Analysis: India’s IPO boom has rapidly turned to bust
I am “just overwhelmed,” said Vijay Shekhar Sharma, while wiping tears from his eyes. He was addressing an audience at the listing ceremony of One97 Communications, the parent company of digital payments giant Paytm.
During November’s listing ceremony, Sharma called the company’s purpose of bringing millions of Indians into the mainstream economy “pious.”
Investors, however, appear to disagree — Paytm’s stock crashed 27% on its first day of trading.
Four months later, things have only gotten worse. The firm’s stock is now trading close to 560 rupees ($8), more than 70% below its offer price, according to data from Refinitiv.
It is not the only Indian internet company that has soured on the stock market this year. While Paytm has been a flop since day one, other Indian tech giants whose debuts were red-hot in comparison have also plunged in recent months.
Instead, it has turned into a big, fat reality check for tech companies, with retail investors questioning their huge valuations. The steep plunge in those stocks has also likely thwarted IPO plans for other Indian companies — at least for the foreseeable future.
“Last year, there was an IPO frenzy and people were willing to pay the aggressive valuations these companies demanded,” said Piyush Nagda, head of investment products at Mumbai-based brokerage Prabhudas Lilladher. “But those retail investors were looking for immediate listing day gains.”
“Other investors who got on the bus after the IPO may be repenting now,” he added.
Paytm’s flop
India’s tech IPO party — which started with Zomato last year — came to a screeching halt with Paytm’s debut.
While the stock has trended lower for most part since its listing, March has been particularly difficult for the payments company.
Paytm launched its Payments Bank in 2017 as a joint venture with Sharma. It can accept deposits and issue debit cards but cannot lend money to customers.
The RBI said it would allow Paytm’s Payments Bank to add new customers “after reviewing [the] report of the IT auditors.”
“We believe RBI’s direction will not materially impact Paytm’s overall business,” a company spokesperson said in a statement.
In a note last week, Macquarie analysts predicted a bleak future for the company.
The RBI ban and Paytm’s “Chinese ownership” make it “significantly” harder for the bank now to get a license from the regulators to upgrade and start lending, they wrote.
“Given this, and competition from other fintechs in the payments space, we remain skeptical about Paytm’s longer-term ability to generate free cash flow,” they added, slashing Paytm’s target price to Rs 450 ($6).
All this bad news for Paytm comes on top of its lack of clear path to profitability, which has perturbed analysts since its IPO launch. Paytm reported a loss of $104 million for the December quarter.
And it is not just Paytm that has failed to impress investors with latest earnings.
Zomato — which remains a loss-making company — had scored big with its IPO in July last year, but its stock has fizzled lately, declining over 40% alone since the start of this year.
“Venture capitalists have the stomach to digest these numbers,” said Nagda, while talking about lack of profits among Indian tech giants. “But retail investors react immediately once they see quarterly numbers.”
Zomato did not respond to a request for comment.
Mihir Vora, senior director and chief investment officer at Max Life Insurance called this moment a “reality check” for India’s cash-guzzling tech firms, which need to participate in more “regular investor communications.”
“The cash burn is too large,” he said. Markets want to know “where the next round of funding is coming from.”
What’s next?
Paytm’s nosedive, followed by the battering other tech stocks have received in India lately, may be forcing other companies to reconsider their IPO plans.
“It’s considering also halving its expected valuation from the $12 billion originally targeted,” Bloomberg added, citing unnamed sources.
In an email to CNN Business, OYO “strongly” denied the assertions made in the report. “OYO continues to receive investor interest as we await approval from the regulator,” it added, but declined to disclose any specific details.
Paytm’s smaller rival Mobikwik has said it would defer its IPO, originally planned for November last year, by a few months. The company told CNN Business last year it would “list at the right time,” without sharing any other details.
Despite the current turmoil, most global investors say that India remains attractive for them, provided companies coming to market are more realistic about their valuations.
“There is no emerging market that offers the growth opportunities that India does,” said Nuno Fernandes, portfolio manager of the emerging wealth strategy at GW&K Investment Management. But he also said that he found most valuations by Indian tech giants last year “completely unwarranted” and hopes other startups would be more cautious now.
“My recommendation to the management is that it is better to be modest and be successful in the IPO, rather than have it falter.”
