The year 2021 has been remarkable for Indian tech startups. The overall ecosystem has matured. And after raising millions of VC money, Indian startups have now started taking IPO routes. Among all of them, two digital payment companies hot with equity investors include Mobikwik and Paytm.
Mobikwik, founded by Upadana Taku and Bipin Preet Singh in 2009, has filed DRHP, draft red herring prospectus to raise about 1,900 crore INR via a public issue (1). Meanwhile, Paytm is looking to raise about 16,600 crore INR with its IPO (2).
And as these companies are getting ready to go public, the biggest risk factor remains: they are both still loss-making companies.
And it raises questions such as, should retail investors join the FOMO and invest in these trending IPOs? Do these companies have any real potential? What are the risk factors? We have mixed feelings about it.
Keep reading on to know all the details.
A Brief History
Mobikwik and Paytm have never been on friendly terms. In the past, Mobikwik has even taken multiple potshots at Paytm and challenged the company’s Indian credentials by citing the big stake China’s Alibaba Group holds in Paytm (3).
However, Paytm managed to take significant market share in the e-wallet segment, whereas Mobikwik lagged and changed its course.
Currently, Paytm is competing with much bigger rivals like PhonePe, Google, and Amazon. Meanwhile, Mobikwik is trying to cross-sell financial service products, which explains the significant difference between their valuation and scale.
As per reports, Mobikwik was last valued at 700 million USD and is looking to enter the unicorn club for the IPO. On the other hand, Paytm was last valued at 16 billion USD and is looking at a 24 to 30 billion USD valuation.
In FY 2021, Mobikwik’s total income dropped 18% to 302.2 crore INR, while its losses increased to 111.3 crore INR. In comparison, Paytm witnessed a 14% drop in its consolidated income to 2,802 crore INR in the same period, while its losses dropped 42% to 1,701 crore INR.
As per the DRHP, the issue size of Paytm is 16,600 crore INR, a mixture of new issues and offers for sale (worth about 8,300 crores INR each). The digital payment firm will utilize the net proceeds from new issues to fund organic and inorganic growth.
The organic growth includes technology ramp-up and infrastructure expansion for acquisition and retention of customers to strengthen the company’s overall payment ecosystem. Paytm’s inorganic growth strategy includes strategic alliances and acquisitions.
On the other hand, the issue size of Mobikwik as per its DRHP filing is 1,900 crore INR, which is also a mixture of new issues (worth about 1,500 crore INR) and offer for sale (about 400 crore INR).
Why are Paytm and Mobikwik IPOs Trending?
As we mentioned earlier, it is raining IPOs in the Indian stock market. Since tech companies are using the IPO route for the first time in India, it is gaining significant interest among investors (4). For instance, last month, the Zomato IPO was oversubscribed by almost 40x, and it became a blockbuster event of the year (5).
The social media platforms were overwhelmed with creative memes and people explaining segments, offerings, revenue, expenses so accurately that even an amateur would understand the operations of the digital food delivery company. However, as the overhang of the Zomato IPO is over, market investors and participants are looking for new triggers to keep themselves busy.
And the news of Paytm and Mobikwik IPOs has given them the sparks they were looking for.
While it is encouraging to see startups raising money on the Indian market, big and buzzing names don’t always make a good profit. It can be all FOMO, which is not good for any retail investors. Because, when it comes to tech unicorns, everyone is betting on future growth, which is largely uncertain.
The underlying logic behind the high valuations based on future growth prospects is that the same strategy has worked for Facebook, Amazon, Twitter, Alibaba, and several others. All of these businesses had accumulated losses over their initial years before becoming profitable.
Another key concern is the lack of historical records and information when investing in an IPO. As per experts, companies often try to get a better valuation before going public and create a lot of hype. Hence, it is recommended for investors to analyze the company before trading on a trending IPO. If you still want to do FOMO, Fear Of Missing Out investment, make sure your portfolio allocations are negligible.
High IPO Valuations Drivers
- The FOMO Syndrome: Logic aside, no one wants to miss out on the new IPO opportunity
- Despite producing so many unicorns, Indian tech companies have only now started to go public
- Digital IPOs have become new additions to the global liquidity bucket list
- With China clamping down on its tech companies, the interest is now shifting towards India (6)
Why are Companies Rushing to Go Public?
Last year, multiple companies went public to secure funds. According to available data, companies raised more than 25,000 crore INR from IPOs last year (7). And as per market experts, IPOs in 2021 will easily surpass these numbers as more companies opt for IPOs.
Several businesses went public after the end of 2020 to reduce the impact of the coronavirus pandemic on their business and leverage vigorous stock market activity, as reports suggest that more than 14.2 million new demat accounts were opened last year (8).
Notably, even as the COVID-19 wreaked havoc on the country’s economy, the domestic stock market has remained unaffected. In truth, the stock market benchmark indicates that S&P, BSE, Sensex, and Nifty performed better than ever over the past few months (9).
Considering the excellent market performance, exceptional performance of most recent IPOs, and more investors looking to make most of these tech companies with high liquidity, there is a perfect environment for more companies to go public.
These tech startups are raising capital in the wake of pandemics or funding business expansion because of high demand. Correspondingly, tech companies like Paytm, Zomato, and Mobikwik are looking to raise capital and expand their business by going public.
How Can You Evaluate Loss-making IPOs?
While all the points above sound great, how can you decide which IPO is better than which? Because most of our tech IPOs, whether Paytm, Zomato, or Mobikwik, are loss-making.
- There is an analogy in today’s market, “winner takes it all.” Hence, if you see a potential leader emerging in the market, you can invest even at steep valuations.
- Look at the positive cash flows because anyone with a decent business model can build valuations even without any profit in today’s market.
- Cross-selling platforms like Paytm can drive high valuations.
- Answer questions like their revenue growth over the past few years, losses have been narrowing, a fall in promotion expenditure, and a rise in revenue per customer. The list can go on and on, but you can still look for these proxy measures to evaluate the IPO.
The Potential of Paytm IPO
The Right Timing
The parent company of Paytm, One97 Communications Ltd, had started preparation for the IPO even before the pandemic. And it gave the right boost to the company as digital payment and shopping skyrocketed during the nationwide lockdown.
The positive trend is why other companies like Mobikwik, Delhivery, Policybazaar, and Nykaa are also looking at an IPO. And as we mentioned above and in our previous story about PharmEasy IPO, with the rise in the number of new investors, the Indian market is currently in an excellent position for IPOs.
Read Also: PharmEasy IPO: A Good Buy or Not?
Even though Paytm is reporting losses, it is witnessing a drop in losses and increased revenue.
The company boasts a robust valuation, and it is targeting a 25 to 30 billion USD valuation with the IPO, which sets Paytm at an attractive position among investors. The fintech company is also India’s second-highest-valued unicorn with over 16 billion USD valuation (10). Notably, Byju’s stands at the top position with over 16.5 billion USD valuation.
Paytm claims to be India’s top digital transaction enabler, with more than 1.4 billion transactions recorded in March. It further claims to have boarded over 20 million merchant partners and 30 to 50% more significant than its digital payments market rivals (11).
Even though the platform has digital payments as its primary bread and butter, it has diversified its offers, including (12)
- Paytm Payments
- Paytm Mall
- Paytm Credit
- Paytm for Businesses
- Paytm Money
- Payment Insurance
- Internet Commerce and Cloud
- Others like Advertising, Gaming, and App store
Concerns with Paytm IPO
When it comes to Paytm, there are two big risks; competition against market-dominant tech companies and access to digital ecosystems.
Paytm competes against tech giants like Google, Amazon, and Facebook, looking to squeeze Paytm’s market share. Notably, Paytm has also mentioned the same in its IPO filing,
“We compete with domestic and international firms, and some of these companies have significant financial resources and larger consumer base than we do, which offers them a significant competitive edge.”
Moreover, the issue of competing against tech giants goes beyond gaining more customers. It is also about access since restrictions on app marketplaces, dominated by Paytm’s rival Google, can affect its mobile app usage. Remember Vijay Sharma’s feud with Google?
Notably, Paytm’s multiple businesses like e-commerce and insurance broking have not added much to its revenue. Moreover, apart from its core payment products, it hasn’t made any disruption at all (13, 14).
Whether you decide to invest in Paytm or not – at your own risk, we have to say that it is the right time for Paytm to do an IPO because its rivals are rising fast and fiercely. And, an IPO can make a difference for the company.
The Potential of Mobikwik IPO
Determined and Resilient Founding Team
Nothing is more assuring for a startup’s success than a resilient founding team heading the company you are about to invest in. If you have been following Mobikwik for a while now, you know the company’s founders have seen it all.
Here’s a peek into Mobikwik growth story:
Launched in 2009 as a payment wallet, Mobikwik witnessed tremendous growth until the launch of UPI in 2016. The growth of UPI soon rendered e-wallets redundant. While Paytm and PhonePe somehow managed to be in the UPI race, Mobikwik lagged as it resisted change.
In 2018, the company changed its course and forayed into Lending, collaborating with Bajaj Finance, looking towards profitability. However, the partnership fell through because of the huge NPA in instant loans and operational gaps.
Then in 2019, it started BNPL, Buy Now Pay Later Service, which witnessed good growth, and Mobikwik managed to gain 140% and witnessed contribution margins as high as 19% for the first time.
However, then the pandemic happened, and it took the company by storm. What was more concerning is that during the same, its biggest competitor, Paytm, grew significantly!
Yet, kudos to founders for believing in the company to successfully list itself in the Indian market.
Maybe a Red Bottom Line is Not That Bad
While startups that burn more cash can gain more market attention, it comes with a heavy price. In the past three years, Paytm has spent significantly towards marketing, promotion, and customer incentives. At the same time, Mobikwik has kept them low.
And as we discussed in our recently published story, 12 Keys to Grow Your Small Business, it is important to keep your overhead costs as much low as possible, and it seems like Mobikwik management has been making continuous efforts to keep their costs low, which, in turn, can create more value for its shareholders.
If so, Mobikwik is in the right direction, and the IPO money may give them the right push to see the tunnel’s end’s light.
As per the reports, Mobikwik is looking at a 1 billion USD valuation for its IPO, which gives it an EV/R, Enterprise Valuation of REvenue of about 26 times, which is more practical and less risky when compared to Paytm, which is eying an EV/R multiple upward of 67 times.
Mobikwik insists that the integration of its wallet with its BNPL business will offer it multiple competitive advantages. While the wallet-based BNPL sounds promising over other models, there are multiple concerns about its data breach history.
Notably, in March this year, the personal data of more than 100 million Mobikwik customers were leaked for sale on the dark web, which made it one of the biggest data breaches in India (17).
Such events can offset years of business expansion and cause significant user, finance, and equity losses. Sometimes, such events can cause market upheavals for a listed entity, where Mobikwik is heading now.
Moreover, the exposure to credit risk for startups like Mobikwik is high, considering BNPL business needs credit underwriting from NBFCs and partner banks for which Mobikwik offers financial guarantees. The company is also a non-credited-rated firm at the moment, which negatively impacts its ability to access funds for future expansion. According to the PAPG Guidelines of the RBI, Mobikwik will need to acquire and maintain a network of 25 crore INR or 3.3 million USD by 2023 (18).
Even though it is not a high target for a company looking at a billion-dollar valuation, it indicates adherence to legal norms that can be tricky for certain companies, especially for Mobikwik, which has previously been charged for violating RBI norms (19).
Even though the fintech industry is growing rapidly, it is still a grey area for Indian regulatory compliance. There is fierce competition with much bigger players in the market compared to Mobikwik. Still, the company is willing to take a bet on its IPO amid the hot IPO rallies in the country and take advantage of the favorable market (20).
And because Mobikwik cannot secure funds from VCs and private markets anymore (21), it should come as no surprise that the founders are now looking at retail investors.
Common Risks Outlined in Paytm and Mobikwik IPO Documents
According to Quartz (22), the below-listed points are common risks outlined in IPO documents of both companies.
Risks related to industry and business:
- The coronavirus pandemic
- Retaining and growing relationships with businesses, merchants, and users
- Cyberattacks and security breaches
- Competition in the industry
- History of losses
- Maintaining growth levels
- Retaining brand and reputation
- Third-party related risks such as payment gateway partners, working with restaurants, etc
- Dependency on mobile operating systems, application marketplaces, and internet search engines to drive traffic
- Compliance with permits, regulations, and laws
- Marketing and sales initiatives may fail
- Dependence on promoters and senior management
- Protecting IP rights, including receiving approval for pending trademark applications
- Offices on rented properties
- promoters hold a significant shareholding
- Strategic investments and acquisitions can be disruptive
- Hostile media coverage
Risks related to external factors:
- Economic or political uncertainty
- Natural or human-made outbreaks and disasters
- Economic slowdown
- Financial instability in other nations
- Challenges in raising overseas funding
So, should you invest in Paytm and Mobikwik IPOs? After all this information, we leave that decision to you.
All the material in the story is for information purposes only and should not be used as legal, professional, or any other advice.