Paytm list debacle casts terror on Indian tech IPO pipeline

Earlier in November, Paytm founder Vijay Shekhar Sharma traveled to Tirupati in India’s hilly south. The temple, famous for promoting good fortune and its own wealth, was a suitable place for Sharma to search [the] blessing of God” before launching India’s largest IPO ever.

The IPO did not follow the script this week, with shares in the fintech plummeting by more than a third in its first two days as a publicly traded company, making it one of the worst debuts in Indian stock market history. The group’s shares, which raised $2.5 billion and were valued at $20 billion, have since risen but remain about 17 percent below their issue price.

The debacle has spotlighted Paytm, its shareholders SoftBank and Alibaba, and IPO bookrunners, including Goldman Sachs, Morgan Stanley and Citigroup. It has also raised concerns among investors and entrepreneurs, fearing it could derail a series of expected Indian IPOs that would cement the province’s status as a leading destination for tech start-ups after the US and China.

“The concern for all of us is whether this will affect broader technical sentiment in India? One bad deal and one bad judgment could upset the apple cart,” said the head of India’s equity capital markets at a Western bank. “Value will be very difficult.”

MobiKwik, an Indian fintech company, has postponed its IPO originally scheduled for November, saying this week it will quote “at the right time”.

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

Sandeep Murthy, a partner at Mumbai-based investment group Lightbox, said there could be “a period of cooling” in fintech listings until early next year, but argued it was “natural”.

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

Food delivery company Zomato, which listed in July, overcame skepticism about its cash burn and valuation, with its stock doubling against its IPO price. Shares in insurance aggregator PolicyBazaar and beauty platform Nykaa have also surged since debuting earlier this month.

But Paytm’s much larger listing, accounting for about half of the total raised through Indian tech IPOs this year, threatens to overshadow others.

Founded 11 years ago, Paytm has grown into one of India’s most recognizable technology brands thanks to its mobile wallets. The charismatic Sharma attracted leading international investors, including Alibaba founder Jack Ma, Warren Buffett and Masayoshi Son, the CEO of SoftBank.

Bar Graph of Performance from Listing Price (%) with Spotlight on India's New Tech Mentions

But the introduction of the Government of India’s UPI digital payments infrastructure undermined its core business, with PhonePe, owned by Google and Walmart, now the market leader. Paytm has diversified into everything from investing to insurance, but faces better-established competitors in every industry and lacks clear strengths, analysts say.

Its core business isn’t making money, and a move to cut marketing costs indicated it was trying to show a better result before it was listed, said Prashant Gokhale, the Hong Kong-based co-founder of research group Aletheia Capital. “There was a lot of hype with SoftBank and Warren Buffett there,” he said.

A person with direct knowledge of Paytm’s discussions about IPO prices said there were too many liquidity trades, especially as the crackdown in China has made India more attractive as a destination.

“Investors are desperate for places to go, which has pushed prices up without improving fundamentals,” the person said. “A lot of money that’s been after that deal and didn’t get it are probably happy now.”

Chart showing investment growth in India's technology sector surpassing that of China

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

The debut has drawn comparisons to Reliance Power’s disastrous 2008 listing, which raised a record $1.5 billion before plummeting 17 percent on its first day of trading. The shares never recovered and traded 95 percent below their issue price this week.

Madhur Deora, Paytm’s chief financial officer, told the Financial Times that the company “would focus on our performance. . . How that translates into valuation and stock price and so on is, of course, up to investors to decide.”

Some argue that Paytm’s painful debut could ultimately be a blessing if it prompts investors to look at other highly regarded and much-hyped Indian tech companies with some skepticism.

“What was encouraging for me in any case? [was] seeing that the market was not in a state of irrational exuberance,” Lightbox’s Murthy said of the company’s debut. “If a market blindly valued things, it would” [be] a bigger challenge in the future.”

An analysis by Goldman Sachs found that the Indian companies that are potential IPO candidates had an average price-to-sale ratio, one measure used to value companies, of 21 over the past three years, compared to three for groups. in India’s Nifty Index. .

One of its most prominent upcoming offerings is budget hotel group Oyo, which filed a draft prospectus last month to raise $1.1 billion. Chief executive Ritesh Agarwal, who was backed by SoftBank, tried to make Oyo the largest hotel company in the world, only to scale back its ambition in the face of a liquidity crisis.

Fellow SoftBank portfolio company Ola, a ride-sharing group, also plans to file a prospectus in the coming months. The company is now focused on making low-cost electric scooters, but deliveries of the new bikes have been repeatedly delayed.

“Valuations are moving forward,” said Mohit Nigam, fund manager at Hem Securities in Mumbai. “We as investors need to be careful in the run-up to the upcoming IPOs because these guys, no matter how good their business, . . . one cannot overlook profits and cash flows.”

Rajan Anandan, head of Sequoia Capital India, claimed it was too early to assess Paytm’s long-term prospects, but acknowledged that technical valuations in India and abroad were at risk of declining.

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

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