Paytm's IPO flop may embitter millions of retail investors in India

Retail investors have seen more than 35 per cent of their value wiped out in just two trading sessions. PHOTO: REUTERS

MUMBAI (BLOOMBERG) - A stunning two-day plunge by India's Paytm after its initial public offering (IPO) casts a shadow over the prospects for technology firms preparing to go public in what was supposed to be the country's breakout year.

Retail investors, who bought an unprecedented amount of shares in Paytm's parent One 97 Communications, have seen more than 35 per cent of their value wiped out in just two trading sessions. Further losses may be in store if the stock slumps from its Monday closing price of 1,359.6 rupees to the 1,200 rupees predicted by Macquarie Group.

"The event in a way will nudge people to be cautious and not take the market for granted by blindly placing bets," said Mr Gopal Agrawal, managing director and co-head of investment banking at Edelweiss Financial Services. "It is important that a company's story and prospects are well understood by investors."

India's equity markets have been on a tear this year, buoyed by a central bank that slashed interest rates to a record low and millions of new individual investors seeking higher returns in riskier assets. The rally has encouraged at least half a dozen technology start-ups to seek to public listings, including SoftBank Group-backed Oyo Hotels & Homes and logistics provider Delhivery.

At least some of the IPO prospects that have been "on the periphery" and looking to benefit from the flood of transactions, may now rethink the timing and pricing of their issues, Mr Agrawal said.

Firms in the South Asian nation have raised about US$15 billion (S$20.5 billion) through IPOs this year, already an annual record by total proceeds. Critics have been questioning valuations on some of these IPOs, given they are still loss-making companies.

"The pandemic led to huge technology adoption in the country that got priced into the valuations of many technology companies," said Mr Ashutosh Sharma, vice-president and research director at Forrester Research. "Is this the beginning of a downward trend? I don't know. But going forward, investors will look cautiously on the risks and business future of tech companies."

Paytm's valuation, at about 26 times estimated price-to-sales for the financial year 2023, is expensive especially when profitability will remain elusive for a long time, wrote analysts Suresh Ganapathy and Param Subramanian of Macquarie Capital Securities (India) in one of the few research reports covering Paytm's prospects.

Most fintech players globally trade around 0.3-0.5 times price-to-sales growth ratio, they said.

Paytm's large IPO size also restricted demand, which could bode well for smaller prospective IPOs. Food delivery app Zomato and beauty start-up Nykaa - both smaller than Paytm's offering - have seen their shares surge more than 80 per cent since their IPOs.

Edelweiss's Mr Agrawal suggests pricing share sales to "leave something on the table for investors".

"If an issue could be priced 10 per cent higher or lower, it will be advisable to go with a lower pricing, which offers a much bigger upside when it comes to trade," he said.

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