The fall of Paytm: Warren Buffett's only Indian investment

Analysts believe that Paytm's problems were masked by promoter and banker-driven hype.

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Image: Punit Paranjpe/AFP via Getty Images

Paytm has been a digital payments pioneer in India and a household name for the past decade or so. For most of its life, it has been a 'mobile wallet' through which you can load up cash and pay merchants via a mobile app.

On November 18th last year, Paytm launched its IPO, the largest in Indian history. Paytm's founder Vijay Shankar Sharma, had long held aspirations for the company to be biggest and brightest of its kind across the world and especially in India.

Outstripping the largest IPO in Indian history until that point in time -- that of Coal India in 2010 -- was one emphatic way to stamp its formal arrival into the big leagues of global and Indian businesses.

Go big or go home

Sharma has been fond of saying "go big or go home," so much so that he has fashioned it into the company's de-facto motto.

The stage was set for a huge payout for both Sharma and Paytm. India had heard a lot about him and his company over the past five years through his relentless media presence, and of course, his investors -- Alibaba, Buffett and Softbank amongst others -- who were the biggest names in global venture capital.

After all, the mobile payment giants next door in China -- Wechat Pay and Alipay -- were worth astronomical sums with estimated valuations of $86 billion and $315 billion respectively with the latter eventually plummeting to around $108 billion after being yanked by the Chinese government right before its IPO.

Sharma's personal story is the kind you root for -- a small-town boy from northern India, his father a local school teacher and his mother a homemaker, who spoke only Hindi and who traveled to Delhi to study engineering at the unusually precocious age of 15.

Shy and introverted and unable to speak English, he went from an academic star to a backbencher who struggled. Yet, he never stopped chasing his entrepreneurial dreams.

At the opening bell of the stock being listed, Sharma broke down into tears, a catharsis for all the toil and struggle of his early years. Paytm's bankers and Sharma had collectively decided to set the IPO price at Rs 2,150 ($29), thus valuing the company at $20 billion and bringing in a big pay day for everyone.

Sunk by the hype

It turns out that the bell that appeared to ring in Paytm's victory may have been tolling for other reasons. Paytm's stock crashed spectacularly by 27%, the biggest slump in Indian IPO history.

It may not have entirely been caused by stock analyst firm Macquarie's report on Paytm, but it certainly didn't help. Arriving a few hours before the listing and titled Too many fingers In too many pies, Macquarie sliced open what it thought was a puffed-up piece of a company that Sharma and his bankers had marketed to the press, investors and others. This was something that many other observers had been echoing, albeit, not with such deadly timing.

First of all Macquarie highlighted that the company had never been profitable. It reported a net loss of ₹473 crore ($63 million) in the second quarter of its financial year ending July, compared with ₹437 crore (58 million) in the same period a year earlier.

The problem that Macquarie and others were finding with Paytm is that the company seemed to be taking in cash with not much to show for it. As much as 70 percent of its equity infusion was being used to stem the tide of red, most of which was spent on advertising.

Macquarie called it "a cash burning machine," and most shocking of all is that revenue actually slumped in FY21 as it fell by 11% to ₹3,187 crore -- truly surreal for a high-growth, digital company.

At the time, professor of finance Aswath Damodaran from New York University said in BloombergQuint that Paytm seems to function on "hyperbolic forecasts from its founder and top management that are off by a factor of three or four."

Perhaps the biggest problem -- indeed the one that further clouds the firm's outlook going ahead according to many of the company's analysts and observers -- was its diversification drive into a confusing and unconnected group of businesses.

Too much for too little

Over the last three years, the company dived into consumer lending, credit cards, wealth management, insurance distribution as well as areas unrelated to its core competence such as movie ticketing, fantasy sports and e-commerce.

Paytm's move into these areas coincided with a development in the Indian payments landscape that drastically altered the company's dominant position. But the story really began well before its spectacular rise.

In late 2016 Indian Prime Minister Narendra Modi decided to, in a disastrous decision for the Indian economy and the welfare of its citizens, remove all Indian ₹500 and ₹1000 notes from circulation overnight without warning which caused widespread hardship and suffering. This was move was especially detrimental amongst India's poor.

Sharma had taken out full-page nationwide newspaper ads that morning, with Modi's photo plastered onto it, hailing his decision and Paytm's imminent ascendancy.

He even went so far as to mock those struggling to access cash, telling them to 'Paytm' it as ATMs were empty.

And Paytm indeed did ascend, becoming the de-facto solution for cashless transactions as cash itself was now a scarce resource thanks to the deeply flawed demonetisation drive. Thereafter, it attracted a number of marquee investments from the richest billionaires across the globe, including Warren Buffett, Jack Ma and Masayoshi Son.

Then came the moment of reckoning, a decisive turning point for Paytm. A full-stack, payments gateway called UPI was rolled out by the Indian government where individuals could seamlessly use their bank account to send other individuals or institutions money. It quickly became the go-to way to send digital money.

But there was a huge business model problem for Paytm's wallet-based solution -- the platform was free to all consumers and merchants.

Even though this existential dilemma had been revealed in detail in various articles, it didn't seem to deter the team that charted the course for the company's IPO

Consequently, Paytm's stock price, instead of soaring on its listing day as expected by founders, promoters and investors, tanked spectacularly by 27% from ₹1,955 per share on listing to ₹1,564 per share by the end of the day, the largest first day loss in India's IPO history. Today, it trades at ₹795, far away from its opening day high.

Global competitors such as Walmart Flipkart's PhonePe and Google Pay began winning market share and currently sit at 47% and 34% respectively, followed by Paytm at 14%.

An uncertain future

So what does the future bode for a company that has no dominance in any one market?

Paytm is certainly far from down and out. It has deep-pocketed investors, a determined and tenacious CEO in Sharma and investors who have plenty of cash.

The best case scenario for Paytm is to get a banking license, a proposition that isn't easy. It currently has a license to operate a payments bank, which is more or less a clearing house without the permission to issue credit, which would be the ideal goal for any company in its place.

As Digant Haira of GreenEdge Wealth Services points out, even if it becomes a company that has $15 billion in loans, other established banks already exist, and they certainly don't face the negative valuations that Paytm does. 

Moreover, more than 30% of Paytm is Chinese owned and at a time of geopolitical tensions between China and India, the future looks difficult at best, according to stock analyst outfit Macquarie.

To add to its worries, the company has had a number of high-profile executives depart recently including its chief operating officer of Paytm Payments Bank, the COO of its offline payments division and Abhishek Gupta, senior vice-president and COO of Paytm.

Warren Buffett, a man revered for his astute, value-driven stock market picks that are embedded in the sound fundamentals of earning power and strong future growth, is surely kicking himself.

Updated at 12:18pm IST, 4 March 2022: Clarified which notes were demonetised.

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