Paytm: Jack Of All Trades, Master Of None? Analysts believe that Paytm IPO's poor performance was a result of the inflated valuation and some fundamental flaws

After the recent stellar debut of Zomato, Policybazaar, Nykaa and Freshworks at the stock markets, Paytm's lackluster performance has become the talk of the startup town, albeit in a negative way. The shares of One97 Communications, the parent company of mobile payments and financial services app Paytm, fell over 27 per cent from the IPO issue price of INR 2,150 on day one and saw a further 13 per cent decline on day 2.

While the company saw a small recovery on Tuesday, it is still far from compensating for the losses of the first two days. Analysts believe that Paytm's poor performance was a result of the valuation offered by the company. "The inflated valuation, which was driven by an aspiration to be the largest IPO in India, as well as a large float of $2.5 billion, out of which more than 50 per cent was "offer for sale' by existing investors and promoters, was one of the key reasons for the unfavorable investor sentiment we saw towards the IPO," said Pearl Agarwal, founder and managing director, Eximius Ventures.

Further, the high valuation was coupled with a complex business model which stopped institutional investors and high net worth individuals (HNIs) from subscribing to the IPO. While Nykaa was oversubscribed by nearly 82 times, Paytm was oversubscribed by only 1.89 times.

Paytm's USP, which is being a strong contender to create a super app, turned out to be a rather weak point in its IPO debut. The company was launched in 2009 as a digital payment platform to enable cashless payments to consumers. Today, it has created an ecosystem that integrates payments, credit, insurance, merchants, wealth management, e-commerce services, among others, with a user base of more than 333 million consumers and nearly 21 million merchants.

However, despite this, Paytm is still not a market leader in any particular segment. "Paytm has a diversified business model, operating in multiple markets but not being a significant market leader, this fact coupled with the high valuation and burn was disliked by investors," said Ankur Bansal, co-founder and director, BlackSoil.

Also, none of Paytm's businesses is profitable yet and there is no clarity on when and how Paytm will start becoming profitable. According to Macquarie Research's report, Paytm has been a cash-burning machine, spinning off several business lines with no visibility on achieving profitability. "Paytm has drawn in equity capital of INR 190 billion since its inception, of which only 70 per cent (INR 132 billion) has gone towards funding losses. Paytm has a problematic business model. It generates very low revenue for every dollar invested or spent towards marketing. This is especially problematic for a low-margin consumer-facing business where competition across each vertical is only increasing," it said.

"The issue of profitability needs to be addressed. So far, the company has burnt cash to build topline, but has not yet demonstrated how they will deliver a positive bottom line," said Manoj Kumar, co-founder, Val-More Action Advisory. Also, though the company enjoys a large share in overall payments made by individuals to merchants, it is way behind PhonePe and Google Pay in terms of grabbing the UPI market.

Furthermore, the fintech space is strongly controlled by the government and there are many regulatory risks that may derail the company's plans. In fact, the Macquire report has said that the company's Chinese link may affect its banking license prospects. "In our view, Paytm is not a practical contender for a universal/small finance bank license. The main reason in our view is that Chinese-controlled firms, Alibaba and Ant, together still own close to 31 per cent stake in One97," it said.

The increasing risk of inflation and rising interest rates have led central banks to reconsider their expansive monetary policies. "The recent bull market and IPO frenzy were driven by excess liquidity in the system due to expansive monetary policies by several central banks across the world. But as the central banks are becoming cautious and reversing their stance on monetary policies, public markets too are being sluggish, as is visible since the last few days," said Agarwal.

It is no small feat that Paytm has acquired a user base of 333 million and 21 million merchants, said Kumar, but at the same time, the company has not been able to deliver a positive bottom line over 12 years of their existence is something to watch out for.