Why did Paytm share prices fall on its opening day?

India's largest IPO, Paytm, saw its shares fall by 27 per cent on its debut day. As trading was temporarily stopped, many questioned its hefty valuations. Here is the complete story.

 |  4-minute read |   19-11-2021
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If you want to make money from shares, you should definitely consider trying the Warren Buffett approach. Well, he is the seniormost guy on the 10 Richest People in the World List and he has been an early investor in Paytm. Surely his wisdom counts for something, right? So how about evaluating Paytm through Buffett’s standards?

Why would Buffett choose Paytm?

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Now Buffett chooses his stocks using a very simple, 4-step philosophy.  

  1. The company should be capable of making consistent earning.
  2. It should give a good return on equity
  3. It should be managed by reliable people
  4. It should be sensibly priced

 

 

Now let’s check where Paytm stands vis-a-vis these factors:

1. Consistent Earning Capability (How strong can it stand?)

Paytm makes money through 3 main business models:

a. Payment services (71% of total revenue) – whenever you make a payment in any shop using Paytm, sometimes there is a female audio prompt that goes, “Paytm pe 10 rupay jama ho gaye hai.” That is an example of you receiving Paytm’s Payment services.

b. Cloud and e-commerce services (25% of total revenue) – Every time you book movie tickets and air tickets through Paytm, you receive a cloud or e-commerce service.

c. Financial services (4% of total revenue) – Using Fasttag for your car through Paytm comes under this service. Its services under the Paytm Payment Bank (where you can use your international debit card, deposits, cash withdrawal, etc.) also comes under this section.

Revenue Model:

Every time you use Paytm's Payment or Cloud services (like phone recharge or booking travel tickets), Paytm makes money from 2 customers. It charges:

  1. Processing Fees from a retailer (i.e. your local kirana store), and
  2. Convenience fees from the consumer (i.e. the app user at home)

If you buy any financial services (like insurance or loans from its Payment Bank), Paytm charges brokerage.

Now the big question: But how will they grow with a falling market share and growing competition?

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2. Paytm’s Return On Equity: Let’s simplify these financials

Paytm’s revenue as on March 2019 was about Rs 3,232 crore and as on March 21 was about Rs 2,802 crore. So their revenues reduced, even though the industry is growing exponentially. This is probably because of strong competition from Google Pay, Bhim UPI, Phone Pay, etc., which are rapidly gaining market share. Paytm’s reduced marketing costs might also be a reason for its rapidly reducing market share.

Its losses for 2020 were Rs 2,942 crore, and for 2021, it reduced to Rs 1,700 crore. The company is expected to remain in losses in the near future and break even by 2023. But having incurred losses in the past years, it will also get to carry forward such losses in the future, thus getting a chance to save on taxes. 

Return on stocks can be calculated in many ways, like Cashflows, Earning Per Share (EPS), Return on Net worth (RONW), Price Earning Ratio (PE Ratio), and so on. But since Paytm has not been earning anything for the last few years, factors like EPS, Return on Net Worth, and Cashflows are negative. And since EPS is negative, we cannot compute PE Ratio. 

Paytm cannot be compared to any competitor as well, since none of its competitors, like Google Pay, BHIM, PhonePay, are listed on the stock market.

Now the big question: Why would someone invest in a loss-making company?

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3. Management:

Paytm is managed by Vijay Shekhar Sharma, who is the MD and CEO of the company. Along with Vijay, Douglas Feagin acts as the non-executive director. Paytm’s IPO was backed by China’s Ant Group and Japan’s SoftBank, and both bankers had reduced their stake by 5% and 2.5% respectively. Why would bankers reduce their stake?

Vijay Sharma. Photo: Getty ImagesVijay Sharma. Photo: Getty Images

4. Sensibly priced:

Paytm’s offer price of Rs 2,150 was not supported by investors, many of whom were waiting to trade shares on the day of the debut. When financials are not strong and there seems to be a lack of a clear path to be profitable quickly, the demand will be low even if the stock is listed. 

Other factors: Paytm is currently litigating a GST liability of Rs 3,733 crore, which is more than their total revenue (Rs 2,800 crore) of 2021. Something you should pay heed to.

Yes, Paytm has a strong brand value and everybody knows the tune of 'Paytm karo'. Yes, even Warren Buffett holds stakes in this company. But should a common man buy it at 2000 bucks? Probably not. Because there are better opportunities out there. And because you aren't Warren Buffett. 

As for Warren, he doesn't care about short-term ups and downs any way, so maybe won't make much of a difference to him. 

Writer

Akshata Kamath Akshata Kamath @akshispublished

Akshata Kamath is a Digital Storyteller at DailyO. She loves to simplify Finance, Business, Healing and History.

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