How excited would investors be about a cash burning IPO?
There is, at last, indication that Paytm may do the biggest IPO in Indian new issues market at Rs.21,800 crore. More details are awaited but it is expected to happen by December 2021, making it the largest IPO; ahead of Coal India.
Biggest IPO ever
Clearly, the Paytm IPO is likely to be much bigger than the Coal India IPO of 2010. However, we are assuming that the LIC IPO does not happen before and it does look unlikely to happen by then. The IPO from Paytm is expected to be a mix of fresh fund raising and an offer for sale to give exit to early investors. It is estimated that the IPO may be done at an indicative valuation range of $25 billion to $30 billion. That would make Paytm nearly twice as valuable as the nearest digital company in India, Byju’s.
As of now it is not clear whether the IPO will be made entirely in India or would be split between India and the US. The company already has a marquee set of investors on its rolls including Softbank of Japan, Ant Financial of China and the redoubtable Berkshire Hathaway. All this is going to add a lot of heft to the IPO, irrespective of whether they target an India-specific IPO or an international IPO. The bigger challenge would be to create adequate appetite among QIB and retail investors for a loss-making company, which does not have visibility of making big profits, anytime in the near future. That is the real challenge!
Got to look beyond losses
When it comes to ecommerce plays, it is the trend of losses than the actual loss that really matter. For FY20, Paytm loss from operations narrowed from Rs.- 4217 crore in FY19 to Rs.-2942 crore in FY20. Also, the negative cash from its operations also narrowed from Rs.-4495 crore to Rs.2385 crore. However, on a top line basis, the revenues have been almost flat at Rs.3281 crore. In terms of total revenue mix, the payment business still accounts for 95% of total revenues with financial services still being only a marginal contributor. Also, Paytm has bled nearly Rs.277 crore on its Little Internet acquisition of 2017. The cost cuts have helped, but they may have played out, substantially, if not entirely.
Will Paytm IPO attract investors
One thing is certain that it will be the first time that Indian investors will be up against loss making IPOs where the age-old valuation metrics will not apply. It is not clear as to the kind of retail demand that such an IPO could attract despite the fact that Paytm is a household name. They would have to either look at a larger allocation to QIBs or a mix of domestic and global IPO. It looks like the retail appetite for a loss- making IPO may be hard to come by. Paytm grew its merchant base, active users, and offline merchant base in a big way in last 5 years. It is unclear if that translates into real IPO appetite!