Paytm to Zomato, India’s tech IPO boom quickly turned into a bust

I am “just overwhelmed,” said Vijay Shekhar Sharma, wiping tears from his eyes. He spoke to an audience at the listing ceremony for One97 Communications, the parent company of digital payments giant Paytm.

Sharma founded the company nearly 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 investors such as SoftBank (SFTBF) and Warren Buffett. In 2021, One97 raised $2.5 billion in the largest initial public offering (IPO) in the country’s history.

During the November listing ceremony, Sharma called the company’s goal of bringing millions of Indians into the mainstream economy “godly”.

Investors, however, do not seem to agree – Paytm’s shares fell 27% on the first day of trading.

Four months later, things just started worse. The company’s shares are currently trading at around Rs 560 ($8), more than 70% below the offer price, according to Refinitiv data.

It’s not the only Indian internet company whose shares have soured on the stock market this year. While Paytm has been a fiasco since day one, other Indian tech giants whose debuts have been hot by comparison have also fallen in recent months.

Food delivery company Zomato – the first Indian unicorn to go public – is down more than 36% from its first day of trading in July last year.
E-commerce site Nykaa, whose debut late last year made its founder India’s richest female billionaire, is also trading 36% off its listing day highs. Policybazaar’s online insurance market has fallen over 40% since trading began in November.
While tech stocks are hurting globally, the fall in India is especially painful for investors and companies that were hoping for a coming-of-age period for one of Asia’s fastest-growing startup ecosystems.

Instead, it has become a massive reality check for tech companies, with retail investors questioning their huge valuations. The sharp drop in these shares is also likely to have hampered IPO plans by other Indian companies. companies, at least for the foreseeable future.

“Last year there was an IPO frenzy and people were willing to pay the aggressive valuation that these companies were demanding,” said Piyush Nagda, head of investment products at the Mumbai-based brokerage Prabhudas Lilladher. “But these retail investors were looking for immediate returns on listing day.”

“Other investors who got on the bus after the IPO may be remorseful now,” he added.

Flop Paytm

The Indian tech IPO that started with Zomato last year came to an abrupt halt with the debut of Paytm.

While stocks have mostly been down since their listing, March has been a particularly difficult month for the payments company.

Earlier this month, India’s central bank prohibited banking division of the company from registering new customers. The Reserve Bank of India (RBI) has also instructed the bank to “appoint an IT audit firm to conduct a comprehensive systems audit of its IT system.”

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 payment bank Paytm to add new customers “after verification.” [the] IT auditors report.

Paytm shares fell even more after notifying RBI, despite the fact that the company tried to reassure existing customers by telling them that they can continue to use the services of this bank.nonstop.”

“We do not believe the direction of RBI will have a material impact on Paytm’s business as a whole,” a company spokesperson said in a statement.

But the damage has been done. To further complicate matters, China’s Ant Group and Alibaba (WOMAN) own more than 30% of Paytm according to the latest documents, and this investment has become problematic as border clashes in 2020 soured relations between India and China and led to New Delhi ban dozens of Chinese apps.

In a note last week, Macquarie analysts predicted a bleak future for the company.

That The RBI ban and Paytm’s “Chinese ownership” make it much more difficult for the bank to obtain a license from regulators to renew and start lending, they write.

“Given this and competition from other fintech companies in the payments space, we remain skeptical of Paytm’s long-term ability to generate free cash flow,” they added, lowering Paytm’s price target to Rs 450 ($6).

All of this bad news for Paytm has to do with the lack of a clear path to profitability, which has been troubling analysts since the IPO was launched. Paytm posted a loss of $104 million for the December quarter.

And it’s not just Paytm that failed to impress investors with recent earnings.

Zomato, which remains a money-losing company, made big headway in its IPO last July, but its stock has fallen more recently, down more than 40% since the start of the year alone.

Company said Tuesday that it would launch a 10-minute food delivery service, but the stock remained near its all-time low even after the announcement.
Food delivery partner Zomato on the road in Kolkata, India on July 14, 2021.

“Venture capitalists have the guts to digest these numbers,” Nagda said, referring to the Indian tech giants’ lack of profits. “But retail investors react as soon as they see the quarterly numbers.”

Zomato has also disappointed investors with its relative lack of transparency. because he only keeps one income call per year. Most public companies make four calls a year, usually after each quarterly report.

Zomato did not respond to a request for comment.

Mihir Vora, senior director and chief investment officer of Max Life Insurance, called the moment a “reality check” for money-hungry Indian tech firms that need to engage in more “regular communications with investors.”

“Money losses are too great,” he said. Markets want to know “where the next round of funding will come from.”

What’s next?

The fall of Paytm, followed by a recent blow to other tech stocks in India, could force other companies to reconsider their IPO plans.

Last October, Softbank-backed hotel chain OYO confirmed plans to raise nearly $1 billion through its debut. But, according to recent bloomberg reportthe company is now considering “cutting its fundraising goal in half or even postponing the debut.”

“He is also considering halving the expected valuation from the $12 billion originally planned,” Bloomberg added, citing unnamed sources.

OYO hotel in Kolkata, India on June 8, 2021.

In an email to CNN Business, OYO “strongly” denied the claims made in the report. “OYO continues to attract investor interest as we await regulatory approval,” the company added, but declined to provide any specific details.

Paytm’s smaller competitor, Mobikwik, said it would delay its IPO, originally scheduled for November last year, by a few months. The company told CNN Business last year that it would “list at the right time,” without giving any other details.

Despite the current turmoil, most global investors say India remains attractive to them, provided that companies entering the market are more realistic about their valuations.

“There is no emerging market that offers growth opportunities like India,” said Nuno Fernandez, portfolio manager for emerging markets development strategy at GW&K Investment Management. But he also said he considered most of the Indian tech giants’ valuations last year “completely unfounded” and hoped other startups would now be more cautious.

“My advice to management is that it’s better to be humble and succeed in an IPO than to let it falter.”

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