IPO Analysis: One 97 Communications Ltd (Paytm)

IPO Rating: Invest for long-term  

About the issue:  

One 97 Communications primarily owns and operates India’s biggest digital payments platform known as Paytm. The company is coming out with its initial public offering (IPO) of equity shares of the face value of Rs 1 per equity share. The maiden offer comprises a fresh issue of Rs 8,300 crore and the sale of shares worth Rs 10,000 crore by existing investors, according to its red herring prospectus.  

The price band of the issue has been fixed at Rs 2080 to Rs 2150 per equity share. The IPO opening date is November 8, 2021, while it will be closing on November 10, 2021. The issue will be listed on the exchange on November 18, 2021. The IPO market lot size is 6 shares. A retail-individual investor can apply up to a maximum of 15 lots (90 shares or Rs 1,93,500). The net proceeds generated from the IPO will be utilized towards growing and strengthening the Paytm ecosystem, including through acquisition and retention of consumers and merchants and providing them with greater access to technology and financial services - Rs 4,300 crore, investing in new business initiatives, acquisitions and strategic partnerships - Rs 2,000 crore, and for general corporate purposes.  

Paytm IPO Details: 

About the company: 

Incorporated in 2000, One 97 Communications Ltd is India's leading digital ecosystem for consumers as well as merchants. As of March 31, 2021, the company has a 333 million+ client base and 21 million+ registered merchants to whom it offers payment services, financial services, commerce and cloud services. 

In 2009, the company launched the first digital mobile payment platform, "Paytm App" to offer cashless payment services to customers and now, it became India's largest payment platform and the most valuable payments brand with a total brand value of USD 6.3 billion as per Kantar BrandZ India 2020 Report. The app enables customers to do cashless transactions at stores, top-up mobile phones, online money transfers, pay bills, access digital banking services, purchase tickets, play games online, buy insurance, make investments, and more. However, merchants can use the platform for advertising, online payment solutions, offering products to customers, and loyalty solutions.  

Here’s the vast presence of the company in a snapshot: 

*Source: Company DRHP 

Competitive strengths: 

• India's leading digital payment service platform. 

• Strong brand identity with a brand value of USD 6.3 billion. 

• Large customer base with 333 million total customers, 114 million annual transacting users, and 21 million registered merchants. 

• Paytm Super-app to access a wide range of digital payment services over mobile phones. 

Company Financials: 

The most talked-about concern about the Paytm IPO has been its profitability. Yes, the company has been in losses for the past few years as can be seen from the table below. The company has been so focused on customer acquisition and retention, and on expanding its digital business across various services, that its gross merchandise value (GMV) has been growing strong, but its bottom line has not been impressive. One positive thing is that the losses are on a decreasing trend as seen in the table indicating increasing efficiency. 

*Contribution profit is a non-GAAP financial measure calculated as revenue from operations less payment processing charges, promotional cashbacks and incentives, connectivity and content fees, contest, ticketing and FASTag expenses and logistic, deployment & collection cost of its businesses. 

Recommendation: 

Digital payment platforms like Paytm have become increasingly popular in the last several years. Paytm already had a significant market share in the digital payments segment. The business witnessed exponential growth, especially after demonetization. Even though most of the cash was back in the market, Paytm had received tremendous attention during and after demonetization. According to RedSeer, Paytm has a 40 per cent market share in payments transaction volume and about 65-70 per cent market share in wallet payments transactions. Given the sheer number of users it has, there is no doubt regarding the widespread acceptance of Paytm throughout India. 

The financials of the company are something to be watchful about. The company has been incurring net losses for the past few years. According to its red herring prospectus, the company has stated that it anticipates increasing operating expenses in the future, and it may continue incurring losses for some years. Also, the company is engaged in numerous services that that might affect the efficiency of its core businesses.  

In recent times, when markets are experiencing a strong bull run, a hoard of IPOs are coming in for the benefit of higher valuations. Even the loss-making companies are held high by investors. It is recommended to stay cautious and invest your hard-earned money prudently without getting carried away by the hyped credentials. Based on our due diligence, we recommend risk loving investors to invest in the IPO for the long term.