Paytm’s wobbly debut may hit upcoming tech IPOs in India

Paytm’s initial public offering may, in fact, soften the private markets and tech valuations overall in what has been
a record year for dealmaking in the digital economy, they said.

As many as 37 unicorns—companies with a private market valuation of $1 billion or more— have been added this year. Several companies
have raised back-to-back funding rounds this year with valuations doubling or tripling within a few months, ET reported previously.

“For a startup listing, investors would like to see some clear dominance in target markets with reasonable net margins or unit economics,” said Anurag Singh, managing partner at hedge fund Ansid Capital. “Basically, the startup market will have to stop ‘creating unicorns’ by bidding itself up. Value creation happiness on the ground with the business model…but for some startups, valuation for listing is totally divorced from reality.”

Paytm’s listing followed a string of stellar IPOs by unicorns such as
Zomato,
Nykaa and
Policybazaar, whose market caps spiked after they hit the markets.

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In the case of Paytm, the IPO size—nearly $2.5 billion—
was the largest ever in India and the fourth largest for a fintech globally. Analysts said given its lack of a clear path to profitability, Paytm’s $20 billion valuation became hard to justify in the public markets.

“This pricing with no regard to profitability is not something that the markets have an appetite for. It hasn’t worked well even in the US where new-age listings are struggling to keep their listing valuations,” Singh said.

Several other startups, including logistics and supply chain provider
Delhivery and online pharmacy platform
Pharmeasy, have already filed their IPO prospectuses and are expected to make their debuts next year.

Noida-based Paytm was valued at $16 billion
when it raised $1 billion in 2019 and it sought a valuation of $20 billion at the time of its IPO.

“If the largest fintech company in India goes public and hits the lower circuit on the first day, it is a negative signal…It will impact the private valuations even if it is not immediate,” said an investor, whose portfolio includes a startup that’s planning an IPO.

“People who are writing these cheques have given these companies hope of capital but if they don’t perform and execute, they will end up the Paytm way…,” this investor said. “People are going to be careful, the other private companies which are becoming unicorns have to basically become sustainable when they go to the market, or at least become near sustainable. Unlimited cash guzzling will not happen.”

Other investors said private and public markets may not generalise a one-off event, but bankers may need to learn something: price IPOs reasonably, leave value for public market investors, and have a strong and easy-to-explain business model.

“An IPO is a great milestone. What a company should not forget is that fundamentals like revenue, profitability, business models, and fair pricing are core for any business. Public markets should give some time and observe new-age tech companies over the next two years,” said Ashish Dave, CEO at Mirae Asset Venture Investments (India), which has backed startups such as Zomato, Ola, and BigBasket.

“The next set of startups looking to tap the public market may get cautious and wait for the euphoria to return to the market,” said Aditya Kondawar, chief operating officer of JST Investments, a financial services platform.

“You want a really conducive environment so that an IPO going company can maximise their subscriptions. Now that this has happened, we may see a bit of a break in IPOs,” he said. “What happened today is a big event. IPO-going companies will become cautious. They would want things to settle down and then they would take a call.”