Should you apply to Paytm’s IPO at such expensive valuations?

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Fintech firm One97 Communications the parent company of Paytm will create history on November 8 as its Rs 18,300 crore IPO (initial public offering), India largest public offering so far will open for subscription. The three-day offer will close on November 10. The price band for the issue has been fixed at Rs 2,080-2,150 per share having a face value of Re 1 per share.

Investors can bid for a minimum of 6 equity shares and in multiples, thereafter, translating to a minimum bidding amount of Rs 12,900 at the higher end of the price band. A retail investor can at max apply for 15 lots or 90 shares for Rs 1,93,500.

The Rs 18,300-crore public offer comprises fresh issuance of equity shares of Rs 8,300 crore, along with an offer for sale (OFS) of Rs 10,000 crore by existing promoters and shareholders.

The company has effectively increased its public issue size from Rs 16,600 crore earlier to Rs 18,300 crore. The increase in IPO size is fully through the OFS route.

The OFS would be driven by China’s Ant Group selling shares worth Rs 4,704.40 crore. Whereas Japan’s SoftBank, is slated to sell shares worth Rs 1,689 crore and Elevation Capital will sell shares with an aggregate value of more than Rs 2,030 crore. While Alibaba is selling about Rs 785 crore worth shares and Vijay Shekar Sharma will sell shares worth over Rs 402 crore.

The company will utilise the part of the net proceeds from the fresh issue towards growing and strengthening the Paytm ecosystem, through the acquisition and retention of consumers and merchants and providing them with greater access to technology and financial services. Investing in new business initiatives, acquisitions and strategic partnerships and for general corporate purposes.

Grey market chatter

Ahead of the IPO the shares of One97 Communications are quoting at Rs 2,290 per share in the grey market marking a premium of Rs 140 or 6.51% over its upper price band of Rs 2,150.

Trends in the grey market look subdued as the premium quoted is in the range of Rs 100-140 which is around 5-7% only.

“The company has narrowed its losses mostly by constricting its marketing and advertising expenses. Amongst all the startups, Paytm is an ideal example of well-diversified businesses but lacks clear leadership in almost all the segments. At upper band, Post issue, sales to market cap comes around 49x which makes the issue expensive. Apart from valuations, ‘its road to profitability’ is more challenging,” said Abhay Doshi, Founder of Unlisted Arena.

Should you apply?

While the valuations for the issue are expensive yet brokerages have a subscribe rating. Here is what they have to say about the issue.

Angel One | Rating: Subscribe

At the upper end of the price band, Paytm is valued at 49.7x its FY21 revenues. While valuations may appear to be expensive, Paytm has become synonymous with digital payments through mobile and is the market leader in the mobile payment space. Paytm is well-positioned to benefit from the exponential 5x growth in mobile payments between FY2021 – FY2026 and hence believe that the valuations are justified.

Choice Broking | Rating: Subscribe for long term

There is a large section of the population who are underserved in payments and financial services products. Also, there is a vast population of small businesses, which have not witnessed the benefits of digital commerce. Thus, OCL has a large addressable market to serve. At higher price band of Rs. 2,150, it is demanding an EV/Sales (Enterprise Value to Sales) multiple of 46.1x, which seems to be stretched. The demanded valuation is also at significant premium to China’s Ant Group proposed IPO in 2020.

Marwardi Shares & Finance | Rating: Avoid

Considering the trailing twelve months (June 2021) sales of Rs 3,142 crore on the post-issue basis, the company is going to list at a Market Cap/Sales of 44.36 with a market cap of Rs 1,39,378.8 crore. There are no listed companies in India whose business is comparable with that of the company’s business. The brokerage firm has assigned an “Avoid” rating to this IPO as valuations are demanding for a loss-making company.

Dilip Davda, Primary Market Expert | Rating: May Apply

One 97 Communications is a mega player in the digital ecosystem segment and has a lion share, but its top line has remained almost static for the last three fiscals and has been incurring losses for all these years and may remain in red in the near term too as per statements on page 38/39 of RHP. It has huge carried forward losses and negative earnings. Thanks to premiums collected for placements that have helped this company to post positive NAV. Issue pricing is with a negative P/E. Its market cap of Rs. 1.39+ lakh cr. raises eyebrows. However, considering madness seen for Unicorn and high tech sector companies in the recent past is perhaps indicating changed sentiment for investment parameters. On all fronts, this issue is exorbitantly priced discounting all near term positives. Of late many new entrants have entered this space and raised a threat. Hence cash surplus/risk seekers only may consider an investment with a long term perspective, others can ignore it.

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)