What happened to Paytm’s IPO valuation?

If you weren’t paying close attention, you might have expected a different result from Paytm’s IPO. After all, the company is incredibly well funded by investors that you know by name, and the Indian fintech giant has sufficiently scaled into a global brand.


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And yet.

After debuting last Thursday, Paytm has notched two double-digit declines, measured in percentage terms, during its first two days of trading. As far as going public is concerned, seeing your share price fall 27% and then 13% is about as bad as it can go.

So, what happened? To understand the lackluster Paytm IPO — technically the public offering from One 97 Communications, Paytm’s parent company — we’re going back to the company’s IPO filing, which we’ll augment with a new filing that dropped today containing a few more data points concerning its performance.

What we want to know is whether we can spot in the numbers enough reason to understand the company’s awful post-IPO performance. Was Paytm simply mispriced in its public debut? If so, we don’t have to spend as much time wondering if the larger Indian stock market is less than welcoming toward tech unicorns.

Thanks to TechCrunch’s Manish Singh, we also have some analyst numbers to lean up against for support. Into the breach!

Paytm’s IPO filing

To avoid this post going on for more words than you want to read, we’ll skip a deep dive into what Paytm offers the market. Let it suffice to say that it offers payments, bill pay and loans to the Indian market, among other efforts.

So how good of a business is fintech in India? Let’s take a peek at the company’s IPO filing.

Here’s the income statement presented:

Image Credits: Paytm IPO filing

All numbers detailed are in millions of ₹, or rupees. Translating the 2021 numbers into dollars, Paytm saw $428.5 million in total revenue for the year concluding March 31, 2021. That was placed against a total expense volume of $643.2 million, leading to a loss of $214.6 million.

The company is certainly less profitable than we might have expected, even if it did manage to show falling losses from fiscal year to fiscal year since calendar 2018. Falling losses are good, but less attractive when stacked against declining revenues and slower sales and marketing costs.

More simply, Paytm posted its smallest year of revenues that we have data for in its most recent fiscal year, along with radical declines in what it spent on “marketing and promotional expenses” that helped it lower its overall cost structure. It’s perhaps good that Paytm didn’t shrink more while cutting its marketing budget so sharply, but if the company wants to reignite growth, it will have to, we presume, spend to do so. That will likely boost marketing costs, perhaps impacting the company’s ability to continue to post falling losses.

From a very high level, Paytm built a huge, popular fintech business in India. But it appears that it is struggling to pull enough revenue from its work to cover the cost of doing business.

Part of this is to blame on COVID-19 and the ensuing economic carnage that the pandemic wrought. As Paytm noted in its filing:

Lockdowns imposed as a result of the pandemic impacted our operations, in particular our commerce and cloud
business.

It was not the only company to struggle in this way. But simply having fellow travelers in presenting revenue growth issues doesn’t mean that one’s IPO will go well.

I bet that if you asked the average person what they thought was Paytm’s growth rate in its last fiscal year, most folks wouldn’t have guessed that it was negative. It is not easy to go public on the back of falling incomes!

Still, there are some good things to discuss. For example, GMV growth at the company has been strong in recent years:

Our total merchant base has grown from 11.2 million as of March 31, 2019 to 21.1 million as of March 31, 2021, and our GMV has increased from ₹2,292 billion in FY 2019 to ₹4,033 billion in FY 2021.

And today, the company announced results regarding a number of its key financial indicators that looked good. Here’s the GMV chart that we care about:

Image Credits: Paytm filing

Recall that the final fiscal period that we discussed above ended March 31, 2021. Since then, GMV growth has been pretty darn good. As has loan volume:

Image Credits: Paytm filing

Encouraging! But enough to raise the company’s value? Not yet.

What the analysts said

There were some notable bears on the Paytm offering. Macquarie Research said that the company’s “business model lacks focus and direction,” giving it “40%+ downside,” according to a report that The Exchange viewed. Why was the group so negative? It expects that competition will lead to declines in its unit economics, and that — as we noted above — “building scale with profitability [will prove to be] a challenge.”

Earlier in November, however, Bernstein said that it estimated Paytm’s value between $21 billion and $24 billion, or what the group calculated to be a “~22-25x Fy2023 revenue multiple.” Unlike the NFL this year, the bears had this one right.

Synthesis

It appears that some good product results from recent quarters have not proven enough to remove the weight of Paytm’s IPO price from its shoulders. Why is that the case? Surely the falling revenue figures do not help. But perhaps at its core, Paytm was simply overvalued in its IPO.

FT reports that at its IPO price, Paytm was worth $20 billion (TechCrunch calculated $19 billion, but there’s always nuance in how one counts shares pre-IPO). That’s a rather rich price, given that the company had less than $500 million in total revenue during its last fiscal year, for an implied revenue multiple of more than 40x. The multiples figure has come down with its share price, but Paytm is still valued like a high-growth SaaS company instead of a recently negative-growth-posting fintech.

That appears to be the matter, the issue, the rub: The company’s IPO price was simply too high compared to its recent financial results. And, yes, the company raised a bajillion dollars at a very attractive valuation, giving it a strong capital base from which to grow in the future. But investors in public companies expect a bit more — usually — than future hopes. Trailing results matter as well, and Paytm’s were just too weak to support its IPO price.