Why Indians Must Not Invest In Loss Making Companny’s IPO, What We Should Learn From Paytm & Zomato

One of India’s most well-known software entrepreneurs sobbed in front of the Bombay Stock Exchange in November of last year. With tears in his eyes, Vijay Shekhar Sharma said, “I’m just overwhelmed.” He was addressing a crowd during the first public offering of One97 Communications, the parent company of the sizable Paytm Company.

The company was founded by Sharma almost twenty years ago. In the previous five years, Paytm has emerged as the fintech industry’s darling in India. It is supported by well-known international investors like Warren Buffett and SoftBank (SFTBF). In 2021, One97 will have the largest IPO in the nation, raising $2.5 billion (IPO).

Sharma called the company’s objective of integrating millions of Indians into the mainstream economy “pious” during the company’s IPO ceremony in November. Paytm’s shares dropped 27% on the first day of trading, suggesting that investors don’t agree. Four months later, the situation has only become worse.

Refinitiv records show that the company’s shares are currently trading for around 560 rupees ($8), which is more than 70% less than the offer price. Not surprisingly, it is not the only Indian internet company whose stock has dropped this year. Other Indian IT behemoths whose beginnings were hot in contrast to Paytm’s disaster from the start have also faltered recently. Since its first day of trading, Zomato, the first unicorn company in India, has lost more than 36% of its value.

Internet store Nykaa, whose creator became India’s richest self-made female billionaire after its debut late last year, is likewise trading 36% off its highs from the day it went public. Since it started trading in November, the online insurance marketplace Policybazaar has decreased by more than 40%. Even though technology stocks are down everywhere, the fall in India is especially painful for investors and businesses that had hoped for a maturation phase for one of Asia’s fastest-growing startup ecosystems.

Retail investors now doubt the enormous values of internet companies, and the situation has become a big, fat reality check for them. Plans for additional Indian businesses to go public have likely been derailed by the sharp decline in their equities, at least in the near term. According to Piyush Nagda, head of investment products at Mumbai-based brokerage Prabhudas Lilladher, “Last year, there was an IPO craze, and individuals were prepared to pay the extreme prices these businesses asked.” But those small-time investors want profits on a listing day. He said, “Other investors who boarded the bus after the IPO may be regretting it today.

With the launch of Paytm, India’s digital IPO party—which had begun with Zomato last year—came to an abrupt end. Although the stock has generally trended lower since it was listed, the month of March has been particularly challenging for the payments business. India’s national bank prohibited the company’s banking division from adding new clients earlier this month. Additionally, the bank was instructed by the Reserve Bank of India (RBI) to “appoint an IT audit firm to perform a full System Audit of its IT system.”

In 2017 Paytm and Sharma established their joint venture, Payments Bank. Although it can produce debit cards and receive deposits, it cannot make loans to clients. The RBI stated that “after examining [the] findings of the IT auditors,” it will let Paytm’s Payments Bank acquire new clients. Even though the business made an effort to reassure current customers by assuring them that they may continue using that bank’s services “without interruption,” Paytm shares fell even more after the RBI’s notification.

According to a company spokeswoman, “We believe RBI’s directive will not substantially harm Paytm’s overall operations.” However, the harm was already done. China’s Ant Group and Alibaba (BABA), according to the latest filings, hold more than 30% of Paytm, which complicates matters further. This investment has proven troublesome since border incidents in 2020 damaged relations between India and China and prompted New Delhi to ban many Chinese applications. Analysts at Macquarie projected a gloomy future for the firm in a letter last week.

It is “much” more difficult for the bank now to obtain a license from the authorities to improve and begin lending as a result of the RBI prohibition and Paytm’s “Chinese ownership,” they said. They reduced Paytm’s target price to Rs 450 ($6) and stated, “Given this and competition from other fintechs in the payments industry, we remain dubious about Paytm’s longer-term capacity to produce free cash flow.”

In addition to all of this negative news, analysts have been troubled by Paytm’s unclear route to profitability ever since its IPO launch. Paytm reported a $104 million deficit for the three months ending in December. And Paytm is not the only company whose most recent earnings have failed to excite investors.

Zomato, which continues to operate at a loss, had great success with its initial public offering (IPO) in July of last year, but its price has since tanked, down more than 40% only since the year’s beginning. Even after the firm announced Tuesday that it will launch a 10-minute meal delivery service, the stock price stayed close to its all-time low.

When referring to the absence of earnings among Indian software companies, Nagda remarked, “Venture capitalists have the stomach to absorb these data.” “But when ordinary investors see quarterly data, they respond right away.” Zomato’s relative lack of transparency—it only conducts one earnings call a year—has also let down investors. Most public firms conduct four calls a year, often following each quarter’s results.

When contacted for comment, Zomato did not provide any. For India’s money-hungry internet companies, which must engage in more “frequent investor contacts,” this moment serves as a “reality check,” according to Mihir Vora, senior director, and chief investment officer at Max Life Insurance. He declared, “The monetary burn is too much.” “Where the next round of investment is coming from” is what the markets want to know.

Other businesses may be forced to reevaluate their IPO ambitions as a result of Paytm’s steep decline and the subsequent beating other tech stocks in India have recently taken. The OYO hotel business, owned by Softbank, announced ambitions to raise around $1 billion through its initial public offering in October of last year. However, a new Bloomberg story claims that the business is now thinking about “halving its fundraising objective or perhaps delaying the launch.”

According to unidentified sources cited by Bloomberg, “it’s considering also reducing its estimated valuation from the $12 billion originally intended.” OYO “strongly” refuted the allegations made in the story in an email to Business. OYO continued to attract investor interest while waiting for regulator permission, the company said, declining to provide any further information.

The smaller rival to Paytm, Mobikwik, has announced that it would postpone its IPO, which was initially scheduled for November last year, by a few months. The majority of international investors claim that despite the present unrest, India still appeals to them as long as new enterprises have more reasonable prices.

India provides more chances for development than any other growing market, according to Nuno Fernandes, portfolio manager of GW&K Investment Management’s emerging wealth strategy. However, he said that he believed the majority of valuations made by Indian IT companies the previous year were “totally unjustifiable” and hoped other businesses would be more circumspect going forward. “My advice to management is that it is better to be modest and have a successful IPO than for it to fail,”

India’s IPO boom has quickly collapsed.

With the launch of Paytm, India’s digital IPO party—which had begun with Zomato last year—came to an abrupt end. Although the stock has generally trended lower since it was listed, the month of March has been particularly challenging for the payments business. India’s national bank prohibited the company’s banking division from adding new clients earlier this month.

Additionally, the bank was instructed by the Reserve Bank of India (RBI) to “appoint an IT audit firm to perform a full System Audit of its IT system.” In 2017 Paytm and Sharma established their joint venture, Payments Bank. Although it can produce debit cards and receive deposits, it cannot make loans to clients.

 The RBI stated that “after examining [the] findings of the IT auditors,” it will let Paytm’s Payments Bank acquire new clients. Even though the business made an effort to reassure current customers by assuring them that they may continue using that bank’s services “without interruption,” Paytm shares fell even more after the RBI’s notification.

According to a company spokeswoman, “We believe RBI’s directive will not substantially harm Paytm’s overall operations.” However, the harm was already done. China’s Ant Group and Alibaba (BABA), according to the latest filings, hold more than 30% of Paytm, which complicates matters further. This investment has proven troublesome since border incidents in 2020 damaged relations between India and China and prompted New Delhi to ban many Chinese applications.

Macquarie analysts forecasted a gloomy future for the business in a letter last week. They argued that the RBI prohibition and Paytm’s “Chinese ownership” had made it “much” more difficult for the bank to obtain a license from the regulators to upgrade and begin lending.” Given this, and competition from other fintechs in the payments industry, we remain dubious about Paytm’s longer-term capacity to produce free cash flow,” they continued, cutting Paytm’s target price to Rs 450 ($6).

Along with all of these negative developments, experts have been troubled by Paytm’s unclear road to profitability ever since the company’s IPO. For the December quarter, Paytm recorded a loss of $104 million.

Never, especially for individual investors, invest in startups that are losing money:

The lesson here is never to invest in loss-making businesses, especially for individual investors. Loss-making businesses do not pay dividends to investors, and there is a good likelihood that the stock price will plummet within a few months, as it did in the cases of Paytm and Zomato.

There is no disputing that Zomato and Paytm rode the hype bandwagon with inflated valuations while being loss-making businesses with little expectations of breaking even in the next two or three years. Anurag Singh, a Twitter user, and investor presented a thorough and insightful thread on the Zomato IPO bubble at the time, sparking the interest of “Know nothing” investors (a term popularised by Warren Buffet) as well.

The user drew attention to the fact that Zomato is currently valued at Rs 66,000 crore (USD 8.8 Billion) The food giant’s worth was $ 3.5 billion a year ago, meanwhile, before the epidemic hit the world, and that too after it had acquired Uber Eats and its India services. It is crucial to remember that Uber Eats now owns 9.1% of Zomato. The fact that the firm managed to expand its worth by multiples in a pandemic year when the average delivery order value dropped from around Rs 400 to Rs 238 seems quite puzzling.

Stricter IPO standards for IT businesses that are losing money

Loss-making, new-age technology businesses that intend to go public must explain how they determined the IPO pricing, according to market regulator Sebi. Additionally, it demands that these businesses provide the prices at which shares were sold to investors in pre-IPO rounds that lasted up to 18 months before the submission of offer paperwork to the regulatory body.

The IPOs were closed, and several new, tech-enabled businesses that had not yet shown operational profits were listed as a result. Several of these firms’ stock values are currently much below their IPO price. Despite trading at a significant discount to their listing price, several are still trading above their IPO price.

The proposed offer documents’ current disclosure requirements were written with traditional firms in mind. According to Sebi, the criteria currently used to evaluate a company’s IPO offer price “may not aid investors much in reaching investment decisions concerning a loss-making issuer” as more and more modern, tech-driven enterprises that are loss-making want to list.

Currently, IPO-seeking firms must provide important accounting ratios such as earnings per share (EPS), price to earnings, return on net worth, and net asset value of the company in their offer documents. The offer document must also provide information on pertinent accounting ratios of comparable companies to the one that will go public.

edited and proofread by nikita sharma