Paytm, India’s leading digital payment provider aims to secure about 3 billion USD, about 21,800 crore INR, in an IPO in the Indian market later this year. According to a Bloomberg report on Wednesday, it would be the country’s most prominent public debut ever.
Alibaba and SoftBank-backed Payment is currently India’s most valued startup at 16 billion USD. It aims at a 25 to 30 billion USD valuation.
If Paytm IPO is successful, it will surpass Coal India’s offering, which raised 15k crore INR in 2010, the country’s biggest IPO so far. There are expectations that the float would be a mix of new equity issuance and a share sale by existing investors.
The company reportedly talks with multiple investment banks, with Morgan Stanley being the leading contender. Paytm is aiming to list by November and may start the work by next month or from July.
There has been no comment from Paytm on the topic.
Paytm’s consolidated revenue grew by a little over 1% in the previous fiscal year to 3,280 crore INR, while it cut losses by 30% to 2,942 crore INR, as per its annual report. Audited numbers for FY21 are not published yet.
Notably, the company has been expanding its financial services verticals like mutual funds, stock trading, and insurance.
According to Bernstein, an investment research firm, Paytm will double its revenue to 1 billion USD by the FY2023, with one-third of that coming from its non-payment verticals. It added that Paytm has a good start in its lending business for merchants and consumers, which will be crucial for its future.
As per the company insiders, Paytm aims to gradually turn profitable by rationalizing capital-intensive services with low margins, a decision it made in 2019. Afterward, the fintech firm has also stopped most of its cashback schemes on the UPI, Unified Payments Interface network.
Paytm IPO: Marking Indian Startups Coming of an Age
After over a decade, Paytm is on par with other international startups regarding the years it took to go public and offer an exit to its investors. And when it happens, the 3 billion USD IPO, Initial Public Offering by One97 Communications, the parent company of Paytm, will mark the coming age of India’s millennial-era startups.
If Paytm IPO is successful, it could have a similar long-term impact as the June 1993 Infosys IPO had in pushing the potential of the country’s IT service industry into the public consciousness. That one IPO opened the doors for small shareholders to participate, ensuring India’s IT success story.
In the United States, the dating app Bumble, whose February 2021 IPO, at 8.2 billion USD valuation, made its founder Whitney Wolfe Herd, the youngest woman to take a company public and a billionaire (1). The Chinese equivalent of Uber, Didi Chuxing, started in 2012 is also planning to list this year at a target valuation of over 60 billion USD (2).
However, in India’s family businesses-dominated space, a supersized IPO by a young startup is exceptional. What is more? Paytm won’t be alone. As discussed in our previous article, India on Unicorn Spree, The Party has Only Started, Freshworks, Delhivery, BYJU’s, Zomato, Flipkart, and Policybazaar, among others, are also planning to debut the market this year.
When it comes to sheer size, Paytm will take some beating. At that size, Paytm will also mark an inflection point in the Indian market economy. The five big IPOs in India, so far, have been from old-economy industries such as power, coal, oil and gas, and real estate. By topping them, Paytm can usher in a new era for the public markets in India.
At the same time, big IPOs have also flattered to deceive in the past in India. In January 2008, Reliance Power, owned by Anil Ambani, launched a massive 11,560 crore INR issue, with a promise of a vast, growing consumer market, without any of the performance numbers Paytm boasts. The excited stock slumped 17% on its stock market debut, and investors never recovered their initial investment (3).
Similarly, DLF’s 9,187 crore INR IPO was pretty successful initially. However, after peaking in January 2008, it has been all downhill for its investors since then.
Paytm will have to dispel this unfortunate market curse. Moreover, even its timing is auspicious. The Indian digital payment market, driven by Paytm, Google Pay, and PhonePe, has surged during the pandemic.
According to ACI Worldwide, a US-based payments system company, India recorded the highest volume of real-time transactions in 2020, pretty ahead of China, South Korea, and the United States. It happened even though paper-based payments still hold sway with about 61.4% share of all transactions. Nonetheless, the number gives enormous hope to investors looking ahead at the Paytm IPO since it indicates substantial room for digital payments growth.
According to a prediction by Credit Suisse Group AG, online payments in India could reach 1 trillion USD by 2023.
The Paytm IPO will also give insights into how investors see companies that are still loss-making but hold out the exponential growth potential in their bottom lines. Less risk-averse investors in the United States have well accepted this model. However, Indians are still not warmed up to such businesses (4).
Paytm, which is still not profitable, has the potential to change that.
In January, Vijay Shekhar Sharma, the CEO and founder of Paytm, stated at a Reuters Next conference that following the pandemic-driven rise in the use of its platform, the company could turn the corner by the end of this year.
Chinese Investors Set to Get Bumper Exits
Paytm aims to file a DRHP, Draft Red Herring Prospectus by July, with the markets regular, the SEBI, Securities and Exchange Board of India, said sources.
Reports also suggest that the Noida-based company is evaluating a secondary share sale that could cut existing shareholders’ stakes before the IPO.
While the details are not final, there is the possibility of including its largest investors, such as Japan’s SoftBank, China’s Alibaba, and venture capital company, Elevation Capital, formerly known as SAIF Partners. As per a source, the transaction could be pro-rata, where all major shareholders could proportionally forgo a part of their stakes.
Along with Morgan Stanely and JPMorgan, Paytm can also bring ICICI Securities, Axis Capital, and SBI Capital on board to accelerate its compliance timelines (5).
As per a person directly aware of the plan, Paytm is planning to put 10% of shares, which would be about 3 billion USD, ballpark but absolute but in this area.
So far, Paytm has secured 2.8 billion USD.
Hence, the company will evaluate if it has to make a secondary transaction and will provide it on a pro-rata basis to its stakeholders. It is also planning the contours, but in the past five years, none of its major shareholders have expressed any desire to exit, added the source.
Nevertheless, reports suggest that two of its Chinese investors, Ant Financial and Alibaba are likely to dilute or exit their stakes during the IPO. As the company is looking to be true, “Atma Nirbhar.”
Notably, together, Alibaba and Ant Financial hold 37% in Paytm, with other major stakeholders being SoftBank at 20% and Elevation Capital at 19%.
Since the Indo-China tension escalated last year, Paytm has been in the crossfire since Chinese companies own about 40% of its stake.
Meanwhile, Ant Financial has also put its investments into Indian startups on hold while seeking an exit from prominent Indian startups such as Zomato and Paytm.
The market is also describing Paytm IPO as a watershed moment, testing the appetite for tech firms. However, since SEBI has proposed new dual listing norms, reports suggest that Paytm may also consider listing in overseas markets (6).
Paytm’s Core Business Growth
As we discussed, Paytm is expanding its core business while also adding other financial services verticals. Paytm is presumed to make losses for an eight consecutive financial year in FY21. However, there are expectations that it will be narrow from the last financial year. But, revenues are also likely to take a hit due to the coronavirus pandemic.
According to a person aware of the company’s operations, offline merchant payments are still hit because of the ongoing second wave of the coronavirus pandemic. It was one of the areas they concentrated more on the past year as it offers more options to capitalize than peer-to-peer payments.
Industry executives also believe that revenue growth is crucial to Paytm’s reception in the public markets.
Several regulatory approvals from now on will be critical to how Paytm’s business will fare.
Paytm’s 568 crore INR acquisition of Raheja QBE, a general insurer in 2020, has not yet received approval from the insurance regulator for an IRDA license (7).
Separately, the fintech startup plans to convert its payments bank into a small finance bank to lend to consumers directly. However, it is waiting for the recommendations of a working group of the RBI, Reserve Bank of India, for approval by the banking regulator before moving forward.
According to sources, it is a moot point whether Paytm’s valuation will increase in the public float.
Paytm has ambitious plans with its Paytm Lending and has brought new executives on board, including Amit Nayyar as President (8) and Bhavesh Gupate as Chief Executive (9).
Madhur Deora, a former investment banker (10), is also the President of the company. He joined the startup as CFO in 2016, after leaving Citi’s investment banking unit as MD.
Apart from Paytm founder, Deora is among the top executives directly involved with the proposed IPO plan.
Paytm also has an ecommerce business under Paytm Mall, which initially tried taking on space’s behemoths like Jeff Bezos’s Amazon India and Walmart-owned Flipkart. However, it has remained a distant third player (11).
The fintech company has set up a joint venture with AG Tech, an Alibaba Group firm, in 2018 to create a gaming platform, which started life as Gamepind, later renamed Paytm First Games (12). It competes with platforms like MPL, Mobile Premier Leagues, and Dream 11.
Paytm’s potential IPO is coming at a time when several startups have firmed up similar plans. Zomato, a food delivery platform, plans to go public after filing its DRHP with SEBI last month. It is aiming to secure 1.1 billion USD.
Invest in Paytm Pre-IPO? Be Cautious
Ever since the reports of potential Paytm IPO have surged, there has been an increase in its share price in the unlisted market following.
Notably, Paytm stock has almost doubled in the unlisted market, up to 24k INR, as per the person who deals in unlisted firms’ shares. Its shares were trading at 11k to 12k INR in the unlisted market before the IPO news. Within five days of the news, the share price surged to 21k INR, as per the dealers.
According to the Financial Express’s conversation with Abhay Doshi, founder of UnlistedArena.com, which deals in unlisted and pre-IPO shares (13), Paytm shares were available very cheaply before the news, and the valuation gap led to heavy demand among the investors, leading to share rallying more than 100% within a week.
Aditya Kondawar, founder and COO of JST Investments (14), cautions that since Paytm has not yet decided on an issue price, it may happen that the price investors are paying now in the unlisted market may be much higher than the IPO price.
Kondawar added that a similar thing had happened in Barbeque Nation Pre-IPO, as its Pre-IPO price was 1,100 INR, but its IPO came at 500 INR. Moreover, pre-IPO comes with a one-year lock-in period.
While pre IPO investment has benefited several investors, it does not hurt to be cautious and have a safety margin.
There are a lot of expectations from Paytm IPO. Despite these high prices, investors are expecting to make money from the IPO.
Even though the IPO’s price bank is not announced yet, such premiums in the grey market may result in listing gains, says Vishal Balabhadruni, Banking Analyst at CapitalVia Global Research (15).
Paytm is an established competitor in the Indian fintech space with deep market penetration and share. The unicorn, which started as a payment interface, also got into alternate banking by turning itself into a payments bank.
Anyhow, we are keen to watch if Paytm would get high valuations as the company is still loss-making. The space is highly disruptive as Paytm faces tough competition from PhonePe and GooglePe, which have also established themselves in the past few years.