The poster boy of digital payments in India, Vijay Shekhar Sharma, now faces the ignominy of being referred to as the first entrepreneur from India’s unicorn club to have the worst listing in the public market.

At current prices, One97 Communications trades at $14 billion, much lower than the $20 billion that it was valued at its IPO price of ₹2,150. In fact, it has fallen below that valuation of $16 billion that it had fetched when the company had raised $1 billion in 2019.

To top it all, on Day 1, foreign brokerage house Macquarie Capital Securities dubbed the company a cash guzzler and slashed the stock price by 44% to ₹1,200. Suresh Ganapathy and Param Subramanian, analysts who authored the report, say 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.” Paytm has a market share of 65-70% in the digital wallets business and about 40% in the consumer-to-merchant segment by transaction volume of mobile payment instruments.

The report mentions that Paytm is “a loss leader” in the payments business. “Competition and regulation will drive down unit economics and/or growth prospects in the medium term.” Unless the company enters the lending business, it can’t make significant money by merely being a distributor, thereby “impeding its ability to achieve scale with profitability," it says.

The report titled Too many fingers in too many pies also raises concern over the structure of the group. “We are also not enthused with the company’s complicated organisation structure, related-party transactions, churn in top management and a thinly staffed board with 75% of members being based out of India,” states the report.

More importantly, the analysts have called out the company for its history of spinning off several business verticals without achieving market leadership or profitability. The report states that Paytm has been a cash-burning machine, spinning off several businesses with no visibility on achieving profitability. The analysts mention that the company has drawn in equity capital of ₹19,000 crore since its inception, of which nearly 70% (₹13,200 crore) has gone towards funding losses. That inherent flaw in the business model is that it generates very low revenues for every dollar invested or spent towards marketing. “That Paytm has a problematic business model is exemplified as 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,” mentions the report.

The key business of Paytm — digital payments — got disrupted when the government-backed NPCI rolled out UPI, a real-time retail payment system, in December 2019. The solution is available free of cost (zero merchant discount rate) by the government to all consumers and merchants, which takes the wind out of Paytm’s core business. UPI, currently, accounts for around 65% of Paytm's gross merchant value, which the brokerage expects will increase further to around 85% by FY26. In doing so, Paytm’s take-rates will continue to decline.

To ensure its survival, the payments platform had been forced to pivot into several other businesses in search of profitability. It was looking to monetise by cross-sell/distribution of other products across its 50 million-plus strong active consumer base and 22-million merchant base. It had been on a spree of spin-offs in the past three years — hiving off consumer lending (2020), co-branded credit cards (2020), insurance distribution (2020), wealth management (2018) and its mini-app platform (2020). However, none of this has translated into significant revenues or profitability for Paytm. The analysts believe that Paytm, at best, can generate $350 million in revenues through distribution and that estimate itself is aggressive and that a larger proportion of revenues will only accrue if it starts lending. Though Paytm has sought a small finance bank licence, regulations currently bar such entities from getting into the lending business. “Paytm has to lend, i.e., use its own balance sheet to make loans and do that profitably for which it needs a banking licence, credit underwriting experience and collection infrastructure, all of which are lacking at present in our view,” state the analysts.

The brokerage also believes that getting a banking licence seems tough given the influence of external investors. “Obtaining a small finance bank license could be difficult in our view given that Chinese-controlled firms own more than a 30% stake,” mentions the report.

As a consequence, the brokerage house expects the stock to come off its IPO high. Paytm’s valuation, at ~26x FY23E price to sales (P/S), is expensive especially when profitability remains elusive for a long time. “Most fintech players globally trade around 0.3x-0.5x PSg (price-to-sales growth ratio) and we have assumed the upper end of this band. We are unwilling to give it a premium here as we are unsure about the path to profitability,” sums up the report.

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