One97 Communications (Paytm) IPO- Should You Subscribe or Avoid? Paytm IPO Detailed Analysis

Paytm (an abbreviation for “pay through mobile”) is an Indian multinational technology company that specializes in digital payment systems, e-commerce, and finance, based in Noida. It offers online services as mobile recharges, utility, bill payments, travel, movies, and events bookings to name a few. Here is a 7 point analysis of Paytm IPO covering IPO details, company overview, Financials, Peer comparison, Company’s strengths, and Risks, and the Valuation aspect.

IPO Details:

• The IPO Window of Paytm is open between 8^th November 2021 to 10^th November 2021.
• The Issue Size of the IPO is Rs. 18,300 Cr. which consists of a Fresh Issue as well as an Offer for Sale.
• The IPO consists of an Offer for Sale (OFS) worth Rs. 10,000 Cr. The OFS consist of selling 17,569,941 Equity Shares. While the Fresh Issue is worth Rs. 8,300 Cr.
• The IPO is getting listed at both the stock exchange- Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
• The price band of the IPO is Rs. 2,080 to Rs. 2,150 per equity share.
• The Face Value is Rs. 1 per equity share.
• The Investor Quota of the IPO is as follows Qualified Institutional Buyers (QIB)- 75%, Non-Institutional Investors (NIIs)-15%, and Retail Investors- 10%.
• The IPO Lot consists of 6 shares in 1 lot and multiples thereof up to 15 Lots.
• The objective of the Issue :
• Rs. 4,300 Cr. will be utilized for growing and strengthening the Paytm ecosystem, including through acquisitions, retention of consumers & merchants, and providing them with greater access to technology and financial services
• Rs. 2,300 Cr. will be invested in new business initiatives, acquisitions, and strategic partnerships.
• The rest of the amount will be utilized for General Corporate Purposes.
• The Shareholding pattern of One97 Communications Limited are:
• The Shareholding of Public-Founder will go down from 9.77% to 8.90% post-issue.
• The Shareholding of Public-Investors will also go down from 60.20% to 49.79% post-IPO.
• The shareholding of Public-Others will also go down from 1.30% to 1.16% post-Issue.
• Oppositely, the Shareholding of Paytm will go up from 28.74% to 40.15% post-Issue.
• Through the offer for sale, the Founder Vijay Shekhar Sharma is selling shares of  402 Crores.

About Paytm:

• Paytm is India’s leading digital ecosystem for consumers and merchants.
• Paytm offers payment services, commerce, cloud services, and financial services.
• As of June 2021, Paytm is having around 33 Cr. customers and around 2 Cr. Merchants.
• Paytm is a 2-sided (consumer and merchant) ecosystem that enables e-commerce, and provides access to financial services through our financial institution partners, by leveraging technology to improve the lives of the consumers and help the merchants grow their businesses
• The company launched Paytm in 2009, intending to enable customers to go cashless and make payments through their mobile phones. They have built their largest payment platform in India based on the Number of Consumers, no of transactions, and the number of merchants. The Paytm brand is India’s most valuable brand. It has a brand value of 6.3 Billion Dollars.
• India- a country of crores of young and aspiring consumers who are yet to have access to various financial products. . There are crores of small businesses in India that would benefit from having increased access to affordable software, technology, and financial services. This indicates a huge runway for growth available to Paytm.
• Total Digital Payments to reach 40-50 Trillion US Dollars by FY26.
• Total 1.6 Trillion USD of Household Savings by 2026.
• USD 228 Billion of Total Insurance Premium by 2026

i) Tailwinds of Paytm as a business:

• Strong GDP growth of India– India to grow at a 9% CAGR rate over next 5 Years.
• Increasing Pace of Digitization– Digital Ecommerce to grow 3.3 times in next 5 years.
• Digital Payments evolving rapidly– India’s Digital Payments scenario helps the users to grow from 25 crores to 75 crores
• Under-Penetration of Financial Services– India’s Financial markets is significantly under-penetrated.

ii) Business Verticals of Paytm:

• Paytm Wallet– Money Stored in Paytm wallet earns interest
• Recharge Business– Commission charged by Paytm to its customers for using their platform for recharge.
• Digital Gold– Advantage of Gold prices can be taken by buying Gold digitally.
• Ecommerce Vertical– You can buy various products on the Paytm app, It charges certain fees for it.

iii) Paytm Payments Instruments and Merchant Acquiring:

iv) Key Parameters of Paytm:

a) Key Activities- Paytm, being a technology platform, risks dangers such as security and fraud which is why it has to take effective measures in protecting its consumer’s money by enhancing its security.

b) Key Resources- The RBI (Reserve Bank of India) gives license to Paytm’s main Business. The main resources are the design/software culture that makes it easier for lower-income Indians to use.

c) Key Partners- Paytm partners with the banks that provide it with payment getaways into the banking system. It also merges itself with various organizations that have its payment services for its customer base.

d) Cost Structure- The main cost is the acquisition cost of its customer. The other most important cost is the Maintenance of the platform.

e) Revenue Stream- The majority portion of Revenue comes from the commission it charges to its customers for using its platform to make payments.

v) Glimpse of Paytm Business Models:

3) Financial Performance:

• The Revenue from Operations of the company has grown at a CAGR rate of 42% between FY17 to FY21 from Rs. 780 Cr. In FY17, to Rs. 3,309 Cr. in FY18, and then Rs. 3,186 Cr. in FY21. The Revenue from Operations of the company stood at Rs. 948 Cr. for Q1FY22.
• The Earnings before Interest, Taxes, and Depreciation & Amortisation (EBITDA) of the company has remained negative over the year. Specifically, the EBITDA of the company for FY21 is negative Rs. 1,382 Cr.
• Paytm has not turned profitable yet and has recorded a loss over the years. Loss for FY17, FY19, FY19, FY20, and FY21 stood as Rs. 620 Cr., Rs. 1,583 Cr., Rs. 4,211 Cr., Rs. 2,941 Cr., and Rs. 1,701 Cr. respectively.
• Further, the company also has negative cash flow from operations, but the company recorded positive cash flow in Q1FY22.

i) Key Ratios:

4) Peer Comparison:

• The key difference between Paytm and Mobikwik is that Mobikwik has very few optionalities in terms of service offerings when compared to Paytm. And also Mobikwik has very limited reach as compared to Paytm, meaning that places, where you can use Mobikwik, to make payments, are very fewer.
• Paytm derives 66% of its revenue from Payment and Financial Services, while 22% from Commercial and Cloud Services, and 12% from Other businesses.

5) Key Strengths:

• Huge ecosystem to address large market opportunities.
• Trusted Brand, Scale & Reach
• High brand recall and customer stickiness
• Huge network effects create sustainability
• Strong Insights of Indian Consumers and Merchants
• Experienced management team

6) Key Risks:

• Huge dependency on Merchant Base
• Inability to Retain and Attract Customers
• The Private Equity investors are selling 75% of their stake
• High competition from Private Banks & Other Major Players
• High Litigations against Company
• High fixed costs per center due to an integrated model

7) Valuations:

The Company is reporting continuous negative EPS for the last 3 years on account of expansion plans and various customer acquisition costs. Since the EPS is negative, the traditional valuation method of PE will not be appropriate to consider here.

Conclusion:

Currently, the Grey Market Premium of Paytm IPO is hovering around 5%-6% premium over the price band i.e., 120 Rs. Per Share. The Company has come up with the IPO with a higher valuation, but one should keep in mind that these are disruptors, and hence traditional thought processes should not be applied here. Investors of aggressive nature can keep this stock on the radar, post listing of IPO. Do follow due diligence before making an investment decision or do consult a financial advisor.