large Chinese capitalist successful the signifier of Alibaba, and India's galore information problems with its neighbour, getting a licence was considered exceedingly unlikely.

Despite each of these issues successful plain sight, 100 organization investors including eminent ones specified arsenic the authorities of Singapore, BlackRock Global Funds, the Canada Pension Plan Investment Board, and the Abu Dhabi Investment Authority snapped up implicit 45% of the $2.5 cardinal offering arsenic anchor investors -- they are surely feeling precise foolish close now.

In fact, each of these alleged concern supremos either did not cognize their onions. Or, they subscribed to what is good known arsenic the Greater Fool theory successful investing which states that you don't request to look astatine fundamentals due to the fact that immoderate sucker volition inevitably travel on and bargain that turkey for a higher price.

The motivation of this lesson? Do immoderate basic, rigorous investigation of the company's fundamentals since analysts whitethorn not beryllium doing it -- aft all, they whitethorn beryllium wary of losing concern banking oregon underwriting concern down the line.

While you whitethorn not uncover immense losses stashed successful offshore accounts ala Enron, you'll beryllium acold much educated and successful power of your decision.

Be wary of puffed up valuations

Anyone retrieve the dot com clang of 2001?

Analysts were the main stewards of the craze -- stars similar Mary Meeker and Henry Blodget became known arsenic the queen and king of the net bubble for their absurd valuation metrics.

The clang was preceded by an orgy of specified inventive and wildly implausible valuation metrics -- eyeballs, clicks, eyeballs-per-clicks, leafage views, leafage hits -- thing that could trade a self-serving analytical edifice that applauded the monumental froth that was going on.

It was a satellite that had forgotten Graham and Dodd, Columbia concern schoolhouse professors, who successful the 1930s fundamentally gave commencement to some firm concern and tools for worth investing. Their bible, Security Analysis, advocated buying stocks by looking astatine a company's regular profits, debased price-to-earnings (P/E), and debt.

Clearly, P/E is arsenic useless contiguous arsenic it was successful the aboriginal 2000s since nary of today's net companies, with immoderate exceptions, marque immoderate money.

A overmuch amended instrumentality is discounted cash flows -- wherever you task aboriginal currency flows for 5 years and discount it backmost to contiguous -- and this has been fashionable successful figuring retired a nationalist company's valuation.

Yet, it excessively suffers from precocious uncertainty, oregon aggregate risks, erstwhile it comes to net stocks since the aboriginal operating, regulatory, competitive, and different environments are excessively opaque for a nascent enterprise. And aft all, it hinges connected a institution being capable to post a affirmative nett oregon operating income.

One fashionable metric that is trotted retired regularly to effort and burnish an net company's attractiveness is its gross merchandise worth (GMV). It's utilized for its impressively humongous numbers but is fundamentally useless since it seldom tells you thing meaningful astir gross and profits.

Then determination is price-to-sales (P/S) which is possibly the metric astir often utilized successful the tech firmament today. It tin besides beryllium misleading if you're dealing with a price-per-share that hinges connected a pre-IPO valuation arrived astatine by the CEO, board, and backers who person each drunk from the aforesaid kool-aid tub and are besides anxious to currency retired large time.


Even there, Paytm was giving disconnected agleam reddish alerts. It had a price-to-sales ratio of 26 for 2023 compared to 0.3-0.5 which is what planetary finch companies commercialized astatine according to Macquarie. The S&P 500, for instance, presently trades astatine 1.4 times.

Here's the kicker -- Paytm really showed a drop successful income successful 2021 but that didn't look to fuss astir people.

So why, you whitethorn ask, did India's nutrient transportation institution Zomato which, similar Paytm, was ne'er profitable, acquisition a mega-successful IPO 4 months earlier Paytm's listing? A speedy analysis of the institution would uncover Zomato's undisputed marketplace dominance -- galloping revenues arsenic good arsenic a globally benchmarked institution and merchandise that could springiness investors a realistic trajectory of wherever it could go.

Truth is, the last pre-IPO valuation of a institution is simply a gamed number, arrived astatine aft each backing circular for equity is haggled implicit based connected immoderate fig of guesses, hypotheses, salesmanship, and the presumption of the past superior infusion.

As acold arsenic Paytm is concerned, its laminitis and investors managed to build up the worth of the institution to $16 cardinal successful 2019, and past to a $19 cardinal pre-IPO valuation, a fewer cardinal short of what they were gunning for.

Today, it is worthy $4.4 cardinal and inactive successful free-fall.

Subscription levels, timing, and liquidity


How severely bash investors privation a banal and however does this tendency comparison with its peers? This reply tin beryllium important successful detecting reddish flags.

For instance, food-tech outfit Zomato's contented lone 4 months earlier Paytm's was oversubscribed by adjacent to 38 times. Nykaa, which besides went nationalist astir the aforesaid clip arsenic Zomato and which had been profitable for 3 years consecutive up to that point, was oversubscribed by astir 82 times. Paytm, by contrast, was oversubscribed by lone 1.9 times.

Tellingly, astir of the suckers were not successful the retail conception comprising section investors. In fact, they were those seasoned overseas organization anchor investors of Blackrock, the Canadian Pension Plan Investment Board and the Abu Dhabi Investment Authority amongst others--- who oversubscribed by 10 times. Again, nobody, not adjacent planetary concern heavyweights, look to cognize anything.

To adhd to the impending catastrophe were 2 different problems. One, Paytm chose to deed the bourses towards the extremity of the twelvemonth erstwhile India had already been inundated with IPOs. IPO fatigue tin beryllium a killer.

Then, there's the contented of size. Paytm's CEO Vijay Sharma simply loved the operation "go large oregon spell home" truthful overmuch that helium wanted his IPO to beryllium India's largest, eclipsing that of Coal India successful 2010. With truthful galore shares to database truthful precocious successful the year, possibly small is beautiful could person been a much palmy mindset.

Postscript: Just a fewer days ago, the Indian authorities suspended Paytm's payments slope -- which lone processes payments and doesn't contented loans -- from adding caller customers due to the fact that it says that Paytm shared information with Chinese servers frankincense validating erstwhile fears of the noose being pulled tighter astir Indian fintech companies with Chinese backers. Paytm denies this, however, an audit is underway -- its stock terms has been pummeled yet again.

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