Paytm’s shares climbed nearly 13 per cent on Wednesday, extending gains from yesterday, and partially erasing losses from a selloff that wiped out nearly a third of the digital payment company’s startup value last week.

Analysts said investors were taking a longer-term bet on the financial technology firm’s prospects. The shares were still 20 per cent off their Initial Public Offer issue price of Rs 2,150 but some analysts suggested they might reach that level soon if the “value-buying” kept up.

Says one analyst confidently: “Paytm will be above the issue price soon. India is the last bastion of great hope and fabulous returns in the long term.”

Still, last week’s catastrophic trading debut by Paytm, blamed on an overheated valuation, has shaken up the outlook for forthcoming IPO issues. In particular, the underwhelming market reception given to Paytm’s IPO is expected to make investors scrutinise more closely fundamentals like revenues, profits and business models in forthcoming flotations.

While foreign heavyweight investment funds like Black Rock and the Canada pension plan subscribed heavily to India’s biggest-ever IPO, analysts said the issue was stratospherically overpriced for a cash-guzzling company with falling revenues and no profits in sight. On the first day of trading alone, investors in the IPO lost nearly Rs 5,000 crore.

Horribly priced

“The Paytm IPO was horribly priced. Everyone knew it from Day 1. And that was evident in the way the offering got a tepid response from both the public and local institutions,” said one Chennai-based analyst. Paytm’s valuation of 43 times price-to-sales was exorbitant when global companies like Paypal are at 7.55 times, he said. Paytm founder Vijay Shekhar Sharma’s desire to stage India’s biggest IPO may have contributed to the expensive pricing, analysts say.

But the bigger long-term issue is Paytm’s revenue. “Paytm has had a problem of falling revenues for the last three years and a lack of profitability. In the financial year 2021, when Indians moved online en masse, revenues fell 10 per cent when they should have risen steeply,” the analyst added. One97, Paytm’s parent, reported a $230 million loss in the last financial year on revenue of $430 million.

So what’s gone wrong with Ant-backed Paytm’s business model? There’s a simple answer for that too: Competition. Paytm was once the unchallenged king of the financial payments jungle.

Paytm founder Vijay Shekhar Sharma while addressing a crowd at the Bombay Stock Exchange on the company’s listing day PTI

Punishing competition

Nowadays, though, Paytm faces punishing competition from other payments companies like GooglePay and PhonePe which have built their business on the high-convenience United Payments Interface (UPI) interface technology. In a crowded market, even companies with strong name recognition like WhatsApp Pay are struggling.

“My gardener and my milkman will only take GooglePay. They have not heard about anything else, including WhatsApp pay. UPI is costing Paytm big time,” said a Mumbai strategist.

Wind back the clock to November 8, 2016, when Prime Minister Narendra Modi stunned the nation by announcing demonetisation. Industrialist Harsh Goenka, who was with Paytm founder Vijay Shekhar Sharma on the night of the announcement, recalled in a tweet that the Paytm founder “nearly danced with joy” at the news. This was the bonanza moment for Paytm which took out full-page advertisements in all the country’s top dailies the very next morning. Overnight, it became a giant and founder Sharma established his position as one of the Indian start-up world’s pin-up stars.

“They had this nice spike at that time and became a megacompany on the back of demonetisation because they were the only game in town,” said the strategist. “They became famous with that scan code plastered all over town. Now, post-Covid who is going to come near you and scan your code? Paytm has become irrelevant in the payments sphere,” he said.

An also ran?

Recognizing its extremely weak position in payments, the decade-old start-up has been styling itself as India’s answer to Chinese super-apps like Ant, branching out from digital payments to insurance, gold trading and mobile gaming but is the leader in none of the segments and is unlikely to become one.“Most things Paytm does, every other large ecosystem player like Amazon, Flipkart, Google etc are doing,” research house Macquarie noted.

The other startups that have come to market and have fared well like food-delivery giant Zomato and insurer Policybazaar “have zooming revenues,” said the strategist. Online beauty portal Nykaa which was listed earlier this month not only has climbing revenues but profits as well, a rare thing in the startup world.

Also, all the other IPOs rose on their first day. Zomato paved the way for the other IPOs with a startling 80 per cent leap on the day it was listed. Zomato’s huge success triggered a rush to the market by other start-ups that had been waiting in the wings. Insurance aggregator Policybazaar climbed 17.35 per cent on its opening day. Nykaa shot up 96 per cent on its listing day, turning its founder ex-banker Falguni Nayar into India’s richest self-made woman overnight.

Foreign investors saved the day

But it was evident that the Paytm IPO, the biggest since Coal India’s flotation in 2010, was in trouble from the day it opened for subscription. It was undersubscribed by both domestic investors and domestic institutions who should be the backbone of any issue. Finally, it was rescued by foreign institutional investors.

While foreign heavyweight investment funds like Black Rock and the Canada pension plan subscribed heavily to India’s biggest-ever IPO, local retail investors and financial institutions largely kept away. Paytm’s issue ended up being subscribed just 1.89 times. Nykaa, by contrast, got 82 times more applications than there were shares on offer.

Says a market analyst: “They managed to scrape through the IPO on the back of foreign investors. All the other start-up IPOs were oversubscribed in every category.”

When demand was so weak for the Paytm issue -- it was subscribed just 1.89 times (Nykaa by contrast got 82 times more applications than there were shares on offer) -- analysts suspected it might mean that the company’s trading debut would not be stellar. But Paytm’s first day of trading went far worse than anyone had expected. The company’s share price tumbled 27 per cent on the first day. On its second day, the stock fell another 12.5 per cent.

Now, the Paytm issue may be having a chill effect on other fintech players. Mobikwik, another payments company that had planned to list in the very near future, announced Tuesday it will “launch at the right time”.

Whether the investor jitters will last and hurt prospects for other looming IPOs remains to be seen. India has been on an IPO tear with more than 50 companies raising a record $15 billion so far this year. SoftBank-backed Oyo wants to raise $1.1 billion via an IPO. Ride-sharing company Ola, which posted its first operating profit in the 2020-21 financial year, also wants to list to raise at least $1.5-2bn. Online education provider Byju may also seek to raise funds via an IPO along with logistics company Delhivery.

Sharma pep- talk

In a bid to repair shattered employee morale after Paytm’s shares plunged, Sharma compared the firm to Tesla. The electric vehicle-maker, he reminded employees at a four-hour town-hall meeting, had been the world’s most shorted stock for a few years before its market capitalisation soared to reach the $1.1 trillion level where it stands now.

Sharm’s pep-talk was a nice encouragement for employees. But many analysts say the day when Paytm’s shares take off could be a while coming. Piyush Nagda, who heads investment products at Prabhudas Lilladher, expects Paytm shares to remain subdued for the short-to-medium term as IPO investors will try to sell the stock when it rises and new investors will steer clear until the sentiment towards the company changes.

Macquarie remains bleak on Paytm, assigning the company a 12-month target of Rs 1,200 per share: "Paytm has been a cash-burning machine, spinning off several business lines with no visibility on achieving profitability,” Macquarie said in a report.

Some analysts, though, are upbeat about Paytm’s prospects. They point out that institutional investors like the Canada pension plan and BlackRock hold 87 per cent of the issue and are likely in for the long haul, giving Paytm time to get its act together.

Says one analyst: “A new segment of Internet-based companies is getting created in India. We don’t know what valuations will work: It’s all a work in progress and the learning curve is both steep and unforgiving.”