One97 Communications (PAYTM) (BOM:543396, Financial), the parent company of India’s largest mobile payments and commerce platform Paytm, went public on Nov. 18 to much fanfare, raising 183 billion rupees ($2.5 billion) and marking the country’s largest-ever initial public offering.
The company that started the digital payments revolution in India has the backing of world-class investing giants such as Softbank (SFTBF), Alibaba (BABA, Financial) and even Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A, Financial) (BRK.A, Financial). Paytm is not just a mobile payments platform, it is also India's leading financial services company, offering full-stack payments and financial solutions to consumers, offline merchants and online platforms.
However, the attractive market position and backing of famous investors didn’t stop the stock from crashing 27% on its first day of trading, losing over a quarter of its market cap as the market seemingly grew wary of overvaluation and foreign competition.
Could the IPO flop be an opportunity for investors to follow Buffett’s conglomerate into the company that is trying to gain a position as the top payments processor in India’s fast-growing economy, or are there other factors to be wary of?
India’s tech boom
The second-largest country in the world by population, India nevertheless ranks seventh in the world in terms of gross domestic product. In other words, India’s economy holds tremendous growth opportunity for companies that can gain and maintain a competitive edge.
This year has marked unprecedented growth in India’s economy, with the tech sector in particular growing rapidly. A March 2021 research report from Credit Suisse (CS, Financial) on India’s corporate landscape stated the following:
“An unprecedented pace of new-company formation and innovation in a variety of sectors resulted in a surge in the number of highly valued and as-yet-unlisted companies. Against 336 listed companies with a ~$1 billion market capitalization, there are now 100 unicorns in India with a combined market capitalization of $240 billion.”
Stock prices have followed right along, with the MSCI India index up about 30% this year (nearly doubling the return of the global index) while India’s benchmark 30-share S&P BSE Sensex is up 25% and the Nifty 50 has returned 31%.
Paytm’s valuation has grown significantly thanks to the overall economic growth, new company formation and tech growth. The company also owes its success to its ambitious goals as well as the Indian government’s 2016 decision to withdraw the country’s two highest-valued banknotes from the market in the hopes of curbing corruption.
The previously unheard of currency withdrawal experiment wiped out 86% of the currency in circulation and destroyed piles of money hidden away by tax evaders, striking a blow against corruption and counterfeiting. Importantly for Paytm, it also dramatically accelerated the transition to a world of digital currency.
Aside from general overvaluation, the factor that analysts are most often attributing to Paytm’s IPO flop is tough competition, not just from local competitors but from foreign tech giants looking to get a slice of the fast-growing economy in India as their home markets slow to a crawl in terms of growth.
In particular, analysts are keeping an eye on competition from U.S. giants such as Walmart (WMT, Financial), Meta’s (FB, Financial) Facebook and Alphabet’s (GOOG, Financial) (GOOGL, Financial) Google, which have launched their own mobile payments systems that make use of the Unified Payments Interface, an Indian government-backed technology.
Madhur Deora, the president and group chief financial officer of Paytm, says he is not worried about competition, though. UPI-based payments are just one of the parts of Paytm’s business, with the company diversifying into commerce and financial services, where its home-field advantage will give it more of an edge over competitors that are unfamiliar with the market.
The growing economy can also support more than one growth story at this stage. “A vast majority of Indians do not have access to formal credit... They just don't have a credit history," Deora said. "So there's a lot of what we call [India's] underserved or unserved… There's a huge market in providing access to credit.”
Pre-IPO investing is a different ballgame
While the growth potential for Paytm and its parent company seems undeniable, investors should note that post-IPO investing isn’t the same as pre-IPO investing.
Berkshire, Softbank and Alibaba have all backed Paytm, which indicates they believe in the long-term potential of the company. However, they also invested in the company at a far lower cost and risk than what is currently on offer to the general public, even after the stock’s post-IPO slide.
Take Berkshire’s investment, for example. The Oracle of Omaha’s conglomerate had a 2.8% stake worth 17 million shares before the IPO after the investment powerhouse poured $300 million into a funding round that valued the startup at $10 billion in 2018. The IPO valued the stock at $20 billion; if Berkshire sold part of the holding at the IPO, it could have doubled its investment on the shares it sold, though we do not yet have any way of knowing how many (if any) shares the conglomerate parted with. After the stock’s IPO flop, the company is now valued at only $14 billion, but that’s better than what those buying at the IPO price have earned.
It should be noted that it was not Buffett himself who initiated the investment in One97 Communications. One of his portfolio managers, Todd Combs, led the investment discussions and joined One97's board. Buffett's conglomerate has traditionally steered clear of tech startups and emerging markets, but financial services are their one of their areas of expertise. Moreover, as Buffett has allocated more responsibility to his portfolio managers, more fintech companies have begun appearing in the equity portfolio, including Brazil's StoneCo Ltd. (STNE, Financial).
We know that Buffett’s conglomerate was willing to buy Paytm’s parent company One97 in 2018, but we currently don’t have any data on whether Buffett or his investment managers think the stock is a buy now, and we won’t unless they make public statements on the topic. Most likely, we will have to wait for the next quarterly 13F statement to glean some insight.
Not for the volatility-averse
Though we don’t know what stance One97’s big early investors currently have on the stock’s valuation, the growth opportunity in the underserved market in India is phenomenal, and Paytm has already achieved the top spot in mobile payments processing among homegrown players. One97 has big plans to expand its footprint in multiple financial services as well.
On the other hand, it still lags behind Google’s PhonePe in terms of UPI transactions; in September of 2021, PhonePe carried out 80% of UPI transactions. Meta’s WhatsApp Pay also doubled its number of transactions. Competition is fierce, market sentiment can change fast and One97’s Paytm platform could fall from grace for unforeseen reasons.
As is always the situation with a high-growth market where there are many different players vying for dominance, it’s almost impossible to pick the winner, even for large-scale institutional investors that have an information edge over individual investors. One97 isn’t a stock for short-term investors or those who are spooked easily by volatility.
It is possible for the selloff to continue from here, though. Several analysts are claiming the stock is still overvalued even after the 27% drop, and even before the IPO, many were taking a skeptical look at the valuation, predicting a quick fall post-listing as sticker shock met with the typical profit-taking.
One other factor to consider, though, is One97’s starting point. The company is just beginning its life and has ambitions far beyond mobile payments, so its potential for growth is much higher than foreign giants that already have solid cash flows. Each $1 added to the company’s earnings per share would have a far greater impact on its bottom line than that same dollar would for Alphabet’s bottom line.
Regarding the IPO flop, Vijay Shekhar Sharma, the founder and CEO of One97, quoted the father of value investing, Benjamin Graham: “In the short run, the market is a voting machine but in the long run it is a weighing machine.”