I’m “just overwhelmed,” Vijay Shekhar Sharma said, wiping tears from his eyes. He addressed an audience at the listing ceremony of One97 Communications, parent company of digital payments giant Paytm.
Sharma founded the company almost two decades ago. Over the past five years, Paytm has become the darling of India’s booming fintech sector and is backed by well-known global companies investors like soft bank (SFTBF) and Warren Buffett. In 2021, One97 raised $2.5 billion in the country’s largest initial public offering (IPO) to date.
During the listing ceremony in November, Sharma called the company’s purpose of bringing millions of Indians into the mainstream economy “pious”.
However, investors seem to have a different opinion — Paytm’s stock plunged 27% in the first day of trading.
It only happened four months later worse. According to data from Refinitiv, the company’s shares are now trading at nearly 560 rupees ($8), more than 70% below its asking price.
It’s not the only Indian internet company to have soured in the stock market this year. While Paytm was a flop from day one, other Indian tech giants whose debuts have been red hot by comparison have also plummeted in recent months.
Food delivery company Zomato — the first Indian unicorn to go public — is down over 36% since its first day of trading last July. E-commerce site Nykaa, whose founder turned its founder into India’s richest self-made billionaire late last year, is also trading 36% off the highs it saw on the day it went public. Online insurance marketplace Policybazaar has fallen more than 40% since it went public in November. As tech stocks suffer globally, the slump in India is particularly painful for investors and companies who were hoping for a coming-of-age period for one of Asia’s fastest-growing startup ecosystems.
Instead, it has become a major reality check for tech companies, with retail investors questioning their enormous valuations. The precipitous fall in these stocks is also likely to have thwarted IPO plans for other Indians company – at least for the foreseeable future.
“Last year there was an IPO frenzy and people were willing to pay the aggressive valuations these companies were asking,” said Piyush Nagda, head of investment products at Prabhudas Lilladher in Mumbai. “But these retail investors were looking for instant gains.”
“Other investors who got on the bus after the IPO may now regret it,” he added.
Paytm the flop
India’s tech IPO party – which started last year with Zomato – came to an abrupt end with the debut of Paytm.
While the stock has trended lower for most of its listing, March was a particularly difficult one for the payments company.
Earlier this month, the Central Bank of India suspended the company’s banking arm of new customers registration. The Reserve Bank of India (RBI) also directed the bank to “appoint an IT audit firm to conduct a comprehensive systems audit of its IT systems.”
Paytm started its Payments Bank in 2017 as a joint venture Sharma. It can accept deposits and issue debit cards, but cannot lend money to customers.
RBI said it would allow Paytms Payments Bank to add new customers “after verification”. [the] IT auditor’s report.”
Paytm stock continued to fall according to RBI’s statement, although the company tried to reassure existing customers by telling them that they can continue using this bank’s services “without interruption”.
“We believe the direction of RBI will not materially impact Paytm’s overall business,” a company spokesman said in a statement.
But the damage was done. To make matters worse, China’s Ant Group and Alibaba (BABA) According to recent filings, they own more than 30% of Paytm, and that investment has become problematic since border disputes soured India-China ties in 2020, spearheaded by New Delhi Ban dozens of Chinese apps.
In a note last week, Macquarie analysts predicted a bleak future for the company.
the The RBI ban and Paytm’s “Chinese ownership” now make it “much more difficult” for the bank to get a license from regulators to upgrade and start lending, they wrote.
“Given this and the competition from other fintechs in the payments space, we remain skeptical about Paytm’s longer-term ability to generate free cash flow,” they added, lowering Paytm’s price target to 450 rupees ($6).
All of this bad news for Paytm comes on top of the lack of a clear path to profitability that has worried analysts since the initial public offering. Paytm reported a loss of $104 million for the December quarter.
And it’s not just Paytm that has failed to impress investors with recent gains.
Zomato — which remains a loss-making company — had great success with its IPO last July, but its stock has fizzled recently, falling over 40% since the beginning of this year alone.
The company said Tuesday it would launch a 10-minute grocery delivery service, but the stock remained near its all-time lows even after the announcement.
“Venture capitalists have the guts to digest these numbers,” Nagda said while discussing the lack of profits at Indian tech giants. “But private investors react immediately when they see the quarterly figures.”
Zomato has also disappointed investors with its relative lack of transparency, as it only conducts one earnings call per year. Most public companies make four calls a year, usually after each quarterly earnings report.
Zomato did not respond to a request for comment.
Mihir Vora, senior director and chief investment officer at Max Life Insurance, called the moment a “reality check” for India’s money-hungry tech companies to participate in “more regular investor communications.”
“The cash burn is too great,” he said. The markets want to know “where the next round of financing will come from”.
What’s next?
Paytm’s nosedive, followed by the blows other tech stocks have taken in India recently, could force other companies to reconsider their IPO plans.
In October last year, Softbank-backed hotel chain OYO confirmed plans to raise nearly $1 billion through its debut. But according to a recent Bloomberg report, the company is now considering “cutting its fundraising goal by half or even putting the debut on hold.”
“It is also considering halving its expected valuation from its original $12 billion target,” Bloomberg added, citing unnamed sources.
In an email to CNN Business, OYO “strongly” denied the claims made in the report. “OYO continues to receive interest from investors while we await regulatory approval,” it added, but declined to reveal specific details.
Paytm’s smaller competitor Mobikwik has announced that it will postpone its initial public offering, originally scheduled for November last year, by a few months. The company told CNN Business last year that it would list “when the time is right” without sharing further details.
Despite the current turmoil, most global investors say India remains attractive to them provided companies entering the market are more realistic about their valuations.
“There is no emerging market that offers the growth opportunities that India offers,” said Nuno Fernandes, portfolio manager of emerging wealth strategy at GW&K Investment Management. But he also said he found most of the valuations of Indian tech giants over the past year “completely unfair” and hopes other startups would now be more cautious.
“My recommendation to management is: It is better to be humble and successful in the IPO than to falter.”
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