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MUMBAI : One 97 Communication Ltd, the company that runs the Paytm payments service, is among the best bets to ride the fintech wave in India, analysts said, even as some expressed reservations about the lofty valuation the company is seeking.
The Paytm initial share sale, which opens for subscription on Monday, aims to raise ₹18,300 crore at a band of ₹2,080-2,150, valuing the company at ₹1.39 trillion at the top end.
“At the upper end of the price band, Paytm is valued at 49.7 times FY21 revenues. While valuations may appear expensive, Paytm is well-positioned to benefit from the exponential growth in mobile payments between FY21 and FY26 and hence valuations are justified,” said Jyoti Roy, equity strategist at Angel One Ltd.
Paytm is India’s largest digital ecosystem for consumers and merchants, with a gross merchandise value (GMV) of ₹4 trillion in FY21. GMV, or the total value of merchandise sold over a period, measures the use of the site to sell merchandise owned by others.
According to Motilal Oswal Financial Services, the key opportunity for Paytm is to monetize its large consumer base of 333 million and merchant base of 21 million through cross-selling of financial services such as credit, wealth and insurance. Currently, payments and financial services contribute 75% to the total core revenue. However, Motilal Oswal Financial Services expects the share of the non-payments businesses to scale up rapidly.
An increase in payments processing charges Paytm pays to financial institutions and card networks could materially hit profitability as these fees form 40% of the total operating expenses, said Motilal Oswal.
Paytm derives most of its revenue from transaction fees that it collects from merchants for payment services. In FY19, FY20, FY21 and Q2FY22, revenue from payment and financial services accounted for 52.5%, 58.1%, 75.3% and 77.4% of its revenue, respectively, from 46 operations.
Paytm had negative cash flows from operating activities for FY19, FY20 and FY21, primarily due to operating losses and on account of additional working capital requirements.
“Any negative cash flows in the future could adversely affect the results of operations and financial condition,” said analysts at ICICIdirect.
Paytm, which started off as a bill payments and mobile recharge platform in 2010, gradually created a payments-led ‘super app’ and evolved into a comprehensive payments ecosystem, covering payments, credit, insurance, merchants, wealth management and e-commerce services, among others.
Aswath Damodaran, professor of finance, Stern School of Business, New York University, said in his 4 October blog that given almost all of the value of Paytm comes from expectations of the future, and there is significant uncertainty on every single dimension, it should come as no surprise that the range on estimated value is immense, with a 3% chance that the company’s equity is worth nothing to more than ₹2 trillion (approx $27 billion) at the 90th percentile.
“Even if you strongly favour the company and find it undervalued, it would be hubris to concentrate your portfolio around this stock. In other words, this is the type of stock that you would put 5% or perhaps 10% of your portfolio in, not 25% or 40%,” he said.
If he invested in Paytm, it would not only have to be at the right price, i.e., trading at less than ₹1.5 trillion (approx $20 billion) “but also with the acceptance that this cannot be a passive (buy and hold) investment, but one that will require active engagement and monitoring of the company’s actions and performance,” he added.
Last week, Paytm raised ₹8,235 crore from anchor investors, with the anchor round oversubscribed 10 times. The issue is a combination of fresh shares and offer for sale. Of the net proceeds from the fresh issue, ₹4,300 crore will be used for growing and strengthening the Paytm ecosystem, including the acquisition and retention of consumers and merchants. Out of the total, ₹2,000 crore will be utilized for investing in new business initiatives, acquisitions and strategic partnerships. In addition, residual funds will be used for general corporate purposes.