Paytm IPO: India’s biggest IPO opens; should you subscribe amid expensive valuation? Check grey market premium

Paytm’s Rs 18,300-crore IPO -- India’s largest public issue to date -- opened for subscription on Monday, at a price band of Rs 2,080-2,150 per share

Paytm’s Rs 18,300-crore IPO — India’s largest public issue to date — opened for subscription on Monday, at a price band of Rs 2,080-2,150 per share. In the primary market, Paytm shares were seen trading at a premium of Rs 60 per share over the IPO price. Paytm shares were ruling at Rs 2,210 per share, nearly 3 per cent premium, in the grey market, according to the people who deal in unlisted shares of the companies. There are no listed companies in India that engage in a business similar to that of Paytm. The public offer will close for subscription on Wednesday, 10 November 2021. It may be noted that the share allotment is likely to take place on 15 November, and the shares are expected to be listed on 18 November 2021.

Expensive valuations

On the financial front, Paytm has posted a revenue of Rs 2,802 crore while a loss of Rs 1,701 crore in FY21. Analysts say that revenue growth does not seem to be exciting. The company has narrowed its losses mostly by constricting its marketing and advertising expenses. “Amongst all the startups, Paytm is an ideal example of well-diversified businesses but lacks clear leadership in almost all the segments,” Abhay Doshi, Founder, UnlistedArena.com, dealing in Pre-IPO & Unlisted Shares, told Financial Express Online. Doshi added that at the upper band, post issue, sales to market cap comes around 49x which makes the issue expensive. Apart from valuations, Doshi believes its ‘road to profitability is more challenging. “As the sector is highly competitive it is quite probable that Paytm will continue making losses in near future to safeguard its market share,” he added.

Should you subscribe to Paytm IPO?

As Paytm is valued at 49.7x its FY21 revenues, Jyoti Roy, DVP- Equity Strategist at Angel One, said that while valuations may appear to be expensive, Paytm has become synonymous with digital payments through mobile and is the market leader in the mobile payment space. “Paytm is well-positioned to benefit from the exponential 5x growth in mobile payments between FY2021-26. Hence, valuations seem to be justified. We recommend investors to ‘subscribe’ to the issue,” Roy added.

There is a large section of the population who are underserved in payments and financial services products. Also there is a vast population of small businesses, which have not witnessed the benefits of digital commerce. Thus, One97 Communications has a large addressable market to serve, said analysts at Choice Broking. “At a higher price band of Rs. 2,150, it is demanding an EV/Sales multiple of 46.1x, which seems to be stretched. The demanded valuation is also at a significant premium to China’s Ant Group proposed IPO in 2020. Thus considering the growth potential and stretched valuations, we assign subscribe for long-term rating for the issue,” Rajnath Yadav, Research Analyst, Choice Broking, said.

Paytm didn’t report an operating profit or a net profit in FY21. They clocked sales of Rs 3,186 crore in FY21 and at $20 bn valuations, the P/S (price to sales) will be 47.1x which is extremely expensive. “No one knows how Paytm will pivot and how it will become profitable. They face stiff competition in all of their businesses (insuretech – legacy insurers and fintech. broking – zerodha, payments – razor pay, pine labs, etc. BNPL – Banks and NBFCs, wallets – Mobikwik, Bajaj finance etc),” Aditya Kondawar, COO, JST Investments, told Financial Express Online.

(The stock recommendations in this story are by the respective research analysts and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)