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NOT MAKING MONEY - SO WHAT?

Paytm’s losses may not stand in the way of its IPO success

India-Paytm-IPO
REUTERS/Shailesh Andrade
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  • Mimansa Verma
By Mimansa Verma

Reporter based in New Delhi

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India’s most-valued tech unicorn is all set to debut on domestic stock exchanges this year. And despite the huge losses on the company’s books, all indicators point to a bumper listing.

Paytm, which started as a mobile wallet and diversified into an array of financial services over the years, filed its IPO papers with the stock market regulator Securities and Exchange Board of India on July 16 (pdf). The Delhi NCR-based company plans to raise up to Rs12,000 crore ($1.6 billion) through the offering, which will make it the largest public offer in the history of India’s stock market. Paytm also intends to raise Rs4,600 crore through a sale of secondary shares, taking the total offering to Rs 16,600 crore.

The company’s massive hopes from the stock markets come despite the fact that its financial health has been far from good. It has posted losses for the last eight consecutive yearsMeanwhile, the company has spent billions into spreading itself thin into a variety of business segments including insurance sales, wealth management, digital gold, travel and movie ticketing, fantasy sports, e-commerce, and also launched a payments bank (a bank operating on a smaller scale without involving any credit risk).

Experts believe that this IPO’s success is pretty much inevitable because investors are looking beyond the current financial situation of tech firms. Most of the interest is based on metrics like growth in user base, quality of user engagement, and net revenues, which is not the case while gauging traditional businesses.

“These business models are such that they have the potential to suddenly switch to profits quickly,” said Kajal Gandhi, senior analyst at ICICI Securities. “Tomorrow, when they start charging customers, the profits turn meaningful in size. Investors are entering into businesses that have huge potential, they may be currently making losses. Valuations can stay rich at this point in time.”

This faith in the future of loss-making tech unicorns was visible last week when restaurant discovery and food delivery firm Zomato went public. The company’s IPO was oversubscribed 38 times, despite the deep losses on its books.

Paytm’s balance sheet

Founded in 2009, Paytm has raised so far raised funds from some of the most marquee global investors, including Japan’s Softbank and China’s Ant Group. The company has spent much of this money on carpet-bombing existing players with lower service costs, discounts, and cashback.

Even though the company’s revenues have gone up, over the years, it has continued to spend heavily. In the year that ended on March 31, Paytm’s parent firm One97 Communications reported a consolidated loss of Rs1,701 crore (pdf), narrower than Rs2,942 crore a year ago, mainly due to lower expenses.

Most of One97’s group companies are in the red. For instance, Paytm General Insurance and Paytm Life Insurance businesses have reported no revenues so far.

In the e-commerce space, where the company was hoping to compete with incumbents Amazon and Flipkart, it hasn’t made a mark so far.

“In the last two to three years, the pivot has been more towards financial services rather than e-commerce,” Ankur Bisen, senior vice-president of Technopak Advisors said. “But I think that is where they (Paytm) are seeing an opportunity to make money, with the assumption that their strategies and initiatives will unfold as planned.”

Should you invest in the Paytm IPO?

While experts have a positive view of Paytm’s IPO, they warn that investors will need to stay invested in the stock for some time to get good returns. After all, the firm could see a strong turnaround in its fortunes when it starts making money as it would add to investors’ confidence

And achieving that milestone is not out of reach. Paytm may break even in 12-18 months with increased financial discipline and targeted strategic investments, according to Gautam Chhugani, director of financials, fintech, crypto at brokerage firm Bernstein. “We expect Paytm’s revenue base to double by FY23 (the year ending March 2023) to around $1 billion, with non-payments revenue contributing around 33%, led by credit tech,” Chhugani said in a pre-IPO primer on Paytm released in May.

The company itself, however, has not expressed such hope. Paytm expects it will “continue to incur net losses for the foreseeable future and may not achieve or maintain profitability in the future,” it said in its pre-IPO documents filed with SEBI. The company listed out several risk factors that may impede its revenues and in turn profitability, which included the possibility of higher payment processing charges, and an increase in operating expenses in the future.

“Our profitability depends on the cost-effectiveness of our business…when we become a listed company, we will incur additional significant legal, accounting, and other expenses that we did not incur as an unlisted company,” Paytm said in the prospectus.

On the other hand, the company’s chief executive and founder Vijay Shekhar Sharma in January had told the Reuters Next conference that Paytm may turn profitable this year due to an increase in the use of its payment platforms during the pandemic.

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