Paytm episode makes startups wary to go IPO way

The lukewarm response to Paytm’s IPO and the subsequent dip in its shares for two consecutive days, not to mention severe losses faced by retail investors who bought its stocks, have discouraged tech companies ready to go public, from taking the plunge yet.

According to Edelweiss Financial Services Limited, key IPO prospects “on the periphery” who were expecting to benefit from the “flood of transactions” may now revise the timing and pricing of their issues.

The Economic Times also reported that payment services from MobiKwik may delay announcing its IPO by a few months due to a 30-40 per cent fall in its valuation and feeble demand from investors.

The fall in Paytm shares has brought the S&P and BSE Sensex to the brink of losing five consecutive sessions, the longest since March.

On Thursday, hours after Paytm listed its IPO, its shares crashed around 27 per cent and later to 10 per cent in early morning deals. On Monday, its shares opened with a downside gap of ₹51.8 per shares, only to lose 17 per cent from its listing date close of ₹1560.80 per shares on NSE. On Monday, the Paytm share price stood at ₹1286.60 on the NSE, 40 per cent less from its upper price band of ₹2,150 per equity share.

Also read: ‘Cash burning machine’: Key reasons why Paytm crashed on market debut

Even though the shares recovered by 6.5 per cent on Tuesday, it wasn’t enough to make up for the losses.

Bloomberg said retail investors who bought shares in Paytm’s parent One97 Communications Ltd. saw a 30 per cent drop in their value since the company’s IPO listing on Thursday. More losses may be on the way if the company’s stocks drop from its Monday closing price of ₹1,359.6 to ₹1,200 predicted by Macquarie Group Ltd.

“The event in a way will nudge people to be cautious and not take the market for granted by blindly placing bets,” Gopal Agarwal, managing director and co-head of investment banking at Edelweiss Financial Services told Bloomberg.

“It is important that a company’s story and prospects are well understood by investors,” he added.

The slashing of interest rates to a record low of 4 per cent by the Reserve Bank of India during the COVID-19 pandemic was a shot in the arm for India’s equity market, encouraging multiple technology startups to seek public listing. This includes Oyo Hotels and Homes and Delhivery Pvt. The IPOs have helped the start-ups to raise around $15 billion this year.

However, the Paytm IPO episode, has not only made start-ups and investors stop in their tracks, but also raised questions on the valuation of some of the IPO, which are still loss-making companies.

“This pandemic led to huge technology adoption in the country that got priced into the valuations of many technology companies,” Ashutosh Sharma, vice president and research director at Forrester Research Inc. told Bloomberg.

“Is this the beginning of a downward? I don’t know. But going forward, investors will look cautiously on the risks and business future of tech companies,” he said.

Expert says, whether it is Paytm or Policybazaar, whose shares have also dipped by 18 per cent in two sessions, both loss-making companies, trends show that firms which promise profit are the ones that excel.

Atul Suri, CEO of Marathon trends, who also runs a PMS funds recently told his clients that the Paytm debacle and the resultant market crash is proof that only companies delivering profit are set to rise during the consolidation phase.

“The singular point that the market recognized in that consolidation phase is that stocks that have earnings continued to move up and stocks that were just story-telling and fairy tales declined. In a euphoric phase, everything moves up but when the market takes a pause, people start bifurcating actual earnings and story-telling,” Economic Times quoted him as saying.

Yashish Dahiya, co-founder and chairman of PB Fintech in a recent statement said it is too premature for such loss-making companies to declare their valuation.

“You are valuing them for what they can become in five to 10 years. Let’s not be stupid and force these companies to try and declare profits early. That will be value-destroying for shareholders in the long term…without a shadow of doubt,” he said.

While Paytm in the IPO prospectus had mentioned that it may not make any profit in the near future, what made matters worse was the fact that the company is still losing money by offering cashbacks to get more users. There is also no surety if these users will generate revenue.