Home Investing Why the plunge in stock value fails to give Paytm an edge

Why the plunge in stock value fails to give Paytm an edge

The Paytm valuation was too lofty for our liking and we dissuaded investors from it. The profuse drop in the share price vindicates this stance.

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Why the plunge in stock value fails to give Paytm an edge

Paytm IPO created a record, but its magic didn’t last. Its stocks continued to fall after a lacklustre debut on bourses. The company’s stock has tumbled by more than 38% from its issue price, eroding a market value of about Rs 50,000 crore in the first few moments without trading. Even the release of healthy business updates for October couldn’t stop the company from falling as their stock continues to tumble.

The Paytm valuation was too lofty for our liking and we dissuaded investors from it. The profuse drop in the share price vindicates this stance.

The steep plummet in the price of Paytm raised many questions, mainly surrounding whether or not this presents an opportunity for potential investors? However, with just just one day at the public market, it is too early to tell.

– Why a steep fall in stock price does not make it less appealing

While the valuation has moderated to 8.5 times (from 13.4) of revenue estimated for FY23 with the company, there is still concern with Paytm’s business model and their lack of current profitability. A number of other loss-making new age digital companies with comparable valuations, such as Zomato and Nykaa have seen a similar rise in their market capitalization post-listing. The main reason for this underlying reluctance to invest in Paytm is the uncertain trajectory

The steep fall in stock price for Paytm does not make it attractive. It seems that the mobile wallet business is steadily dying as customers increasingly adopt the traditional UPI. The way transactions have increased to digital wallets has led people to move away from them, and Paytm lost a lot of customers recently following KYC norms.

– Why the fall in stock price is beneficial for the company

In comparison to those in the UPI app ecosystem, Paytm is a marginal player accounting for only 9% by value and 14% by volume. This market is hyper-competitive with Amazon Pay and WhatsApp Pay as competitors as well as Walmart-backed PhonePe and Google Pay who have raced on ahead claiming majority share through their long-established careers. However, the bread on her butter for Paytm still remains the payments business that accounts for a giant share of the revenue.

Conversely, the reason for the recent decline in the price of Paytm’s stocks does not seem to make it an appealing investment- one pays is apparent given its leading positions in the digital wallet sector. However, even if it succeeds in these segments where it is still developing traction, there’s not much chance that it will increase significantly.

When considering an investment in Paytm, the fall in their stock price may be overlooked due to most of their revenue coming from mobile wallet features. Though they have stepped into other business ventures, the most substantial source of revenue is still related to mobile wallet transactions.

The profitability reduction of PayTm does not make it an attractive investment.

The company needs to worry about its competitors that it has competition within the financial industry to cross-offer commerce and financial services. This plan needs a huge investment and execution, which might not be possible. They need a better strategy if they want to stay in the market

With only the ability to offer credit through partnering with other financial institutions, Paytm has not been able to bring in much revenue for financial services. When Paytm acquired their payment bank license, they were not granted the ability to extend credit, which forced margins to stay low – improving them will mean scaling up the lending business.

Paytm could apply for a small bank (SFB) licence after they complete their five-year anniversary payment. However, it is unclear how the RBI will view that since the lead investor is a Chinese entity. Remember eight months ago when PBOC acquired an entire 1 per cent of HDFC? Congress claimed that was compromising national security and had to be reviewed.

After the Indian push for “economic nationalism,” we do not know how the RBI would respond to a license application from a Chinese-owned company. Even though Paytm wants to pivot and move into other financial services like wealth management and insurance, analysts remain pessimistic.

Paytm had to start from scratch and relearn the ropes of fintech solely on pumping in fresh funds. Paytm has around Rs 18,600 crore cash till FY21 leaving it with little flexibility to any drastic move.

– Should investors invest in Paytm?

According to Aswath Damodaran, valuation guru and professor of finance at the Stern School of Business of New York University, the right price for investing in Paytm is below Rs 150,000 crore. The company’s current market cap is Rs 88,000 crore, much below his fair value for the company.

They note that the steep fall in stock prices cannot be good for Paytm. Amit Bhalla assumes that the take rate will gradually rise to 1% by 2026 from 0.6% now and to 2% after they start focusing on revenues rather than users.

Thanks to its high take rate, global players will always remain competitive with Paytm. However, it has no advantage in terms of uniqueness or leading position in any business segment except for mobile wallet. When the take rate doubles from the current level, we are concerned it will have little to offer to become a true player on equal footing.

Considering recent business uncertainty and the lack of profitability insight, I would avoid investing in Paytm long-term.


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