After listing shock, Paytm's long-term investors are left carrying the baby

On Thursday, shares of Paytm’s owner One97 Communications Ltd listed at a discount of more than 9%, before promptly tumbling to hit the lower trading bound at which bourses halt further transactions. By the end of the session, Paytm shares had settled a whopping 27% below their issue price.

To be sure, Paytm’s listing was expected to be tepid. For one, the response to its IPO itself was far weaker than those of most other new-age startups such as Zomato and, more recently, Nykaa.

Analysts have pointed out that Paytm’s IPO valuation was steep, leaving little scope for a listing pop. Still, a listing plunge was unexpected. “The IPO pricing was looking expensive, but the demand seen in recent issues had made lot of people optimistic. This kind of a fall was not expected at all," said an analyst, requesting anonymity.

The exuberance towards Paytm’s issue was partially riding on the general enthusiasm towards IPOs this year, especially of new-age companies. Most start-ups have been able to list at a high premium and many investors believed Paytm’s brand would ensure a robust welcome as well. To be sure, the IPO valuation of close to $20 billion always looked uncomfortable. However, the bullishness in the broad market swept these concerns away. Clearly, hopes of short-term gains have been blown to bits now.

That brings us to the main argument for Paytm’s valuation: Its growth potential. Indeed, some analysts had highlighted Paytm’s growth potential juxtaposed with the prospects of digital payments in India to justify its valuation. As early as May this year, Bernstein had highlighted the benefits for Paytm from being a full-stack fintech platform, in other words, a super app for finance.

Arguments for Paytm’s scalability had been enough for investors to expect its valuation to grow as well. On its part, the company has an impressive customer base, especially of merchants.

That said, there have been enough signs of discomfort too. Most of these emanate from Paytm’s business model and even its structure as a group. One97 Communications has 39 subsidiaries, of which more than half together contribute just 5% to its revenues.

Brokerage firm Macquarie Capital Securities (India) Pvt. Ltd pointed out in a note that the company has too many hands in too many pies. “Dabbling in multiple business lines inhibits Paytm from being a category leader in any business except wallets, which are becoming inconsequential with the meteoric rise in UPI (Unified Payments Interface) payments," the report said.

The wallet business, where Paytm is the leader, faces an existential threat from UPI.

UPI’s share in total digital payments has increased exponentially in the past few years, leaving wallets way behind. Also, volume growth will not benefit unless it generates revenues.

The scope of revenues from distribution alone is limited. With UPI being free, revenues would be hard to come by.

Paytm’s key to profitability is getting into lending and the company is focusing on scaling the buy-now-pay-later (BNPL) business. However, the company may find it tough here too, according to analysts at Macquarie.

“High credit costs, coupled with high funding costs and low-lending ticket sizes make fintechs’ distribution-only approach to consumer lending unviable in our view and Paytm is no different," the report said.

What’s more is that Paytm is up against big balance sheets such as Bajaj Finance in the lending business, not to forget banks. Distribution of loan products, again, won’t help with revenues.

Against these factors, Paytm’s valuation looks steep when compared with global counterparts. Perhaps investors have taken a hard look. Post the debacle on listing, what is now left is the long-term game. For all the virtues, a long-term investor is also the one left holding the baby.