Paytm’s mega IPO is priced to perfection

by Jackie Wong | UPDATED November 17th, 2021 08:21 AM EST

The firm is growing rapidly and financial services could be a powerful new growth driver. But deep-pocketed competitors and a global regulatory wave pose a risk.

Chinese billionaire Jack Ma may finally cash out through a mobile payments giant’s initial public offering. However, not a Chinese.

One97 Communications, which owns Paytm, one of India’s leading mobile payments companies, is set to go public in the country’s biggest IPO on Thursday. China’s Ant Group, backed by Mr. Ma, is the company’s largest shareholder with approximately 28% stake. Its subsidiary Alibaba also holds about 7% stake. Both companies are set for windfall gains: They first invested in Paytm in 2015, when it was undervalued. Paytm’s offer has been valued at around $20 billion for the company. Ant itself failed to go public a year ago because regulators put its IPO on hold at the last minute.

Other famous billionaire investors are also up for a payday. Warren Buffett’s Berkshire Hathaway and Masayoshi Son’s SoftBank are other supporters of the Indian company. SoftBank’s investments in China, including Alibaba, have suffered under regulatory action from that country. In India it is a different story. Apart from Paytm, other Indian startups backed by SoftBank have gone public this year or are planning to this year, rapidly taking advantage of the market.

Mobile payments have boomed in India in recent years, as the cost of smartphones and mobile plans have declined. Banking services are relatively underdeveloped and therefore mobile payments have become one of the easiest ways to access financial services, as has been the case in China. The 2016 launch of the Unified Payments Interface, an open system regulated by the central bank, has also helped make mobile payments more popular.

Investors are excited about India as e-commerce is still at a relatively early stage given that almost half of the population does not even use the internet. Total payments made to merchants on Paytm’s app grew 76% over the past two years to Rs 4 trillion in the financial year ended March, equivalent to $54 billion.

Paytm has borrowed the playbook of its Chinese investors. Payments are basically a way to grow your user base. The company actually relies on selling high-margin financial services to its 337 million customers. Paytm disbursed 14 lakh loans for the quarter ended June, as against 23,000 loans a year ago. Bernstein expects financial services to account for 19% of its revenue in the fiscal year ending March 2027, up from 5% currently. Paytm has also jumped on the latest trend in payments with its own buy-now, pay-later service. Fintech companies are jumping into the space, from PayPal to Square.

Perhaps this is the reason why investors are paying premium despite Paytm being in the red mark. At the IPO price, Paytm is trading at 50 times the revenue of the last financial year. Paypal is trading at 10x.

If Paytm continues to grow at a fast pace, then such a high height can be justified. But it is also facing stiff competition. Google and Walmart’s PhonePe have a large market share in the peer-to-peer payments market and can be formidable rivals. WhatsApp, which has partnered with Jio, the mobile carrier controlled by India’s richest man, poses another potential challenger.

Regulation is another risk. Ant’s ambitions were drowned out by Beijing’s decision to regulate the company like a bank. Future moves by Indian regulators may not be as drastic. But tighter regulation of consumer Internet firms is a global trend.

Paytm investors are betting that all will be well at current prices. New Delhi—and the competition—may have different views.