How did so many people dupe themselves into thinking that Paytm was a sure bet? Not paying attention to some basic rules of how to value a fintech company, or any company, did them in.
Paytm, an Indian fintech company that once burnished its name by offering Indians a digital wallet alternative to pay for things in a mostly-cash economy, rapidly became a household brand. Backed by blue-chip investors and promoted relentlessly by its frequently bombastic CEO, Paytm was expected to clean house on its listing. In fact, it got pummelled. And it was no ordinary shellacking — Paytm became the worst performing IPO in Indian history. Its stock price debuted at Rs 2,150, fell 30% by the end of the day and since then has plummeted to a catastrophic Rs 522, around 75% below its opening. Almost overnight, the IPO-as-a-sure-bet in India is now considered to be an IPO-of-imminent-disaster. A slew of questions are being asked about what transpired and how to prevent something similar from occurring with many of the other supposedly sure-fire winners who expected to cash out this year opting to delay their debuts. Here are some insights that could help everyone — from entrepreneurs to investors to regulators — to think beyond the hype. “Nobody knows anything,” eminent screenwriter William Goldman once said to fellow writers about the Hollywood film industry in order to convince them to stand by their original ideas while battling business heads who knew nothing about story dynamics. His quote certainly seems to characterise the Paytm IPO that listed $2.5 billion worth of stock at around Rs 2,150 for a $20 billion valuation. The majority of analysts covering the event wrote about the stock in a largely positive manner, waxing in banal terms over the stratospheric growth in digital payments and how the company would surf that wave. It all turned out to be largely lazy speculation. The only people willing to put in some elbow grease in analyzing the company and brave enough to put it into words were two analysts with investment firm Macquarie — they were to do so in devastating style. The report, titled Too Many Fingers in Too Many Pies, dropped just a few hours before the opening bell for the listing, Suresh Ganapathy and Param Subramanian did what no one else was willing to do: Point out that the emperor had no clothes. Now, you don’t have to be a finance whiz to ask some basic existential questions about the company before slapping your money down. Does the company make money? If so, what are its margins like? Does it have a clear competitive advantage? Therefore, is it a market leader? Are its revenues growing, and at what rate? How are its competitors performing? Is it focused on one industry? If not, is diversification going well? How could it be disrupted, if at all? And so on. The Macquarie analysts took a scalpel to Paytm with some of these questions in mind and lo-and-behold, came up with some stinging answers. It turns out that Paytm’s digital wallet business was clearly on its way out thanks to the Indian UPI payments system stack, developed by the government, that emerged a few years ago. It has a huge number of banks that now allow individuals to send money to each other and to institutions. Plus, the system was free. So, not only were digital wallets disrupted but the alternative was loss-making. It was a double knockout for Paytm. Even if you thought at some point the government would offer UPI players some respite by authorising fees on customers, Google Pay and Walmart-Flipkart’s Phone Pe had already gobbled up the majority of the market.
