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Paytm's greater fools: Lessons from a disastrous IPO

How did so many people dupe themselves into thinking that Paytm was a sure bet? Not paying attention to some basic rules of how to value a fintech company, or any company, did them in.
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Written by Rajiv Rao, Contributor on
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Image: Punit Paranjpe/AFP via Getty Images

Paytm, an Indian fintech company that once burnished its name by offering Indians a digital wallet alternative to pay for things in a mostly-cash economy, rapidly became a household brand.

Backed by blue-chip investors and promoted relentlessly by its frequently bombastic CEO, Paytm was expected to clean house on its listing. In fact, it got pummelled. And it was no ordinary shellacking -- Paytm became the worst performing IPO in Indian history. Its stock price debuted at Rs 2,150, fell 30% by the end of the day and since then has plummeted to a catastrophic Rs 522, around 75% below its opening.

Almost overnight, the IPO-as-a-sure-bet in India is now considered to be an IPO-of-imminent-disaster. A slew of questions are being asked about what transpired and how to prevent something similar from occurring with many of the other supposedly sure-fire winners who expected to cash out this year opting to delay their debuts.

Here are some insights that could help everyone -- from entrepreneurs to investors to regulators -- to think beyond the hype.

Be a market fundamentalist

"Nobody knows anything," eminent screenwriter William Goldman once said to fellow writers about the Hollywood film industry in order to convince them to stand by their original ideas while battling business heads who knew nothing about story dynamics.

His quote certainly seems to characterise the Paytm IPO that listed $2.5 billion worth of stock at around Rs 2,150 for a $20 billion valuation.

The majority of analysts covering the event wrote about the stock in a largely positive manner, waxing in banal terms over the stratospheric growth in digital payments and how the company would surf that wave.

It all turned out to be largely lazy speculation. The only people willing to put in some elbow grease in analyzing the company and brave enough to put it into words were two analysts with investment firm Macquarie -- they were to do so in devastating style. 

The report, titled Too Many Fingers in Too Many Pies, dropped just a few hours before the opening bell for the listing, Suresh Ganapathy and Param Subramanian did what no one else was willing to do: Point out that the emperor had no clothes.

Now, you don't have to be a finance whiz to ask some basic existential questions about the company before slapping your money down.

Does the company make money? If so, what are its margins like? Does it have a clear competitive advantage? Therefore, is it a market leader? Are its revenues growing, and at what rate? How are its competitors performing? Is it focused on one industry? If not, is diversification going well? How could it be disrupted, if at all? And so on.

The Macquarie analysts took a scalpel to Paytm with some of these questions in mind and lo-and-behold, came up with some stinging answers.

It turns out that Paytm's digital wallet business was clearly on its way out thanks to the Indian UPI payments system stack, developed by the government, that emerged a few years ago. It has a huge number of banks that now allow individuals to send money to each other and to institutions.

Plus, the system was free. So, not only were digital wallets disrupted but the alternative was loss-making. It was a double knockout for Paytm. Even if you thought at some point the government would offer UPI players some respite by authorising fees on customers, Google Pay and Walmart-Flipkart's Phone Pe had already gobbled up the majority of the market.

Paytm may have recognised this existential threat early by diversifying and venturing into all sorts of businesses -- consumer lending, credit cards, wealth management, insurance distribution, movie ticketing, fantasy sports, and e-commerce -- but in none of these has it been able to establish a dominant position. Macquarie called it "a cash burning machine, spinning off several business lines with no visibility on achieving profitability."

There was one area where it could perhaps make real money and cross sell its other products: becoming a bank. But even there, considering its pedigree of having a major Chinese investor in the shape of Alibaba, and India's numerous security problems with its neighbour, getting a license was considered exceedingly unlikely.

Despite all of these issues in plain sight, 100 institutional investors including eminent ones such as the government of Singapore, BlackRock Global Funds, the Canada Pension Plan Investment Board, and the Abu Dhabi Investment Authority snapped up over 45% of the $2.5 billion offering as anchor investors -- they are surely feeling very foolish right now.

In fact, all of these alleged finance supremos either did not know their onions. Or, they subscribed to what is well known as the Greater Fool theory in investing which states that you don't need to look at fundamentals because some sucker will inevitably come along and buy that turkey for a higher price.

The moral of this lesson? Do some basic, rigorous analysis of the company's fundamentals since analysts may not be doing it -- after all, they may be wary of losing investment banking or underwriting business down the line.

While you may not uncover huge losses stashed in offshore accounts ala Enron, you'll be far more educated and in control of your decision.

Be wary of puffed up valuations

Anyone remember the dot com crash of 2001?

Analysts were the chief stewards of the craze -- stars like Mary Meeker and Henry Blodget became known as the queen and king of the internet bubble for their absurd valuation metrics.

The crash was preceded by an orgy of such inventive and wildly implausible valuation metrics -- eyeballs, clicks, eyeballs-per-clicks, page views, page hits -- anything that could craft a self-serving analytical edifice that applauded the monumental froth that was going on.

It was a world that had forgotten Graham and Dodd, Columbia business school professors, who in the 1930s essentially gave birth to both corporate finance and tools for value investing. Their bible, Security Analysis, advocated buying stocks by looking at a company's regular profits, low price-to-earnings (P/E), and debt.

Clearly, P/E is equally useless today as it was in the early 2000s since none of today's internet companies, with some exceptions, make any money.

A much better tool is discounted cash flows -- where you project future cash flows for five years and discount it back to today -- and this has been popular in figuring out a public company's valuation.

Yet, it too suffers from high uncertainty, or multiple risks, when it comes to internet stocks since the future operating, regulatory, competitive, and other environments are too opaque for a nascent enterprise. And after all, it hinges on a company being able to post a positive net or operating income.

One popular metric that is trotted out regularly to try and burnish an internet company's attractiveness is its gross merchandise value (GMV). It's used for its impressively humongous numbers but is fundamentally useless since it rarely tells you anything meaningful about revenue and profits.

Then there is price-to-sales (P/S) which is perhaps the metric most often used in the tech firmament today. It can also be misleading if you're dealing with a price-per-share that hinges on a pre-IPO valuation arrived at by the CEO, board, and backers who have all drunk from the same kool-aid tub and are also anxious to cash out big time.


Even there, Paytm was giving off bright red alerts. It had a price-to-sales ratio of 26 for 2023 compared to 0.3-0.5 which is what global finch companies trade at according to Macquarie. The S&P 500, for instance, currently trades at 1.4 times.

Here's the kicker -- Paytm actually showed a drop in sales in 2021 but that didn't seem to bother most people.

So why, you may ask, did India's food delivery company Zomato which, like Paytm, was never profitable, experience a mega-successful IPO four months before Paytm's listing? A quick analysis of the company would reveal Zomato's undisputed market dominance -- galloping revenues as well as a globally benchmarked company and product that could give investors a realistic trajectory of where it could go.

Truth is, the final pre-IPO valuation of a company is merely a gamed number, arrived at after each funding round for equity is haggled over based on any number of guesses, hypotheses, salesmanship, and the terms of the last capital infusion.

As far as Paytm is concerned, its founder and investors managed to build up the value of the company to $16 billion in 2019, and then to a $19 billion pre-IPO valuation, a few billion short of what they were gunning for.

Today, it is worth $4.4 billion and still in free-fall.

Subscription levels, timing, and liquidity


How badly do investors want a stock and how does this desire compare with its peers? This answer can be crucial in detecting red flags.

For instance, food-tech outfit Zomato's issue only 4 months before Paytm's was oversubscribed by close to 38 times. Nykaa, which also went public around the same time as Zomato and which had been profitable for three years straight up to that point, was oversubscribed by nearly 82 times. Paytm, by contrast, was oversubscribed by only 1.9 times.

Tellingly, most of the suckers were not in the retail segment comprising local investors. In fact, they were those seasoned foreign institutional 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 even global finance heavyweights, seem to know anything.

To add to the impending disaster were two other problems. One, Paytm chose to hit the bourses towards the end of the year when India had already been inundated with IPOs. IPO fatigue can be a killer.

Then, there's the issue of size. Paytm's CEO Vijay Sharma simply loved the phrase "go big or go home" so much that he wanted his IPO to be India's largest, eclipsing that of Coal India in 2010. With so many shares to list so late in the year, perhaps small is beautiful could have been a more successful mindset.

Postscript: Just a few days ago, the Indian government suspended Paytm's payments bank -- which only processes payments and doesn't issue loans -- from adding new customers because it says that Paytm shared data with Chinese servers thus validating previous fears of the noose being pulled tighter around Indian fintech companies with Chinese backers. Paytm denies this, however, an audit is underway -- its share price has been pummeled yet again.

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