Paytm listing debacle is shaking the pipeline of Indian tech IPOs

At the beginning of November, Paytm founder Vijay Shekhar Sharma traveled to Tirupati in the hilly southern India. His temple, famous for promoting good fortune and one’s own fortune, was a convenient place for Sharma to “seek”. [the] Blessing of God ”before launching India’s largest IPO to date.

The IPO didn’t follow script this week as the fintech’s shares plummeted more than a third in its first two days as a public company, making it one of the worst debuts in Indian stock market history. The group’s shares, which are 2.5 billion

The debacle has put Paytm, its shareholders SoftBank and Alibaba, and IPO bookrunners like Goldman Sachs, Morgan Stanley and Citigroup in the spotlight. It has also raised concerns among investors and entrepreneurs, who feared it could ruin a number of anticipated Indian IPOs that should cement the county’s status as the leading destination for tech startups after the US and China.

“The concern for all of us is that this will affect the general tech sentiment in India? Bad business and bad judgment can upset the apple cart, ”said the head of stock markets for India at a western bank. “The assessment will be very difficult.”

MobiKwik, an Indian fintech company, has postponed its IPO originally planned for November and announced this week that it will be listed “at the right time”.

Ashneer Grover, co-founder of fintech company BharatPe, said Paytm “spoiled” the Indian market. “Nothing can come into this market,” he told the Moneycontrol website.

Sandeep Murthy, a partner in the Lightbox investment group in Mumbai, said there could be a “cool down” in fintech listings by early next year, but argued that it was “natural”.

Indian tech companies have a record $ 5 billion this year, according to Dealogic. The country has become a major beneficiary of ongoing regulatory crackdown on tech companies in China, which has led international investors to look elsewhere.

July-listed grocery delivery company Zomato overcame skepticism about its cash burn and valuation as its stock doubled from its IPO price. Shares in insurance aggregator PolicyBazaar and beauty platform Nykaa have also rallied since their debuts earlier this month.

But Paytm’s far larger listing, which accounts for roughly half of total Indian tech IPO revenue this year, risks overshadowing others.

Paytm was founded 11 years ago and thanks to its mobile wallets it has grown to become one of the best known technology brands in India. The charismatic Sharma attracted leading international investors including Alibaba founder Jack Ma, Warren Buffett and Masayoshi Son, CEO of SoftBank.

Bar chart of the performance of the offer price (%) with spotlight on the new tech offers from Indian

But the Indian government’s rollout of UPI digital payments infrastructure undermined its core business, with PhonePe, owned by Google and Walmart, now leading the market. Paytm has diversified into everything from investing to insurance, but faces better established competitors in each sector and lacks clear strengths, analysts say.

Its core business is not making money, and an attempt to cut marketing spending indicated that it was looking to get better results before listing, said Prashant Gokhale, the Hong Kong-based co-founder of research group Aletheia Capital. “There was a lot of hype there about SoftBank and Warren Buffett,” he said.

One person with direct knowledge of the discussions Paytm had about IPO prices said there were too many liquidity hunts, especially since the move in China has made India a more attractive destination.

“Investors are desperately looking for points of contact, which is driving prices higher without improving fundamentals,” the person said. “A lot of money chasing this business that it didn’t get is probably happy now.”

Graph showing investment growth in India's technology sector outperforming China

Paytm’s large Chinese stake also poses regulatory and reputational risk after India severely curtailed Chinese investments 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 drew comparisons to Reliance Power’s disastrous listing in 2008, which hit a record $ 1.5 billion before plummeting 17 percent on its first day of trading. Its shares have never rallied, trading 95 percent below their issue price this week.

Madhur Deora, Paytm’s chief financial officer, told the Financial Times the company will “focus on our performance. . . How this is reflected in the valuation and share price, etc., must of course be decided by the investors. ”

Some argue that Paytm’s painful debut could ultimately prove a boon if it causes investors to view other highly valued and much-lauded Indian tech companies with some skepticism.

“What was encouraging for me at least [was] to see that the market wasn’t in a state of irrational exuberance, ”said Murthy of Lightbox of the company’s debut. “If a market were to evaluate things blindly, that would be it [be] a bigger challenge in the future. “

An analysis by Goldman Sachs found that these Indian companies that are potential IPO candidates had an average price-to-sales ratio, a company valuation metric, of 21 over the past three years, compared to three for groups in India Benchmark Nifty Index.

Among the most prominent future offers is budget hotel group Oyo, which submitted a draft prospectus last month to raise $ 1.1 billion. Chief Executive Ritesh Agarwal, supported by SoftBank, attempted to make Oyo the largest hotel company in the world only to greatly reduce its ambitions in the face of a liquidity crisis.

Portfolio company Ola, a ridesharing company of Fellow SoftBank, is also planning to submit a prospectus in the coming months. The company is now focused on making cheaper electric scooters, but shipments of the new bikes have been repeatedly delayed.

“Valuations continue,” said Mohit Nigam, a fund manager at Hem Securities in Mumbai. “As investors, we have to be careful about the upcoming IPOs because these guys, no matter how good their business is. . . you can’t overlook profit and cash flows. “

Rajan Anandan, head of Sequoia Capital India, argued it was too early to judge Paytm’s long-term prospects, but acknowledged that technology valuations in India and abroad risked a setback.

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

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