Paytm CEO accused of giving record IPO
“The dreams of a young country are with me,” the founder and CEO of Paytm service operator One97 Communications Ltd said before striking the inaugural gong on the Bombay Stock Exchange at 10 a.m. local time on Thursday.
By 11 a.m., Sharma’s long-awaited party had turned into one of the worst opening days for a blockbuster tech listing since the dot-com bubble. The stock’s 27% drop took even some Paytm pessimists by surprise, casting doubts over a record-breaking run for Indian equities and left Sharma — and his underwriters — left wondering what went wrong with the $2.5 billion fundraising. Had to face tough questions about.
The short answer is that Sharma’s grand ambition to make Paytm’s IPO the biggest ever in the country has been dashed. The founder had made no secret of the fact that he wanted his company’s launch to surpass the long-standing IPO record set by Coal India Limited in 2010. In fact, a startup would have symbology that processes payments in bits while assuming state-run mining giants.
Instead, Paytm now looks to be an example of surprising redundancies. Backed by major banks such as Morgan Stanley and Goldman Sachs Group Inc., the company pushed both the stock’s price and size to breaking point. Retail investors who have piled into the offering are now sitting at huge losses along with global giants such as BlackRock Inc and Canada Pension Plan Investment Board.
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Nikhil Kamath, co-founder, Zerodha Broking Ltd, the country’s largest brokerage, said, “There is excitement around the IPO in India, backed by a bull-run in stocks and people are attracted by it.” “For Paytm, the runway for their profitability is too long and it doesn’t justify the far-reaching pricing.”
Of course, Sharma sees things differently.
“I have never felt more upbeat, optimistic and enthusiastic about the future,” the 43-year-old said in an interview, adding that Paytm shares plunged on Thursday. The recession is “no indicator of the value of our company.”
In fact, the company he started two decades ago with a $100,000 loan now has billions of dollars in cash to fuel its ambitions to serve a billion customers in one of the world’s most promising markets. Sharma, who owns 12% of the company after selling shares in the IPO, has a net worth of $2.5 billion, according to the Bloomberg Billionaires Index.
“We are in this for the long haul,” Sharma said. “We’ll put our heads down and execute.”
Rocky IPOs are not always indicative of the future. Facebook, recently renamed Meta Platforms Inc., lost more than half of its value in the months following its 2012 listing in New York. IPO investors stuck with the company are now sitting on gains of around 800%.
Sharma’s personal journey continues with the rise of the mobile internet and the move from feature phones to smartphones. The son of a school teacher, he grew up in a town in Aligarh in central India, and studied engineering in New Delhi, where he taught himself English by listening to rock music and reading text books with their Hindi translations.
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He founded One97 as a text-based people-search service in 2000 – India’s hotline for 197 phone inquiries. The business soon started providing cricket scores, Bollywood news and horoscopes via text messages on feature phones.
Paytm, whose name rhymes with ATM and is shorthand for Pay Thru Mobile, was launched in 2011 primarily to help users add credit to their prepaid phones, before operating a digital wallet service in 2014. . Its payment service actually started in 2016, when the Indian government invalidated most of the country’s banknotes in an effort to eliminate illegal transactions.
Now, 337 million users of Paytm rely on it for financial and e-commerce transactions. It provides digital loan, insurance, wealth management and stockbroking services in a country with a less developed banking network. Earlier this week, the firm began offering voice trading, taking advantage of artificial intelligence to allow users to buy and sell shares with voice commands.
“India is the biggest and best fintech opportunity in the world,” Sharma said in an interview prior to the listing. “If 2010 was the beginning of an epoch-making decade for Chinese entrepreneurs building global tech companies, 2021 will mark the beginning of a similar decade for Indian tech startups.”
A storekeeper uses a Paytm All-in-One POS payment tool arranged at a medical store on Saturday, July 17, 2021 in Mumbai, India. Paytm, the Indian digital payments pioneer backed by SoftBank Group Corp, is seeking approval for one. The $2.2 billion initial public offering could be India’s largest.
Critics questioned Paytm’s ability to deliver on such high promises even before the final IPO pricing. While sales for its core payments and financial-services arm rose 11% in the year ended March, overall revenue declined 10% amid intense competition, the company reported in July.
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Paytm follows on “exaggerated forecasts from its founder and top management” that are off by a factor of three or four, Ashwath Damodaran, a professor of finance at New York University’s Stern School of Business, wrote on BloombergQuint this month. “Access to capital from its deep-pocketed investors, Alibaba in particular, has made this company casual about its business model and profitability, even by young, tech company standards.”
Alibaba Group Holding Limited and its Ant Group company affiliates were among the early investors of One97, along with Japan’s SoftBank Group Corp.
According to bankers familiar with the matter, Paytm and its backers underestimated the importance of solid demand from retail and institutions during the IPO process. At the top end of its range, the shares were priced at Rs 2,150 per piece. In an early sign of trouble, the IPO was not fully subscribed in the first days of the shares offering – a rarity for deals in red-hot India.
Paytm failed to leave enough money on the table to give investors an incentive to buy, a lesson for the future, said a banker on the deal, asking not to be named as the details are private. The banker said Paytm will now face a quarter-on-quarter journey to prove its potential to investors and aim to turn profitable in the next 12 to 18 months.
Underwriters Morgan Stanley, Axis Capital Holdings Ltd and HDFC Bank Ltd did not immediately respond to emails seeking comment. Goldman Sachs, JPMorgan Chase & Company, Citigroup Inc. and ICICI Securities Ltd declined to comment.
Indians took to social media to voice their frustration – and Schadenfreude. A four-photo montage used over and over again shows a man going from excitement to despair, “When u get allotted IPO after a long time, but its paytm..”
There is doubt that Paytm can recover soon. Prior to the listing, Macquarie Capital Securities (India) Pvt. Ltd. published a report, initiated coverage on the company with an “underperform” rating and a price target of Rs 1,200, which is 44% lower than the issue price. It dubbed Paytm a “cash burning machine” with its payments business.
Analysts Suresh Ganapathy and Param said, “Given Paytm’s massive cash-burning business model, no clear path to profitability, large regulatory risks to the business and questionable corporate governance, we believe the company will be able to trade at Rs. The rupee is overvalued at the upper end of the price band.” Subramaniam wrote in the note.
The company’s challenge will be to scale with profitability. According to Macquarie, consumer and credit delivery is, at best, only a roughly $350 million opportunity.
The note said, “Paytm will have to lend, i.e. use its balance sheet to avail loans and do so profitably for which it needs a banking license, credit underwriting experience and collection infrastructure, of which Everyone is currently lacking.”
(With assistance from Venus Fang, Janet Rodrigues, Stefania Bianchi, Shikhar Balvani and Cecil Vannucci.)
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