Aviral Jain, MD of financial consultancy firm Duff & Phelps, says one way to value the likes of Paytm is using metrics such as subscriber base, number of transactions and gross transaction value. “A digital payment company that is in a rapid growth stage and has experienced significant growth in such metrics, but has not yet turned profitable, can be valued using an adjusted revenue multiple,” he says.
Maitra of ADL India says that globally fintechs are valued at 10-30x revenue. “The rumoured public market valuations for Indian fintech players at 25-60x seem richer than their global, more established, peers,” says Maitra. Paytm may be even higher, at 66-79x revenue. But, an investment banker managing the Paytm IPO says, “For a fintech operating in a high-growth mode, there are always expectations of growth and profits moving up like a hockey stick.”
Jain of Duff & Phelps agrees. “Fintech players have always commanded a premium to traditional financial services businesses due to their ability to leverage technology to grow at a pace not previously seen in financial services,” he says. Perhaps, that is why late-stage and mature payments companies do not command high multiples. “If we need to apply these multiples to value fintechs with high to mid-stage growth, the multiples would be adjusted upwards to price the expected growth,” says Jain.
Paytm doesn’t lend from its books but if, or when, it does, there is a promise. “Fintechs lending from their own balance sheet will probably be valued as tech NBFCs where loan origination, underwriting and disbursement are completely digital. It is reasonable to value such fintechs based on traditional methods like price-to-book,” says Arijit Sarkar, Director, Trifecta Capital Venture Debt. “But you have to add a premium for growth.”
Not everyone agrees that such premiums are deserved. “Globally, fintechs’ bets on new high-margin products to improve overall profitability have not been realised as the competitive environment, fuelled by surplus venture funding, has driven down margins even for the presumably highmargin offerings,” says ADL’s Maitra.
Abhishek Agarwal, Managing Partner, Rockstud Capital, lists Paytm’s likely competitors. “Paytm is trying to be the super app of India to capture the young, new, digital audience. Looking at Reliance, Tata, Facebook and Google fighting in this space, this IPO valuation definitely is expensive,” he says. The valuation could be put to the test soon as Paytm plans to raise Rs 2,000 crore in a pre-IPO placement. While the terms of the offering are not yet decided, it will serve as a benchmark for the upcoming IPO.
A Lot’s at Stake
Paytm’s current valuation of $16 billion in the private market — second only to edtech startup Byju’s $16.5 billion — already accounts for the company’s customer base, network and potential scale, says Sarkar of Trifecta. It will have to balance its growth ambitions with public markets’ expectations of returns and profitability. “So far, the business model is largely a customer acquisition channel. The IPO will certainly put a lot of pressure on Paytm to design the path to profitability,” says EY’s Diwanji.
Then there are factors that have not been likely baked into Paytm’s current valuation. “A public listing for start-ups would certainly mean taking internal governance and compliance systems to the next level,” says Ahluwalia of Shardul Amarchand Mangaldas. That would mean higher expenses.
Then there is regulatory scrutiny. While One97 itself isn’t regulated by any entity, its group entities are. Paytm Payments Bank, Paytm Money and Paytm Life Insurance come under the lens of banking, stock market and insurance regulators, respectively. This assumes importance after Chinese regulators scuppered the IPO of Ant Group and went after behemoths like Alibaba in order to break them up. “We have already seen what happened to Alibaba recently and, therefore, one can’t overlook such facts,” says Agarwal of Rockstud Capital.
Moreover, Sharma, the public face of Paytm for years, is no longer identified as a promoter. Sharma, who started his entrepreneurial journey as a college graduate by selling a website he built, is now simply the MD and CEO, with 14.6 per cent stake in the company he founded. In contrast, Jeff Bezos still holds a 10.3 per cent stake in Amazon even after 27 years. Founders Larry Page and Sergey Brin own a combined 11.4 per cent in Google’s parent Alphabet, while Mark Zuckerberg has a 14 per cent stake in Facebook. “All these founders stayed put with a higher stake to build sustainable businesses. Paytm will have challenges with private equity investors holding the majority stake,” warns the CEO of an NBFC.
While foreign investors like Ant Group, SoftBank and venture capital firm Elevation Capital will wield significant influence as majority shareholders, some say that Sharma’s low stake isn’t important as Paytm is now a professionally run entity. “It is all about the execution. The right management and the board always deliver,” says Deshmukh of Equirus Capital.
One could also point to Paytm’s fellow loss-making startup Zomato’s IPO last month, which was lapped up by retail and institutional investors alike. Then again, it’s not quite fair to compare a fintech company with a foodtech one. Just as Paytm’s IPO may be a watershed moment for startups, it is an equally testing moment for public markets as well.
As ace investor Rakesh Jhunjhunwala often says, “Bhaav bhagwan hai.” Or “Price is god.” All that remains to be seen is who finds religion.
Source : https://www.businesstoday.in/interactive/immersive/untangling-paytm-digital-payment-company/