How many e-commerce firms does it take to fit a light bulb? None, because the bulb is redundant and so are the traditional metrics on which companies are valued in the equity market when it comes to these companies.
Fintech firm One97 Communications Pvt. Ltd, which owns Paytm, will soon find out if it can replicate Zomato’s dream run with its initial public offering (IPO). The food delivery firm not only got a lip-smacking valuation, but also got bids worth over 40 times the amount for the book-built part of its IPO.
Paytm is offering to sell fresh shares worth ₹8,300 crore ($1.11 billion) to the public as part of its ₹16,600-crore IPO. Both Zomato and Paytm are loss-making startups and both narrowed their losses in FY21. But unlike Zomato, Paytm cannot call itself a leader in the digital payments space.
The main reason is that the market is fragmented with several digital solution players vying for attention. At best, Paytm is the largest digital wallet company, which also has grown its other payment services.
To be sure, Paytm’s biggest strength is its merchant base, which is 21 million, according to its draft red herring prospectus. This dwarfs most of its peer wallet companies and even other digital players such as Google Pay.
That said, Flipkart’s PhonePe and Alphabet Inc.’s Google Pay dominate the Unified Payments Interface (UPI) market. UPI has been eating into the share of other payment services. In FY21, UPI-backed transactions totalled ₹40 trillion, while wallets clocked a mere ₹1.5 trillion.
However, to Paytm’s credit, it has morphed into a full-stack payment services provider, which includes UPI as well. So much so, that its IPO prospectus says it is a ‘super app’, which customers can use to access a wide selection of daily life use cases.
The mere mention of a super app normally sends investors into a tizzy, though it must be noted that this has helped little on revenues. Paytm’s revenues were flat in FY20 and fell 15% in FY21. The drop in revenues also coincided with a sharp reduction in marketing and promotional expenses, which highlights the challenges internet firms face while trying to balance growth and profitability.
While the company didn’t offer details of its operations across segments, it said that it earns higher revenue through fees from select payment instruments. Here, UPI and RuPay cards do not generate fee income for the company. The rising share of UPI in digital payment transactions will keep Paytm among the leaders, but it does not help its core product—wallets.
Moreover, without segmental details, investors have little clarity on how the company will keep up its revenue growth in the coming years. “Paytm has to take on big companies like Google and Flipkart in the payments market, not to leave out smaller players giving intense competition. It is a tough battle and the revenue doesn’t inspire,” said an analyst requesting anonymity.
That brings us to the question whether Paytm can pull off a Zomato. Global investment fund T. Rowe Price had put Paytm’s valuation at roughly $15.45 billion in March, in the list of its portfolio holdings. But media reports suggest the valuation could zoom to $25 billion for the IPO.
While Zomato did command huge premium in its IPO compared to its earlier funding round, Paytm, being in a more competitive space, may not be as lucky. But just as with meme stocks, anything seems to be possible in the current frenzy for internet IPOs.