IPO Note - One 97 Communications Ltd (Paytm) By Nirmal Bang
BACKGROUND
Paytm (One 97 Communications) was launched in 2009 as a “mobile-first” digital payments platform. Paytm offers products and services across “payment services”, “commerce and cloud services” and “financial services”. The two-sided (consumer and merchant) ecosystem enables commerce, and provides access to financial services through its financial institution partners, by leveraging technology to benefit consumers as well as merchants in growing their business.v
Details and Objects of the Issue
* The total issue size is Rs. 18,300 Cr constituting (i) Offer For Sale of up to 4.65 Cr equity shares aggregating to Rs. 10,000 Cr by investors; and (ii) fresh issue of up to 3.86 Cr equity shares aggregating to Rs. 8,300 Cr. The offer shall constitute 13.1% of the post-offer paid-up equity capital of the company.
* Paytm proposes to utilise the proceeds from the fresh issue towards (i) growing the ecosystem through acquisition of consumers & merchants and providing them with greater access to technology & financial services; and (ii) investing in new business initiatives, acquisitions and strategic partnerships.
Investment Rationale
* Multiple benefits for consumers and merchants.
* Strong industry tailwinds ensure growth visibility.
* Paytm’s network effect creates sustainable advantages.
* Financial Services vertical to scale up rapidly; shall drive next leg of growth.
Valuation and Recommendation
With many large global investors and tech companies having taken stakes or bought out entire companies, we expect competition to heat up, especially in the merchant payment solutions. Although this would lead to faster penetration of the addressable merchant market of 80 mn accounts and grow industry revenues, it could well limit the addressable profit pool in the longer run. Also in case of Paytm, the consolidated revenue growth has lagged unlisted peers owing to defocus on commerce and consumer payments verticals which would continue to be a drag in the near term until the verticals of merchant payments and financial services become sizable. At 49.7x FY21 revenue, we are not comfortable subscribing to the issue owing to heightened competition, sub-par revenue growth and uncertain profitability metrics. We rate the issue as “NEUTRAL”.
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