Opinion: Making Sense Of Paytm's Debacle Debut

India's biggest-ever IPO has fallen flat on its face on Day 1. Paytm sold shares at Rs 2,150, listed at Rs 1,950 and closed at its day low of Rs 1,560. That means anyone who was hoping to cash in on listing day is down more than 27% on their investments. This has come in the middle of India's IPO fever and after Zomato gave 66% returns on debut and Nykaa almost doubled at the end of its first day.

Paytm's IPO valued the company at roughly $20 billion, it closed on listing day at a valuation of about $14 billion. That is lower than what it was worth in 2019, when it raised one billion dollars. And if the brokerage firm Macquarie has got it right, then the Paytm stock is overvalued even now. Macquarie says Paytm is not worth more than Rs 1,200 because it does nothing that other big players don't already do, and that the company's core business of wallets has become redundant with the spread of UPI. Macquarie calls Paytm a "cash guzzler" which has, in funding losses, burnt 70% of the money it has raised since its launch.

None of this is new. The valuation guru Aswath Damodaran, followed by many serious investors across the world, had put out his own valuation of Paytm six weeks ago, where he called the company "India's premier cash burning machine". Damodaran said Paytm's performance leads "to a cynical conclusion that the company is adding new services and giving them away for nothing (or close to it) to pad its user/transaction numbers. Second, this is a company that seems to run on hyperbolic forecasts from its founders and top management, that are not just consistently higher than what the company deliver, but often by a factor of three or four."

Yet – and here's the interesting part – Damodaran, who tends to be a cautious investor, found several reasons to give Paytm an initial valuation of Rs 1.46 lakh crore or around $20 bn. This is broadly the same as Paytm's IPO valuation. Compare that to Damodaran's assessment of the other big 'start-up' IPO, Zomato. Damodaran valued Zomato at about Rs 41 per share (based on an "upbeat story") versus its IPO offer price of Rs 76 and its listing price of Rs 116.

In fact, as Damodaran had identified, Zomato has several problems of its own – high costs of customer acquisition and marketing, backlash from vendors and delivery partners, limited proprietary data that's restricted to food preferences of customers, a nimble and aggressive competitor like Swiggy and the new entrant, Amazon Foods, which has the deep pockets to give big discounts to price out its rivals.

Yet, the market decided to reward Zomato, but punish Paytm. What explains this? Is it because Paytm is largely a Chinese company, with Alibaba, Ant Group and SAIF Partners owning 54% of the shares before the IPO? Are the markets worried that Paytm will not be able to expand into more lucrative businesses, like running a finance bank, because of its China connection? Or has there been a coordinated effort by big market players to ensure Paytm comes a cropper on its debut? The timing of Macquarie's report, giving their first rating on the stock, on the day of its listing, has raised many questions  that will never be answered satisfactorily.

Some would say that Paytm is unlucky. Its business model is no different than that of several other fintech and ecommerce businesses. All of them are betting on future earnings, with virtually no profits to show in the present. They burn cash to give massive discounts to customers in the hope that people will get so habituated to these platforms that they will remain active even when the prices are hiked. Betting on them is to believe that India has a massive untapped market for e-commerce to penetrate deeper. It is a narrative that is based on the idea that Indians have got hooked to their mobile phones, and that they will reorient their spending priorities to buy more smartphones and data.

The trouble with this story is that it overestimates the Indian economy's ability to make a majority of its citizens richer. If one believes the estimates made by CMIE's Mahesh Vyas, then just about 23 million households in India earn more than five-lakh-rupees per year (less than Rs 42,000 a month). That is about 7% of all Indian families. This is broadly the size of India's buying classes, of people who can afford various kinds of goods and services. If any company wants to reach beyond this ,it will have to give big discounts -  exactly what India's tech platforms have been doing to shore up their customer base. But once these discounts are withdrawn, the customers will drop off as well because they simply do not have the money to buy things at their real market price.

There are no indicators in India's economy to suggest that this massively skewed and unequal pattern of income distribution is going to change anytime soon. CMIE's data for October shows a sharp drop in employment in the middle of the festival season with a large number of people moving into small entrepreneurship to make a living. Consumer sentiment in October continues to be depressed, including amongst the affluent. And if there's a recovery right at the top of the consumption pyramid, it is probably restricted to just the top 1-2% of Indians.

That means most of India's consumer-facing tech companies have probably already reached the saturation point of their real customer-base, of people who can afford to pay for their services even if there were no discounts. This is also one reason why these unicorns have suddenly tapped the markets to raise funds, and list themselves. They have made the most of the bull-run in the stock markets which has continued since mid-March last year, giving their original investors a chance to walk away with a large profit.

Despite this, there is reason to believe that Paytm's debut debacle is an aberration. India's economy is getting increasingly centralised in the hands of a few big corporate houses. They all know that the future is digital, and the only way to stay in the game is to invest in it. This means the Paytms of the world will continue to be funded, even if they keep burning cash. These are platforms that have established themselves amongst millions of customers, and their value doesn't come from how much they can earn, but how much a bigger player will be willing to pay in the future to buy them over.

(Aunindyo Chakravarty was Senior Managing Editor of NDTV's Hindi and Business news channels.)

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.

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