Paytm IPO: All you need to know

India’s very own digital payment system Paytm, formally known as One97 Communications will launch its initial public offering for subscription starting November 8, 2021, in what will be India’s biggest ever D-St debut so far since Coal India.

The world’s largest asset manager BlackRock, Canada Pension Plan Investment Board & sovereign wealth funds of Singapore & Abu Dhabi have emerged as anchor investors for the $2.46 billion (Rs 183 billion) IPO. The company is selling nearly half of its IPO to anchor investors.

Large investors including Jack Ma’s Ant Group, Masayoshi Son’s SoftBank Corp are selling their shares. Paytm is expected to list in mid-November. Here are some of the key details investors may keep in mind:

1. The issue opens on November 8, 2021 and closes on November 10, 2021
2. The issue size is Rs 18,300 crore. Fresh issue is of Rs 8,300 crore while offer for sale stands at Rs 10,000 crore
3. The price band for the IPO has been fixed at Rs 2,080 to Rs 2,150 per share
4. With this issue raise, the company aims to grow and strengthen the Paytm ecosystem, including through the acquisition and retention of consumers and merchants and providing them with greater access to technology and financial services (Rs. 4,300 cr.). The company also aims to invest in new business initiatives, acquisitions, and strategic partnerships (Rs 2,000 cr) among other general corporate purposes.
5. The company has fixed the minimum bid lot size at 6 equity shares and in multiples of 6 shares thereafter. Retail investors can invest a minimum of Rs 12,900 for a single lot and their maximum investment would be Rs 1,93,500 for 15 lots.

Paytm is a leader in India’s digital ecosystem for consumers and merchants, the largest payments platform. Its total merchant base has grown from 11.2 million as of March 31, 2019, to 21.1 million as of March 31, 2021.

Its GMV has increased from Rs 2,292 billion in FY19 to Rs 4,033 billion in FY21. It offers consumers & merchants, technology-led, easy-to-use digital products and services as well as easy and inclusive access to financial services As of June 30, 2021, it offers payment services, commerce & cloud services, and financial services to 33.7 crore consumers & over 2.2 crore merchants, as per its DRHP. Coming to leadership, Vijay Shekhar Sharma is the Managing Director and Chief Executive Officer of the company, and the Chairman of the board. Douglas Feagin is the Non-Executive Director (nominee of Antfin (Netherlands) Holding B.V.).

Here is a look at the sources of revenue for the company:

1. Payment Services: Paytm charges transaction charges also known as merchant fees which is based on the percentage of Gross Merchant Value (GMV). It also earns via consumer, convenience & subscription fees
2. Financial Services: It charges a fee depending on the services the customer avails. It charges a fee on marketing and distribution of credit cards, commission on the insurance policies, fee from the lending business
3. Commerce Services: It charges convenience fees from consumers & earns transaction fees from merchants on tickets for entertainment, travel, and other such services
4. Cloud Services: Paytm charges a subscription fee which can be either fixed or variable based on volume on the platform

Let us take a look at the company’s financials & some key ratios (Source: DRHP & ICICI Direct research)

ICICI Direct has opined that the company competes in markets characterised by vigorous competition, changing technology, changing merchant and consumer needs, evolving industry standards, and frequent introductions of new products and services. There are low barriers to entry within the industry and the cost of switching between offerings is low.

The company derived a majority of its revenue from transaction fees that it collects from merchants for their payment services. For example, in FY19, FY20, FY21, and in Q1FY22, revenue from payment and financial services accounted for 52.5%, 58.1%, 75.3%, 78.0% and 77.4% of its revenue from 46 operations, respectively.

The brokerage also noted that Paytm had negative cash flows from operating activities for FY19, FY20 and FY21.

KRChoksey Research notes that Paytm comes under the purview of RBI, SEBI & IRDA. Any unfavorable move by either of the three can act as a barrier to revenue growth and can materially impact the valuation, it says.

Noted valuation guru Aswath Damodaran wrote in his blog post, “Even if you strongly favour the company and find it undervalued, it would be hubris to concentrate your portfolio around this stock. In other words, this is the type of stock that you would put 5 per cent, or perhaps 10 per cent, of your portfolio in, not 25 per cent or 40 per cent.”

In its research report as of November 3, KRChoksey has recommended to ‘subscribe’ the IPO while ICICI Direct has assigned an ‘unrated’ rating to it.