Paytm to Zomato, Indian tech IPO boom quickly turned into meltdown

I’m “just overwhelmed,” said Vijay Shekhar Sharma, while wiping tears from her eyes. He was addressing an audience at the listing ceremony for One97 Communications, the parent company of digital payments giant Paytm.

Sharma founded the company nearly two decades ago. Over the past five years, Paytm has become the darling of India’s booming fintech industry and is backed by big global names investors such as Soft Bank (SFTBF) and Warren Buffett. In 2021, One97 raised $2.5 billion in the largest initial public offering (IPO) ever in the country.

At the listing ceremony in November, Sharma called the company’s goal of bringing millions of Indians into the mainstream economy “pious”.

Investors, however, seem to disagree – Paytm’s stock plummeted 27% on the first day of trading.

Four months later, things have only gotten worse worse. The company’s stock is now trading at nearly 560 rupees ($8), more than 70% below its offering price, according to data from Refinitiv.

It is not the only Indian internet company that has suffered on the stock market this year. While Paytm has been a flop since day one, other Indian tech giants with comparatively hot starts have also taken a dive in recent months.

Food delivery company Zomato – India’s first unicorn to go public – is down more than 36% since its first day of trading last July.
E-commerce site Nykaa, whose debut late last year made its founder India’s richest self-made billionaire, is also trading 36% below listing day highs. Online insurance market Policybazaar has fallen more than 40% since its launch in November.
As tech stocks suffer globally, India’s fall is particularly painful for investors and companies hoping for a period of maturity for one of Asia’s fastest growing startup ecosystems. .

Instead, it turned into a big, fat reality check for tech companies, with retail investors questioning their huge valuations. The sharp drop in these shares also likely thwarted IPO plans for other Indian companies. businesses — at least for the foreseeable future.

“Last year there was an IPO frenzy and people were willing to pay the aggressive valuations these companies demanded,” said Piyush Nagda, head of investment products at Prabhudas Lilladher, a company brokerage based in Mumbai. “But these retail investors were looking for immediate gains on trade day.”

“Other investors who got on the bus after the IPO might repent now,” he added.

The Paytm flop

India’s tech IPO – which began with Zomato last year – came to an abrupt halt with the debut of Paytm.

While the stock has mostly fallen since listing, March was a particularly tough month for the payments company.

Earlier this month, India’s central bank Rod the banking branch of the company registering new customers. The Reserve Bank of India (RBI) has also ordered the bank to “appoint an IT audit firm to carry out a comprehensive audit of its IT system”.

Paytm launched its Payments Bank in 2017 as a joint venture with Sharma. It can take deposits and issue debit cards, but cannot lend money to customers.

The RBI said it would allow Paytm’s payments bank to add new customers “after reviewing [the] IT auditors’ report.”

Paytm stock plunged again after the RBI notice, even though the company has tried to reassure existing customers that they can continue to use the services of this bank”without interruption.”

“We believe RBI’s direction will not have a material impact on Paytm’s overall business,” a company spokesperson said in a statement.

But the damage was done. To complicate matters further, the Chinese group Ant and Ali Baba (BABA) own more than 30% of Paytm, according to recent documents, and that the investment has become problematic since border clashes in 2020 soured relations between India and China and led New Delhi to ban dozens of Chinese apps.

In a note last week, Macquarie analysts predicted a bleak future for the company.

the The RBI ban and the “Chinese ownership” of Paytm now make it “significantly” more difficult for the bank to obtain a license from regulators to upgrade and start lending, they wrote.

“Given this and competition from other fintechs in the payments space, we remain skeptical of Paytm’s long-term ability to generate free cash flow,” they added, reducing the target price by Paytm at Rs 450 ($6).

All of this bad news for Paytm comes on top of its lack of a clear path to profitability, which has been confusing analysts since its IPO. Paytm posted a loss of $104 million for the December quarter.

And it’s not just Paytm that has failed to impress investors with the latest earnings.

Zomato – which remains a loss-making company – had scored big with its IPO in July last year, but its stock has slumped lately, falling more than 40% since the start of this year.

The company said tuesday that it will launch a 10-minute food delivery service, but the stock remained near an all-time low even after that announcement.
A food delivery partner of Zomato is seen on a road in Kolkata, India on July 14, 2021.

“Venture capitalists have the stomach to digest these numbers,” Nagda said, while talking about the lack of profits among Indian tech giants. “But retail investors react immediately as soon as they see the quarterly numbers.”

Zomato has also disappointed investors with its relative lack of transparency, as it only holds one call on earnings per year. Most public companies make four calls a year, usually after each quarterly result.

Zomato did not respond to a request for comment.

Mihir Vora, senior manager and chief investment officer at Max Life Insurance, called the moment a “reality check” for cash-hungry Indian tech companies, which must engage in “regular investor communications”.

“The cash burn is too high,” he said. Markets want to know “where the next round of funding will come from.”

And after?

The fall of Paytm, followed by the blows that other tech stocks have suffered in India lately, could force other companies to reconsider their IPO plans.

In October last year, Softbank-backed hotel chain OYO confirmed plans to raise nearly $1 billion in its debut. But, according to a recent Bloomberg reportthe company is now considering “halving its fundraising goal or even pausing its debut.”

“It also plans to halve its expected valuation from the $12 billion initially targeted,” Bloomberg added, citing unnamed sources.

An OYO hotel is seen in Kolkata, India on June 8, 2021.

In an email to CNN Business, OYO “strongly” denied the claims made in the report. “OYO continues to attract investor interest as we await regulatory approval,” he added, but declined to divulge specific details.

Paytm’s smaller rival, Mobikwik, has said it will postpone its initial public offering, originally scheduled for November last year, for a few months. The company told CNN Business last year that it would “join at the right time,” without sharing further details.

Despite the current turmoil, most global investors say India remains attractive to them, provided companies entering the market are more realistic about their valuations.

“No emerging market offers the growth opportunities that India does,” said Nuno Fernandes, portfolio manager of emerging wealth strategy at GW&K Investment Management. But he also said he found most of the Indian tech giants’ valuations last year “completely unwarranted” and hoped other startups would be more cautious now.

“My recommendation to management is that it is better to be modest and make the IPO a success, rather than make it falter.”

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