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Tuesday, November 30, 2021

Paytm listing debacle tarnishes India’s tech IPO portfolio

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In early November, Paytm founder Vijay Shekhar Sharma traveled to Tirupati, in the hills of southern India. His temple, famous for promoting good fortune and his own riches, was a suitable place for Sharma to “seek [the] God’s blessing ”before launching the largest initial public offering in Indian history.

The IPO did not follow the script this week, with shares in the fintech sinking more than a third in its first two days as a public company, making it one of the worst debuts in the history of the Indian stock market. The group’s shares, which raised $ 2.5 billion and were valued at $ 20 billion, have since rallied, but are still 17% below their issue price.

The debacle has put the spotlight on Paytm, its shareholders SoftBank and Alibaba, and the bookies in the IPO, including Goldman Sachs, Morgan Stanley and Citigroup. It has also raised concerns from investors and entrepreneurs, fearful that it could derail a number of long-awaited fleets in India that were supposed to cement the county’s status as a leading destination for tech startups after the United States and China.

“The concern of all of us is will this affect the broader technology sentiment in India? A bad deal and an instance of bad judgment can upset the apple cart, “said the director of equity markets for India at a western bank.” The assessment is going to be very difficult. “

MobiKwik, an Indian fintech company, has delayed its originally scheduled November IPO, saying this week it will “go public at the right time.”

Ashneer Grover, co-founder of fintech BharatPe, said Paytm had “screwed up” the Indian market. “Nothing can come in this market,” he told the Moneycontrol website.

Sandeep Murthy, a partner at the Lightbox investment group in Mumbai, said there may be “some cooling period” in fintech charts until early next year, but argued that it was “natural.”

Indian tech companies have raised a record $ 5 billion through listings this year, according to Dealogic, about 10 times last year’s total. The country has emerged as a lead beneficiary of a sustained regulatory crackdown on tech companies in China that prompted international investors to look elsewhere.

Food delivery company Zomato, which was listed in July, overcame skepticism about its cash outlay and valuation, and its stock doubled from its IPO price. Shares of insurance aggregator PolicyBazaar and beauty platform Nykaa have also rebounded since their debut earlier this month.

But Paytm’s much larger list, which accounts for about half of the total raised through India’s tech IPOs this year, runs the risk of outshining others.

Paytm, which was founded 11 years ago, grew to become one of the most recognized technology brands in India thanks to its mobile wallets. The charismatic Sharma attracted top international investors, including Alibaba founder Jack Ma, Warren Buffett, and SoftBank CEO Masayoshi Son.

But the introduction of the Indian government’s UPI digital payments infrastructure undermined their core business, with Google and Walmart-owned PhonePe now market leaders. Paytm has diversified into everything from investments to insurance, but it faces better-established competitors in every sector and lacks clear areas of strength, analysts say.

Its core business is not making money and a move to cut marketing expenses indicated it was trying to show a better bottom line before going public, said Prashant Gokhale, co-founder of Hong Kong-based research group Aletheia Capital. “There was a lot of excitement with SoftBank and Warren Buffett there,” he said.

A person with direct knowledge of Paytm’s discussions on IPO pricing said there was too much liquidity in pursuit of deals, especially with the crackdown in China that has made India more attractive as a destination.

“Investors are desperate to find places to go, which pushed prices up without improving fundamentals,” the person said. “A lot of money chasing that deal that didn’t get it he’s probably happy now.”

Graph showing investment growth in India's tech sector outpacing China

Paytm’s large Chinese ownership also poses a reputational and regulatory risk, after India imposed strict restrictions on Chinese investment following military tensions last year. While Alibaba and its financial arm Ant sold shares in the IPO, together they still own nearly a third of the company.

The debut has drawn comparisons to Reliance Power’s disastrous 2008 listing, which raised a record $ 1.5 billion before falling 17 percent on the first day of trading. Its shares have never recovered and were trading 95 percent below their issue price this week.

Madhur Deora, Paytm’s chief financial officer, told the Financial Times that the company “would focus on our performance. . . The way that that translates into valuation and stock prices, etc., is obviously for investors to decide. ”

Some argue that Paytm’s painful debut may ultimately prove a boon if it prompts investors to look skeptically at other highly valued and publicized Indian tech companies.

“What was at least encouraging to me [was] seeing that the market was not in a state of irrational exuberance, ”said Murthy of Lightbox of the company’s debut. “If a market blindly valued things, that [be] a bigger challenge in the future. “

An analysis by Goldman Sachs found that Indian companies that are potential IPO candidates had an average price / sales ratio, a metric used to value companies, of 21 over the past three years, compared to three for the index groups of Nifty reference from India. .

Among the upcoming top listings is the budget hotel group Oyo, which submitted a draft prospectus. to raise $ 1.1 billion last month. CEO Ritesh Agarwal, who was backed by SoftBank, tried to make Oyo the world’s largest hotel company only to slash his ambition in the face of a liquidity crisis.

Ola, a portfolio company of SoftBank, a rideshare group, also plans to present a prospectus in the coming months. The company is now focused on making cheap electric scooters, but delivery of the new bikes has been repeatedly delayed.

“Valuations are moving up,” said Mohit Nigam, a fund manager at Hem Securities in Mumbai. “We as investors have to be cautious before the next IPOs because these guys, no matter how good their business is. . . You can’t ignore profits and cash flows. “

Rajan Anandan, a director at Sequoia Capital India, argued that it was too early to judge Paytm’s long-term prospects, but acknowledged that technology valuations in India and abroad are at risk of regressing.

“At some point there will be a correction in the public and private markets” across the tech sector, he said at an FT-Indian Express event this week. “When that happens, it will shock everyone.”

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