India's biggest IPO is here — here's what analysts have to say

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India's biggest IPO is here — here's what analysts have to say
Paytm
  • Paytm’s IPO will open for subscription on Monday, seeking a valuation of $19.3-19.9 billion.
  • The price band has been set at ₹2,080-₹2,150 per share, with a lot size of 6 shares.
  • Marwadi Financial Services believes that the valuation is too demanding for a loss making company.
  • Angel One notes that Paytm is well positioned to gain from growth of digital payments and its valuation is justified.
One 97 Communications — the parent company of digital payments giant Paytm — will launch its ₹18,300 crore ($2.4 billion) initial public offering (IPO) on Monday, at a price band of ₹2,080-₹2,150 per share.

The lot size has been set at six shares, which means that a lot would cost ₹12,900 at the upper price band. The IPO will close for subscription on Wednesday, November 10, and the allotment will be announced on November 15.

The listing date has been set at November 18.

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Paytm is seeking a valuation of $19.3-$19.9 billion with this IPO, which has not gone down well with several stock brokerages and this has reflected in their recommendations for this IPO as well. While AngelOne has given a blanket subscribe call for this billion dollar IPO, KR Choksey and Arihant Capital Markets have noted that the IPO can be subscribed for listing gains.

Stock BrokeragesRecommendations
KR ChokseySubscribe for listing gains “only”
AngelOneSubscribe
Marwadi Financial ServicesAvoid
Arihant Capital MarketsSubscribe for listing gains
AnandRathiSubscribe Long Terms
Reliance SecuritiesSubscribe
Canara Bank SecuritiesSubscribe for long term

Earlier, Valuation guru Aswath Damodaran, a professor at New York University’s Stern School of Business — who valued One97 Communications at $20 billion in October 2021 — had noted that Paytm cannot be a passive buy and hold investment but would require more “active engagement and monitoring” of the company’s actions and performance.

“...This is the type of stock that you would put 5%, or perhaps 10% of your portfolio in, not 25% or 40%,” he said in a blog post.
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Watch More: Here's what analysts have to say about India's biggest IPO by Paytm

The valuation seems too demanding for some

Marwadi Financial Services has noted that Paytm is at a great risk if the company fails to retain its customers, attract new customers, increase the volume of transactions from consumers and fail to maintain or improve its technology infrastructure.

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These risks — which were also mentioned in Paytm’s red herring prospectus (RHP) — have the potential to harm the company’s business, revenue, profitability and growth.

Meanwhile, a KRChoskey report highlighted that there are two challenges ahead of Paytm's profitability — achieving a steady ‘take rate’ and keeping the customer and marketing costs low.

A take rate is the fee charged by a marketplace on a transaction performed by a third-party seller or service provider.

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"In the last 5 years the company has focused on acquiring customers and increasing transactions both in value and volume terms. As a result, [the] take rate dropped from 2.18% in FY2017 to 0.79% in FY2021. Globally, if we look at the take rate, which more established payment services providers are able to achieve is in the region of 1.2% to 1.8%," the KRChoksey report added.

Marwadi Financial Services have recommended investors to “avoid” Paytm’s IPO as the valuation is too demanding for a loss-making company.

Jyoti Roy, deputy vice president of equity strategist at Angel One, has a different way of looking at it. He noted that the valuation does appear to be expensive, but Paytm brand has become synonymous with digital payments and is the market leader in the mobile payment space.

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“Paytm is well positioned to benefit from the exponential 5x [times] growth in mobile payments between FY2021 – FY2026 and hence believe that the valuations are justified,” he noted, adding that Paytm is valued at 49.7 times its FY21 revenues at the upper end of the price band.

India's biggest IPO is here — here's what analysts have to say
BI India

Revenue not an issue, but profitability is

KRChoksey believes that Paytm will have to be on a high growth trajectory in revenue terms for a period of three years in order to sustain its current valuation. All of its three verticals — payments, financial services as well as cloud and commerce — will have to keep firing at an accelerated pace.

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“Looking at the past track record, we are reasonably confident that management will leave no stone unturned to achieve this. What remains to be seen is how this growth can be achieved without burning too much of cash,” the brokerage added.

Arihant Capital Markets, on the other hand, noted that Paytm’s history of loss and negative cash flows in prior years have raised questions about its ability to turn profitable.

A report by Reliance Securities added, "Paytm’s financial performance has not been encouraging over the years, with the company continuing to record an EBITDA loss and net loss. However, it has been witnessing an improvement in financial performance, with a continued fall in operating losses and net loss, mainly led by the contraction in marketing & promotional expenses."

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WATCH ALSO: ‘Have seen an IPO season like no other’, Radhika Gupta and Nalin Moniz on flurry of IPOs this season


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