Business

Paytm listing issue affects India’s tech IPO process

In early November, Paytm founder Vijay Shekhar Sharma traveled to Tirupati in southern India. Its temple, famous for promoting its own fortune and wealth, was a suitable place for Sharma to “seek [the] God bless” before he launched his biggest IPO ever.

Unscripted IPO this week, with stake in fintech more than a third off in its first two days as a public company, making it one of the worst debuts in Indian stock market history. The group’s shares, which raised $2.5 billion and are valued at $20 billion, have since risen but are still about 17% below their issue price.

The debacle has focused attention on Paytm, shareholders of SoftBank and Alibaba, and book-mining companies on IPOs including Goldman Sachs, Morgan Stanley and Citigroup. It has also raised concerns from investors and businessmen, who fear it could derail a string of expected Indian uprisings that are said to strengthen the district’s position as a leading destination for tech startups after the US and China.

“The worry for all of us is how will this affect India’s broad tech sentiment? The head of equity markets for India at a western bank said. “The valuation will be very difficult.”

MobiKwik, an Indian fintech company, which delayed its initial November IPO, said this week it would “list at the appropriate time”.

Ashneer Grover, the co-founder of fintech BharatPe, said Paytm has “damaged” the Indian market. “Nothing can come in this market,” he told the Moneycontrol website.

Sandeep Murthy, a partner at investment group Lightbox in Mumbai, said there could be “some cooling down period” in the fintech listings until early next year but argued that was “natural”.

According to Dealogic, Indian tech companies have raised a record $5 billion through listings this year, about 10 times last year’s total. The country has emerged as a top beneficiary about an ongoing regulatory crackdown on technology companies in China, prompting international investors to look elsewhere.

Food delivery company Zomato, listed in July, has weathered skepticism about burning money and valuation, with the company’s stock more than doubling from its IPO price. Shares in insurance aggregator PolicyBazaar and beauty platform Nykaa have also rallied since their launch earlier this month.

But Paytm’s much larger listing, which accounts for about half of all raised through India’s tech IPOs this year, risks overshadowing other companies.

Paytm, founded 11 years ago, has grown to become one of India’s most recognizable tech brands thanks to its mobile wallet. The charismatic Sharma has attracted top international investors including Jack Ma, Alibaba founder Warren Buffett and SoftBank chief executive Masayoshi Son.

But the advent of the Indian government’s UPI digital payments infrastructure sabotage its core business, with PhonePe owned by Google and Walmart currently leading the market. Analysts say Paytm has diversified into everything from investments to insurance but faces better competitors in each and lacks clear areas of strength.

Prashant Gokhale, co-founder of Hong Kong-based research group Aletheia Capital, said its core business is not making money and the move to cut marketing costs shows it is trying to show off. Better returns before listing. “There’s a lot of hype about SoftBank and Warren Buffett there,” he said.

One person with direct knowledge of discussions Paytm had about IPO valuation said that too many transactions chase liquidity, especially with the crackdown in China that has caused India to become a more attractive destination.

“Investors are desperate for places to go, which has pushed prices up without fundamentals improving,” the person said. “Many money chasing that deal without reaching it is probably happy now.”

The graph shows that India's investment growth in the technology sector far exceeds that of China

Paytm’s large ownership in China also poses regulatory and reputational risks, after India imposed strict restrictions on Chinese investment following military tensions last year. While Alibaba and financial firm Ant sold shares in the IPO, they still own nearly a third of the company.

The initial launch has been compared to the disastrous 2008 listing of Reliance Power, which raised a record $1.5 billion before plummeting 17% on its first day of trading. Its shares have never recovered and are trading 95% below the issue price this week.

Madhur Deora, Paytm’s chief financial officer, told the Financial Times that the company will “focus on our performance. . . How that translates into valuation and stock prices etc is clearly decided by investors.”

Some have suggested that Paytm’s agonizing debut could ultimately prove a blessing if it gets investors to look at the highly-rated and heavily hyped Indian tech companies with some incredulous.

“What is the least encouraging thing for me [was] see that the market is not in a state of irrational growth,” Lightbox’s Murthy said of the company’s launch. “If a market priced everything blindly, that would [be] a bigger challenge in the future. ”

An analysis by Goldman Sachs found that Indian companies that are potential IPO candidates have an average price-to-revenue ratio, an indicator used to value companies, of 21 over the past three years, compared with three for groups on the Indian benchmark Nifty index .

Among the most prominent upcoming listings is budget hotel group Oyo, which has submitted a draft prospectus. to raise $1.1 billion last month. SoftBank-backed CEO Ritesh Agarwal tried to turn Oyo into the world’s largest hotel company only to scale back its ambitions in the face of a liquidity crunch.

SoftBank’s Ola portfolio company, a car-sharing conglomerate, also plans to file a prospectus in the coming months. The company is currently focusing on producing low-cost electric motorcycles, but the delivery of new vehicles is constantly delayed.

“The valuation is going forward,” said Mohit Nigam, a fund manager at Hem Securities in Mumbai. “We as investors have to be cautious about upcoming IPOs because of these people, no matter how good their businesses are. . . profit and cash flow cannot be ignored. ”

Rajan Anandan, head of Sequoia Capital India, thinks it’s too early to judge Paytm’s long-term prospects, but acknowledges that tech valuations in India and abroad are at risk of rebounding.

“At some point, there will be a correction in the public and private markets” in the tech sector, he said at an FT-Indian Express event this week. “When that happens, it impacts everyone.”

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