Sonam Srivastava, Co-founder of Wright Research expects the euphoria around Paytm to continue during the listing and even after that. “In the long term, execution of the exponential projections would be critical to keeping this as a long-term bet in your portfolio,” she says.
On Sapphire Foods, Latent View Analytics and Paytm IPOs, she says, “All three companies are attractive in 3 very separate ways, and each has a risk associated with the projected growth paths. I’d expect Paytm to get the biggest cheer just from a behavioural perspective, while all three can be good stocks to hold for the long term if the execution improves.”
Q: Paytm, the largest ever IPO, opens for subscription. What is your advice to investors and why? Should one subscribe to the issue or, better, take a call after listing?
Paytm IPO is not only the largest ever IPO in India, but it also marks the entry of a disruptive Fintech innovator into the Indian public market. The new economy of fintech, digital-first space will have the highest growth potential in the coming few years in India with penetration of banking and digitization both multiplying. Paytm IPO will allow the Indian public markets to participate in this growth journey.
Paytm has a colossal scale, brand value, and an ecosystem of interconnected digital fintech businesses in payment, credit, banking, wealth management, and e-commerce that can grow with synergy. However, Paytm is a growth company that is loss-making and would continue to be so. Paytm also faces stiff competition in the Payments space from UPI and Google and its aspirational foray into financial services from established players.
Given the IPO frenzy that we see in India with an average listing gain of 44 percent, this flag-bearing IPO is a good bet for listing gains. However, post IPO, even though the growth potential of fintech disruption makes it attractive, the company would need to justify its hefty valuation by maintaining the growth in market share, cutting marketing spending, and gaining profitability.
Q: Is it overpriced given the company posting losses year after year, though revenue from operations has increased in the same periods?
Paytm is listing at a valuation of $19 billion at a stratospheric price to revenue multiple of 50. The company is justifying that with its massive scale and the exponential growth journey for fintech in the coming years. Paytm also has a synergetic ecosystem of payment services, merchant payments, e-commerce, cloud services, and financial services, which it aims to leverage to increase its market share in the future.
Paytm has been “burning money” with cashback and marketing in its path to exponential growth in GMV (gross merchandise value). As the company matures, matching the global peers like Paypal, Stripe the revenue multiple is expected to come down, cashback and marketing to reduce, and margins to turn positive in the next five years. The buoyant public market has presented a perfect place for Paytm to charge the hefty valuation, but the management’s execution would be the critical deciding factor for post IPO price.
Q: What is the best valuation criteria for payment platforms providers like Paytm?
Paytm is valued based on the gross merchandising value (GMV), its growth rate, and the take rate or revenue as a percentage of GMV. While the GMV keeps increasing for the next five years, it will rapidly reach a stable speed after that. Similarly, the operating margin would increase as Paytm increases the take rate and gets into the high margin financial intermediary business. The valuation shown by Ashwat Damodaran in his blog would be based on the free cash flow-based terminal value assuming that the return on invested capital also stabilizes over time. Notably, Damodaran attaches a value of Rs 2,190 to the Paytm share.
Q: What are the key risks and concerns one should consider before subscribing to Paytm IPO?
While the bankers and the public seem sold on the bombastic projections as we rush into this big IPO, the critical risk is the execution to justify the projected numbers. Not just maintaining the vast market share but rapid growth is what would explain the numbers and not just that cutting the burn rate and maintaining a stable high revenue/GMV rate in the long term is needed. Also, the competition posed by Google and PhonePe is rising in Payments, while in the Financial Services space, there is immense competition from existing and new players.
I expect the euphoria around Paytm to continue during the listing and even after that. In the long term, execution of the exponential projections would be critical to keeping this as a long-term bet in your portfolio.
Q: What is the best IPO amongst Paytm, Sapphire Foods, and Latent View Analytics for portfolio addition?
Sapphire Foods that operates the Pizza Hut and KFC franchises in India, is also an attractive company coming into the primary markets. Sapphire Foods are also loss-making, but the revenue multiple is only 7X, much lower than the comparable valuation of Devyani Enterprises of 14X.
Latent View Analytics is a software exporter with good profit margins that is listing at a multiple PE multiple of 44, much lower than the multiple that Happiest Minds commands.
All three companies are attractive in 3 very separate ways, and each has a risk associated with the projected growth paths. I’d expect Paytm to get the biggest cheer just from a behavioural perspective, while all three can be good stocks to hold for the long term if the execution improves.
Q: What are the listing gains you expect for Nykaa, Fino Payments Bank, and Policybazaar IPOs?
Nykaa3 has been trading at a premium of 53 percent, Fino Payments Bank at 20 percent, and Policybazaar premium has fallen to 12-15 percent. I expect the listing gain to align with the grey market premium, with Nykaa posting the most significant premium with its strong brand image, superior management, financials, and business model.
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