The curious case of Paytm's stock price journey

Warren Buffett's $300 million investment in Paytm made people confident about Paytm's impending success. Little did anyone know that Buffett’s first and only investment in India will turn sore.

The struggle for Paytm, once looking for a highly promising fintech startup, is far from over. Instead of bringing fortunes to its investors, the investment in Paytm stocks has turned into the worst nightmare of a decade. Almost every investor who was anticipating huge gains from Paytm has incurred heavy losses from the very first day of Paytm listing on the stock market.

Paytm was estimated to be worth $10 billion in September 2018. Berkshire Hathaway, seeing it as an excellent opportunity, invested $300 million, or ₹2,179 crore, for a 2.6 percent stake in Paytm's holding company.

According to the latest data on shareholdings, Berkshire’s investment arm now owns 1.56 crore shares (or 2.41 percent stake) of Paytm as of December 31, 2021. It eventually means that Berkshire’s $276 million is still ‘stuck’ in Paytm and losing its value with each decline.

Buffett-owned Berkshire is not the only major investor that has incurred huge losses. The value of investment made by Antfin (Netherlands) Holding BV and SVF Panther (Cayman) in Paytm shrunk by 55 percent and 62.1 percent as they bought Paytm share at about Rs. 1,835 per piece.

How Did It Start?

Born in 1978 to a school teacher father and a homemaker mother in Aligarh, Vijay Shekhar Sharma(the founder of Paytm), was the third of four children. By his admission, there was not much money to go around. The Paytm founder stated in an interview with Bloomberg that he had to find ways to make money through consulting jobs. But as a teenager in 1997, Sharma reportedly started a website called indiasite.net, which was subsequently sold for $1 million two years later.

In 2000, Sharma founded One97 Communications, which would eventually go on to become the parent company of Paytm. One97 Communications was, at that time, selling content to users through telecom operators. Paytm was launched almost a decade later, in 2009. By 2010, smartphones had become the distribution channel, he said. Paytm moved to online payments in 2014 and launched their licenced wallet product.

The year 2015 brought good tidings to the company as Ant Financial, Alibaba and Softbank decided to invest in the company. At that point, digital payments found a few takers, but cash was still the undisputed king.

Uber and Indian Railways were the first to add Paytm Wallet as a payment option. By 2015, it provided payment services from metro recharges, electricity, gas to water bill payments and had a user base of around 10.4 crores. It also ventured into the travel business and facilitated 20lakhs ticket bookings per month.

In March 2015, Paytm received investments from the Alibaba group, where it took 40% stock as part of a strategic agreement. Soon after, it received backing from TATA group’s MD, Ratan Tata.

In August 2016, it raised funding from Mountain Capital. During this year, Paytm launched events, movies, amusement parks ticketing, flight ticket bookings, and Paytm QR.

While Paytm was gradually scaling up, it was really in 2016 that it caught its lucky break. On November 8, 2016, the government announced the demonetisation of the ₹500 and ₹1,000 banknotes and the issuance of the new series of notes. What that meant was cash shortage for the weeks that followed. With the prolonged shortage, people turned to digital payments. Paytm was one of the most well-known digital payments companies at that time, offering transactions.

The Great Opportunity

Prime Minister Narendra Modi's shock decision to ban 86% of India's cash in November 2016 gave a big boost to online wallets such as Paytm, which signed up around 10 million new users within a month.

In 2017, Paytm became India’s first payment app to cross over 100 million app downloads. After demonetization, Paytm integrated the BHIM UPI to increase its user base. Shortly after that, Paytm touched a new record of 70 lakh transactions.

Paytm announced in January 2017 that the mobile wallet company had clocked ₹5,000 crore worth of transactions, which meant 200 million transactions in terms of volume.

The company started introducing new products like Paytm Cloud and forming new partnerships like the one with Berkshire Hathaway.

Largest IPO

The Paytm IPO was the biggest stock listing India had ever seen – and also the biggest trading flop in the country’s primary market history.

Paytm, made an initial public offer (IPO) of Rs18,300 crore in November 2021. A major part of the issue, i.e., Rs10,000 crore was offer for sale from the existing shareholders, and the new issue was 8,300 crore.

It got listed on the at 9 per cent discount to its offer price and the share touched the lower circuit on its market debut day. It closed at a price of ₹1,560, 27.40 per cent below the offer price.

Experts believe that extremely expensive valuations and no clear guidance from the management on when the company will start making a profit are the reasons for the poor show.

Analysts say that Paytm’s valuation – at about 26 times its estimated price-to-sales ratio for the financial year 2023 – was inflated and unrealistic, given that the fintech group had projected that profitability would remain elusive for a long time.

“Most fintech players globally trade around 0.3-0.5 times price to sales growth ratio,” wrote Suresh Ganapathy, associate director at Macquarie Capital in a report released on the day of the listing. He said Paytm didn’t deserve the rich valuation.

Another reason for the lacklustre response to Paytm IPO was its huge size. The company raised ₹18,300 crore and the market does not have an appetite for such a large listing.

Financials

Paytm’s business segments include payment services, financial services, and commerce and cloud services.

Its large consumer/merchant base of approximately 333mn (million) / 21mn, aided by a large payments platform handled gross merchandise value (GMV) of Rs4.03 trillion in FY20-21 clocking a two-year compounded annual growth rate (CAGR) of 33%.

This resulted in a two-year CAGR of 11.5% in its revenue from payment and financial services. However, the revenue from commerce and cloud services clocked a negative two-year CAGR of 32.8%. Thankfully, aided by a two-year compound average operating cost reduction of 22.4%, the company had the lowest negative earnings before interest, taxes, depreciation and amortisation (EBITDA) during FY20-21.

The key to Paytm’s profitability is a substantial increase in revenue and a reduction in operating costs. However, while revenue has grown, the downward trend in operating cost has been reversed in the second quarter of FY-21-22. It is unclear how and when the proposed strengthening of Paytm's ecosystem and acquisition/retention of consumers, etc.

Paytm’s biggest selling point has been the merchant segment of the payments business. The company is the market leader in P2M (person to merchant) transactions and prizes its merchant base of 22 million as of the financial year 2021, which has now increased to 23 million.

On the UPI platform, Phone Pe and Google Pay have marched ahead of Paytm with market shares in value, of 46.6% and 37.8%, respectively, against 8.7% of Paytm. With almost 20 UPI third-party apps including Phone Pe, Google Pay, Amazon Pay and WhatsApp Pay, and those of large finance companies and banks, the competition is set to intensify.

Cash Burning Machine

Paytm’s biggest cost is payment processing fees that it has to pay to card networks such as Visa, banks and other financial institutions for processing its transactions.

Paytm gives cash-backs to lure customers onto its platform and make them stick to its wallet. This brings us back to the point made earlier of UPI being the cheapest route to acquire customers.

Suresh Ganapathy and Param Subramanian, analysts, said that “dabbling in multiple businesses prevents Paytm from being a category leader in any business except wallets, which is becoming inconsequential with the meteoric rise in UPI payments.”

The report said that Paytm has been a “cash-burning machine… with no visibility on achieving profitability.”

“Paytm has a history of spinning off several business verticals without achieving market leadership or profitability,” they added.

Paytm has drawn in the equity capital of ₹190 billion since inception, of which 70 per cent ( ₹132 billion) has gone towards funding losses. The business generates very low revenues for every dollar invested or spent towards marketing. “This is especially problematic for a low-margin consumer-facing business where competition across each vertical is only increasing,” said the report.

Regulation issues

Paytm has time and again made a case for monetising the merchant business through lending. But Paytm cannot lend from its own balance sheet. So far the company is only a distributor of loans through tie-ups with banks and non-bank finance companies.

Paytm Payments Bank received its license in 2016 and started its operations in 2017. In 2018, for the first time, RBI banned Paytm from onboarding new customers because of KYC lapses. But Paytm resolved it and thus the RBI ban was removed in 6 months.

“This quarter we are talking about $100 million revenue from payments, which is sizable revenue People underestimate the size of payments revenue,” Sharma, the Paytm CEO, said on ETNow television channel. “Credit is the most monetisable financial service. Bajaj Finance has been there for 30-32 years, Paytm processes more loans than Bajaj today, in less than three years”

Sharma didn't specify the time period in issue, but according to the most recent figures, Paytm was outpaced by Bajaj Finance with 4.4 million loans disbursed in the December quarter. Bajaj Finance recorded 7.4 million loans.

But in 2022, RBI has again imposed a similar ban from onboarding new customers which is yet to be lifted.

Stock Price Free Fall

Sold to shareholders at ₹2,150 per share, the stock fell to ₹1,560 fairly quickly. In the last few months, the price has been consistently falling and looks something like this:

The stock tanked 71% from its issue price of ₹2,150 earlier this week, taking the Vijay Shekhar Sharma-led company's market capitalisation below ₹40,000 crore.

Future of Paytm

According to Macquarie’s estimates, Paytm will only generate positive free cash flow (FCF) by 2029-30. “Despite factoring in an aggressive ~50% CAGR increase over the next five years in non-payment business revenues led by distribution business, we expect Paytm to generate +ve FCF only by FY30E,” the report said.

Macquarie has once again cut the target price of Paytm parent One97 Communications to ₹450, 36% down from ₹700 it predicted last month.

Vijay Shekhar Sharma, the founder of One97, however, sounded optimistic over the long-term future of the company.

“No investor comes for one day. We should not say investors lost wealth. One day’s loss, not the whole picture,” he said in an interview.